Thank you for sharing!

Your article was successfully shared with the contacts you provided.
Click here for the full text of this decision FACTS:Randy Box, a real estate broker, owned a company called Malebox Investment Inc. In August 2000, Malebox contracted to purchase an apartment complex known as “the Lodges” for $6.9 million. Box and a business associate Fred Weinberg planned to sell investment interests in the property. Box retained George Dunlap, an attorney employed by Jenkens & Gilchrist, to provide legal services in connection with the transaction. At Box’s request, Dunlap formed Lodges Investors LP, a single-asset Texas limited partnership. The partnership was formed as the purchasing entity to acquire the apartment complex. After Dunlap prepared the limited partnership agreement, Malebox assigned the agreement to purchase the apartment complex to the partnership. Box and Weinberg then solicited participation in the venture through the sale of limited partnership interests in the partnership. The partnership was structured to include a sole general partner, 15 class A limited partners, one special limited partner and one class B limited partner. The $6.9 million purchase price for the complex was financed in part by the assumption of a $4,376,356.81 first mortgage on the property. Because the terms of the mortgage prohibited secondary financing without the lender’s prior consent, the special limited partner class was essentially created to provide seller financing. One Realco Corp., an affiliate of the seller of the complex, subscribed to the partnership as the class B limited partner with a $674,000 contribution. The class B limited partner was to receive a preferred return in exchange for this investment. To this end, the partnership agreement provided the capital contribution of the class B limited partner would be repaid in two scheduled installments. The repayment was to be made through additional pro-rata capital contributions of the class A limited partners. Upon repayment, the class B limited partner’s interest in the partnership would be reduced to zero. If the installment payments were not timely made, the partnership agreement provided the Class B limited partner had the right to remove the general partner and receive an assignment of all of the class A limited partners’ rights. The partnership agreement required the contributions of the limited partners to be made in cash. The Kastners subscribed to the Partnership as class A limited partners with an initial capital contribution of $120,000. Some of the other class A limited partners who later became parties to this lawsuit include: Wenz & Associates, Box Interests, Loren Weinstein and AJ Associates. An entity known as LIGP Inc., also formed by Dunlap, was the general partner of the partnership. Monica Nemtzeanu, president of LIGP, was the special limited partner. Nemtzeanu was also the president of Silverskies Management Ltd., the company retained to manage the apartment complex once it was acquired by the Partnership. Dunlap prepared the partnership agreement in accordance with information provided by Box and Weinberg. On Feb. 26, 2001, Dunlap mailed the partnership agreement to each of the limited partners. Exhibit A to the partnership agreement reflected the partnership percentages and capital contributions of the partners. In the accompanying cover letter, Dunlap explained that other than Nemtzeaunu’s interest, the final percentages in Exhibit A would be determined at the closing based upon the aggregate capital contributions of the partners. Some of the limited partners, including the Kastners, signed the partnership agreement and returned it to Dunlap. Others waited until the closing to sign. Dunlap admitted that he viewed Box as his client. But he also acted as counsel for the partnership and the general partner in connection with the March 1, 2001 closing. The general partner, Box, Weinberg and several other limited partners attended the closing, but the Kastners were not present. At the closing, the parties learned the partnership did not have sufficient funds on deposit with the title company to complete the transaction. The amount of the shortfall was approximately $88,000. To facilitate the closing, the seller agreed to make a short-term loan to the partnership. According to Dunlap, Weinberg suggested the short-term loan and assured everyone the necessary funds would be available to pay off the loan the next day. Dunlap informed those present that under the terms of the partnership agreement, a loan to the Partnership would require the unanimous consent of all the limited partners. According to Weinberg, the idea for the secondary financing originated with Dunlap. Regardless, there is no question that the limited partners present decided to proceed with the closing and the short-term loan. The loan was documented by a closing agreement prepared by the seller’s attorney and signed by the general partner. Apparently, Box and others were to receive certain commissions and equity placement fees in connection with the purchase and sale of the property, but the funds available at closing were not sufficient for payment. On March 5, 2001, Dunlap prepared an “Acknowledgment of Account Payable” in which the partnership acknowledged an obligation to pay a $41,450 commission to Box Interests and a $20,300 commission to another broker. The acknowledgment was executed by the general partner of the partnership. On March 8, 2001, based on information provided by Box and Weinberg, Dunlap provided each of the partners with a fully executed copy of the partnership agreement with Exhibit A attached. No one suggested to Dunlap that the partnership percentages were inaccurate. At some point after the partnership began operating the apartment complex it began to experience financial difficulties. On June 3, 2002, the partnership filed for protection under Chapter 11 of the U.S. Bankruptcy Code, and the relationship between the general partner and the limited partners deteriorated. The Kastners filed suit on behalf of the Kastner Family Trust on June 24, 2003, and asserted claims against Jenkens & Gilchrist, Dunlap, Box, Box Interests, Weinstein, Nemtzeanu, AJ Associates, Weinberg, LIGP, Silverskies and One Realco. The claims against Jenkens & Gilchrist were based on a respondeat superior theory of liability for the alleged wrongful conduct of Dunlap as its employee. The Kastners subsequently nonsuited Nemtzeanu, Weinberg, Silverskies and LIGP. On Aug. 20, 2003, the Kastners entered into a settlement agreement with the partnership and some of the other defendants. The settlement agreement provided an assignment from the partnership to the Kastners of a 40 percent interest in the partnership’s claims against the defendants named in the lawsuit. On Dec. 1, 2003, the Kastners amended the lawsuit to also assert claims against the defendants on behalf of the Partnership. Box, Weinstein, and AJ Associates counterclaimed against the Kastners. Later, Nemtzeanu, LIGP, and Silverskies (collectively, the Intervenors) intervened in the lawsuit to assert claims against Dunlap, Jenkens & Gilchrist and the other defendants. On June 2, 2005, Dunlap and Jenkens & Gilchrist filed a traditional and no-evidence motion for summary judgment, requesting judgment on all of plaintiffs’ claims. Although the plaintiffs responded to the no-evidence motion for summary judgment, they did not respond to the traditional motion. On July 26, 2005, the plaintiffs filed their Sixth Amended Petition and asserted claims for: fraud, constructive fraud, fraudulent concealment, negligent misrepresentation, breach of fiduciary duty, violation of the Texas Deceptive Trade Practices Act, aiding and abetting securities fraud, aiding and abetting breach of fiduciary duty, breach of the partnership agreement and civil conspiracy. On Aug. 1 and 2, 2005, the trial court considered and granted the Jenkens & Gilchrist and Dunlap motion for summary judgment on plaintiffs’ claims but did not specify the grounds upon which its decision was based. On Aug. 29, 2005, the remaining claims of the intervenors against Dunlap and Jenkens & Gilchrist were called to trial. Upon conclusion of the trial, the trial court rendered judgment in favor of Jenkens & Gilchrist and Dunlap. On Sept. 23, 2005, the trial court entered a final judgment disposing of all claims asserted against all parties. An appeal of the summary judgment granted on behalf of Jenkens & Gilchrist and Dunlap (together, Dunlap) followed. HOLDING:Affirmed. In their first issue, the court stated that the Kastners asserted the trial court erred when it granted Dunlap’s no evidence motion for summary judgment on their negligent misrepresentation claim. Negligent misrepresentation, the court stated, requires proof that: 1. the defendant in the course of his business or a transaction in which he had an interest; 2. supplied false information for the guidance of others; 3. without exercising reasonable care or competence in communicating the information; 4. the plaintiff justifiably relied on the information; and 5. proximately causing the plaintiff’s injury. In support of their claim, the Kastners contended that Dunlap improperly identified the partners’ contributions as cash contributions when they were not all made in cash, incorrectly quantified the general partner’s interest and created a document reflecting the incorrect amount of capital raised by the partnership. They further contended that Dunlap represented he would adjust the partnership percentages at closing but failed to do so, and allowed the secondary financing to occur when he knew it violated the terms of the partnership agreement and the first mortgage. All of this conduct, the court stated, arose out of Dunlap’s participation in the March 1, 2001, closing on the partnership’s purchase of the apartment complex. The Kastners acknowledged that they had no attorney-client relationship with Dunlap, but insisted that Dunlap’s conduct falls within the narrow exception to attorney liability for negligent misrepresentation recognized by the Texas Supreme Court in its 1991 opinion McCamish, Martin, Brown & Loeffler v. F.E. Applying Interests. The court, however, disagreed. The duty imposed on an attorney to a nonclient is limited, the court stated. The duty only arises when: 1. the attorney is aware of the nonclient and intends that the nonclient rely on the representation; and 2. the nonclient justifiably relies on the attorney’s representation of a material fact. The court found that the reliance element was absent in the case. There was no evidence Dunlap invited or was aware of the Kastners’ reliance. The Kastners’ claim also failed, the court stated, because the alleged misrepresentations could not form the basis for a tenable negligent misrepresentation action. Because none of the alleged misrepresentations constituted representations of existing fact, they were insufficient to establish negligent misrepresentation. Thus, the court concluded that the trial court properly granted summary judgment and resolved the Kastners’ first issue against them. In addition, because the Kastners “adduced no evidence to establish Dunlap acted with scienter,” the trial court did not err in dismissing the claim against Dunlap for aiding and abetting securities fraud. Finally, the court found that the trial court did not err by granting summary judgment on the Kastners claim that Dunlap aided and abetted a breach of fiduciary duty. OPINION:Richter, J.; Moseley, Bridges and Richter, JJ.

Want to continue reading?
Become a Free ALM Digital Reader.

Benefits of a Digital Membership:

  • Free access to 1 article* every 30 days
  • Access to the entire ALM network of websites
  • Unlimited access to the ALM suite of newsletters
  • Build custom alerts on any search topic of your choosing
  • Search by a wide range of topics

*May exclude premium content
Already have an account?


ALM Legal Publication Newsletters

Sign Up Today and Never Miss Another Story.

As part of your digital membership, you can sign up for an unlimited number of a wide range of complimentary newsletters. Visit your My Account page to make your selections. Get the timely legal news and critical analysis you cannot afford to miss. Tailored just for you. In your inbox. Every day.

Copyright © 2021 ALM Media Properties, LLC. All Rights Reserved.