Texas Business Court exercises jurisdiction based on alter ego allegations

A recent ruling from the Third Division of the Texas Business Court recognizes that well pled allegations of alter ego, conspiracy or other forms of derivative liability premised on corporate formation may be sufficient to create jurisdiction in the Texas Business Court.

In Reed v. Rook TX, LP, et al., No. 25-BC03A-0007, the Business Court held that claims against Rook TX, LP (Rook) and its co-defendant affiliates alleging civil conspiracy, “aiding and abetting,” “assisting and participating” and “concert of action” were sufficient to grant the Business Court jurisdiction because those allegations involved questions of Rook’s “governance, governing documents or internal affairs” under Section 25A.004(b)(2) of the Government Code. This interpretation of Section 25A.004(b)(2) may allow for much more than mere “internal affairs” disputes to be litigated in Business Court.

In the underlying dispute, originally filed in the 353rd District Court in Travis County, Reed alleged that Rook and its affiliates manipulated the Lotto Texas jackpot, depriving Reed (who won the same jackpot) out of US$95 million dollars that he claimed he would have otherwise solely received but for Rook’s rigging. According to Reed, the alleged scheme involved intentional misrepresentation of Rook’s date of formation and the misuse of Rook “to serve as a vehicle[] to hide the identity of the company(s) and individual(s) who received the proceeds of the illegal game rigging scheme.”

Defendants removed the lawsuit to Business Court, asserting jurisdiction under Section 25A.004(b)(2), because Reed’s conspiracy and concert of action allegations related to “the governance, governing documents or internal affairs” of Rook. Specifically, because Reed had argued that Rook was fraudulently and untimely formed, Defendants asserted that the Business Court had jurisdiction. To adjudicate Rook’s allegations, the Business Court would need to consider Rook’s certificate of formation—a “governing document” as defined by Section 25A.004(b)(2)—to determine whether Rook misrepresented its formation date or was created for an improper purpose.

Reed moved to remand the case back to the district court, arguing that his claim was not “predominantly” an internal affair dispute. But Judge Melissa Andrews, writing for the Texas Business Court, found jurisdiction over the dispute.

Judge Andrews held that whether Rook was created as part of some scheme to rig the lottery is a matter “concerning the Rook’s management and direction, the validity of its formation and the duties of its governing persons—all matters covered by Section 25A.004(b)(2) of the Government Code.” According to the Business Court, “These allegations go to the heart of Rook’s existence: is it a legitimate business or a shell created to effectuate an illegal conspiracy.”

The Business Court also rejected Reed’s request to narrow Section 25A.004(b)’s jurisdiction based on an unwritten “predominance test” which would have limited Section 25A.004(b) to only actions where internal affairs and governance are the predominant focus of the dispute. Specifically, Reed argued that Section 25A.004(b) is intended to cover “internal” business disputes, which he described as disputes that “directly challenge or seek to enforce specific rights or duties of shareholders, owners and managers of Texas businesses,” as opposed to “external” business disputes, which he described as disputes “between a third party and the defendants,” like those covered in Section 25A.004(d).

Judge Andrews didn’t agree. Instead, Judge Andrews interpreted Section 25A.004(b)(2) according to its plain text, which does not limit the Business Court’s jurisdiction to only the internal affairs of an organization.

Thus, the Business Court also interpreted Section 25A.004(b)(2) as an indication that the Texas Legislature drafted Section 25A.004(b)(2) to confer jurisdiction to actions concerning a business’s internal affairs or governance or governing documents. As Judge Andrews succinctly stated, “If the Legislature had wanted to include a predominance requirement in the statute, it could have done so.”

The Business Court’s ruling in Reed is a significant interpretation of the scope of Section 25A.004(b)(2). Under the framework set forth in Reed, alter ego-type allegations may be sufficient to open the jurisdictional doors of the Business Court, as long as other requirements (like amount in controversy) are met.