Reinforcing a ruling from the Dallas court of appeals, the Texas Supreme Court on Friday determined that a grocer’s failure to investigate its suspicions that a landlord had leased its property to a competitor means it must forfeit a $20.8 million jury award.
The unanimous ruling from the state’s high court, which also drew a concurrence, is a noteworthy development of the state’s “red flag doctrine” in fraud cases. A Dallas County jury in 2021 sided with Maya Walnut, formerly known as Maya Foods, which had operated El Rio Grande Latin Market No. 5 in the Walnut Creek Center since 2008.
Jurors determined Maya had been defrauded by its landlord, Bryan Ly and Walnut Creek Center, when Ly allowed a competing grocer, El Rancho Supermercado, to sign a lease for the space in July 2018 instead of allowing Maya to renew its lease. Maya had been negotiating the renewal since 2016, but progress “plateaued” in 2018 and Walnut Creek decided it would “take a break” because talks were “going nowhere.”
An owner of Maya, Hamdy Shalabi, testified that he grew suspicious in the fall of 2018 when its competitor, El Rancho, began teasing it would reveal a “big surprise” in June 2019, believing the surprise could be a move to the Walnut Creek location.
“Despite its suspicions, Maya never asked Walnut Creek if it was negotiating a lease with anyone else,” the Texas Supreme Court opinion reads.
At trial, the jury awarded Maya millions in damages for fraud, loss of business value and $10 million in exemplary damages.
Then, in January 2024, a three-justice panel of the Fifth Court of Appeals wiped out that award, holding the lease had no requirement that Ly negotiate exclusively with Maya, and also found Maya had ignored red flags during the course of negotiations that should have prevented it from blindly relying on any representations made by Ly and Walnut Creek.
The Texas Supreme Court agreed with Walnut Creek that it had not made any misrepresentations in talks with Maya that a new lease would be executed. Justice Brett Busby, writing for the court, explained the lease had no exclusivity provision that prevented Walnut Creek from negotiating with anyone else, either.
The Fifth Court of Appeals, in vacating the award, had found that there were five red flags ignored by Maya that should have precluded it from relying on any statements from Walnut Creek. But Justice Busby wrote that the five flags the intermediate court noted — (1) Maya was a sophisticated party; (2) the parties were engaged in arm’s-length negotiations; (3) the existing lease did not require Walnut Creek to lease to or negotiate exclusively with Maya; (4) Ly’s statements were too indefinite and vague to justify reliance; and (5) the lengthy and unsuccessful negotiations raised suspicions that the lease was in jeopardy — “are not red flags in themselves; rather, they are a lens through which we view a party’s ability to perceive red flags.”
“But whether reliance is negated as a matter of law does not turn on whether the court can tally a sufficient number of red flags. Context is determinative, and, in some cases, one red flag alone may negate reliance as a matter of law,” the opinion reads. “Here, as Maya admits, the record shows that the announcement of El Rancho’s ‘big surprise’ in the summer or fall of 2018 raised Maya’s suspicions that its competitor might be taking over the lease at the Walnut Creek property. … Maya should have investigated when it became suspicious that El Rancho may have leased the Walnut Creek property.”
Anne Johnson of Norton Rose Fulbright, who represents Ly and Walnut Creek, told The Lawbook on Friday the opinion offers clarity on the red flag doctrine and answers an important question about “what level of reasonable diligence is necessary” for a plaintiff bringing fraud claims.
“And I would say that the holding of this case is … ‘You have to ask,’” she said. “The other side wanted the court to hold that reasonable investigation would have been fruitless, and I think there may be cases where you do have facts where there’s no way to find out the truth of something. But here, I think the quote on page 14 sums it up: ‘We conclude Maya needed to at least raise its concern.’ That’s it. You have to ask.”
Counsel for Maya did not immediately respond to a request for comment Friday.
Chief Justice Jimmy Blacklock, joined by Justices Debra Lehrmann and James P. Sullivan, wrote an eight-page concurrence calling out Ly’s conduct in negotiations as “at least misleading, and perhaps outright false,” and characterizing Maya’s actions as putting “all its eggs” in one basket when it failed to make a backup plan regarding space to lease if things didn’t work out with Walnut Creek. As a result, Maya “suffered substantial loss — $11 million, according to the jury — when no lease with Ly came to fruition,” Justice Blacklock wrote.
“Whatever Ly’s cut-throat business practices may have been, this lawsuit is an impermissible attempt to hold him responsible for breach of a lease agreement he never made,” Justice Blacklock wrote. “Ly strung Maya along for his own advantage, perhaps manipulatively, but he promised nothing of substance.”
But for Justice Blacklock and the concurring justices, the case doesn’t even turn on red flags and whether Maya “could or should have come to disbelieve Ly’s representations through a diligent inquiry in the face of red flags.”
“The key problem, for me, is that Ly’s representations were unworthy of Maya’s heavy reliance as a matter of law because no reasonable business owner would rely on Ly’s non-committal statements in the bet-the-farm way Maya did,” he wrote. “In other words, the alleged misrepresentations, even if false, were not material to Maya’s decision to forgo pursuit of a backup lease because no reasonable person would have relied on the representations in making that decision.”
Maya Walnut is represented by Lisa Hobbs of LBH Law and Darren L. McCarty of McCarty Law.
Ly is also represented by Kelli Bills of Norton Rose Fulbright and Mary O’Connor of Farrow-Gillespie Heath Wilmoth.
Johnson, the lead lawyer on appeal, has handled this case for five years, including through her own change in law firms, and she took a moment to note the work of other lawyers on the case that aided in achieving the result.
“My longtime colleague Kelli Bills was critical to this win, as was Mary O’Connor, who tried a terrific case and gave us the record we needed on appeal,” she said. “I also want to mention the important contributions of Chris Knight at Haynes Boone and Nathaniel Buchheit at Tillotson Patton. We had a great team.”
The case number is 24-0171.