Overview: The Texas Business Court’s Expanding Reach
A recent decision from the Texas Business Court, Reed v. Rook TX, LP, centers on a dramatic claim: Jerry Reed, who “won a $7.5 million Lotto Texas jackpot in May 2023,” alleges that “his winnings would have been $95 million greater if Rook and other defendants had not illegally manipulated the system to enable Rook to claim the $95 million jackpot in April 2023.” After Reed filed suit, Rook TX removed the case to the Texas Business Court. Even though Reed is a third party, an outsider to Rook TX, the Texas Business Court kept the case by finding that the “action concerns Rook’s governance, governing documents, or internal affairs.”
The Dispute: Allegations of Fraud and Entity Manipulation
Reed’s petition paints a picture of a rigged lottery, and a business entity allegedly created to conceal the true beneficiaries. As the Texas Business Court summarized, Reed claims that Rook “violated Section 466.308 by ‘misrepresenting the creation date of the entity claiming the $95 million jackpot and the date that entity received the ticket.’ Specifically, Reed asserts that when Rook GP claimed the lottery prize on behalf of Rook TX, it represented that Rook TX was formed on March 1, 2023, and received the winning lottery ticket on April 21, 2023, but Rook TX was not actually formed until June 15, 2023—after the April 2023 lottery drawing. He also alleges that Rook was formed as a ‘vehicle[] to hide the identity of the company(s) and individual(s) who received the proceeds of the illegal game rigging scheme.’”
Jurisdictional Battle: Fraud or Governance?
Rook removed the case to the Texas Business Court, invoking Section 25A.004(b)(2) of the Texas Government Code, which grants the court jurisdiction over actions “regarding the governance, governing documents, or internal affairs of an organization.” Reed sought remand, arguing that the case was “about a fraudulent scheme to rig the Texas Lottery and a subsequent misrepresentation made to the State of Texas” and “does not pertain to Rook’s governance or governing documents because his claims ‘can be proven through publicly available records—no reference to internal governance or governing documents is required.’”
The Court’s Analysis: Broad, Not Narrow, Jurisdiction
The Texas Business Court’s opinion delivers a clear message about the breadth of its jurisdiction:
- Public Records Do Not Limit Jurisdiction: The court rejected Reed’s argument that the public availability of governing documents, such as certificates of formation, removes a case from its jurisdiction. “The fact that a governing document is a public record—as is often the case—does not undermine the Court’s jurisdiction. Likewise, the fact that a public website posts an entity’s formation date online does not divorce that date from the governing document that effectuates the underlying formation and is the basis for the posted date.”
- Formation and Purpose Are Core Issues: The court emphasized that “Reed’s action concerns the date of Rook’s formation and whether Rook was formed for improper purposes and in furtherance of the alleged conspiracy to enable Rook to fraudulently claim the April 2023 lottery winnings. The action necessarily concerns Rook’s governance, governing documents, or internal affairs, and therefore falls within this Court’s jurisdiction under Section 25A.004(b)(2).”
- No Predominance Requirement: Addressing Reed’s argument that only “internal” business disputes belong in Business Court, the court stated: “If the Legislature had wanted to exclude actions brought by third parties from (b)(2), it knew how to do so. Some provisions of Section 25A.004(b) do depend on ‘the nature of the parties to the action.’ Parts (b)(3) and (b)(4) expressly depend on what kind of party brings the action and/or what kind of party the action is brought against. Part (b)(2) contains no such language.”
Key Takeaways for Texas Businesses and Counsel
- Third-Party Claims Are Squarely Within Reach: Even claims brought by outside third parties can fall within Texas Business Court’s jurisdiction if they implicate the entity’s formation, governance, or internal affairs.
- Public Records Are Not a Shield: The court made clear that the public nature of governing documents does not remove a case from Texas Business Court jurisdiction.
- No Predominance Requirement: If the action concerns governance, governing documents, or internal affairs in any meaningful way, jurisdiction attaches to the entire action.
Conclusion: The Business Court’s Message Is Clear
The Reed v. Rook TX, LP opinion signals that the Texas Business Court will not hesitate to assert jurisdiction over cases that implicate the formation, governance, or internal affairs of business entities—regardless of whether those issues are the main event or part of a broader dispute. As the court’s analysis in this case demonstrates, Texas businesses and their counsel should take heed: the forum for resolving complex business disputes is shifting, and preparation is paramount.
