Two of Chip Gaines’ former partners in Magnolia Realty claim that the star of HGTV’s wildly popular “Fixer Upper” show defrauded them by withholding information about his impending fame and forcing them to accept cheap buyouts to leave him sole owner of the company and Magnolia name.
In a suit filed Thursday in Waco’s 170th State District Court, Waco attorneys John L. Lewis and Richard L. Clark say they are seeking more than $1 million. The suit names as defendants Chip Gaines; Magnolia Realty; Scripps Networks, the company that owns HGTV; and High Noon Productions, the company that produces “Fixer Upper.”
Attorney Jordan Mayfield, a Waco attorney who is representing Chip Gaines with attorney Robert Little, said the claims are meritless.
“We just received a copy of the petition and haven’t had a chance to study it in detail,” Mayfield said. “But we are generally aware of the story that Mr. Lewis and Mr. Clark are telling. We are confident that these claims will be found to be meritless, and it is disappointing to see people try to take advantage of the hard work and success of Chip and Joanna Gaines.”
The lawsuit asserts claims of conspiracy liability, breach of fiduciary duty, fraud by nondisclosure and statutory fraud, and accuses Gaines essentially of insider trading, or having knowledge and withholding information from his partners that affected the financial well-being of the business.
“In summary, at a time when only the defendants knew that ‘Fixer Upper’ had been fast-tracked for a one-hour premiere on HGTV and was on the verge of radically changing their lives and business enterprises, Chip Gaines conspired to eliminate his business partners — notwithstanding their longstanding friendship — in order to ensure that he alone would profit from Magnolia Realty’s association with ‘Fixer Upper,’ ” according to the lawsuit, filed on behalf of Lewis and Clark by Waco attorney David Tekell.
“With this insider information in hand, Chip Gaines convinced plaintiffs to sell their membership interests in Magnolia Realty quickly to him before a public announcement that ‘Fixer Upper’ was picked up by HGTV,” the suit contends.
Lewis and Gaines met in 1999 when Gaines was referred to Lewis for legal work by a Baylor University business professor. During the next few years, Lewis performed legal services for free for Gaines, who reciprocated by providing free repairs to Lewis’ home.
They became friends, and their families became friends, the lawsuit states. They frequently ate lunch together and went on hunting trips. In 2006, they talked about the possibility of going into business together, discussing a venture that would provide property management services.
That idea evolved into plans to form a real estate brokerage firm, and the pair brought in Clark, a friend of Lewis’ who also was a licensed real estate broker.
After the trio started Magnolia Realty Co., Gaines and Clark also became friends, the suit states. The company never really took off and employed just one real estate agent. However, after that the Gaineses built the Magnolia name into “an empire” using “Fixer Upper” as a national catalyst, and Magnolia Realty is now a “major real estate company, operating in Waco, Austin, Dallas, Houston, Temple, Belton and Killeen, with an army of over 93 real estate agents,” the suit contends.
Consolidating the business
The lawsuit claims that Gaines and officials from Scripps and High Noon decided to fast-track the “Fixer Upper” show and sought to consolidate the Gaineses’ ownership of Magnolia-related businesses. After the meeting, Gaines contacted Lewis and Clark about buying out their two-thirds ownership interest in Magnolia Realty.
“On April 26, 2013, when Chip Gaines initiated the buyout discussion with John Lewis, Chip Gaines knew that Magnolia Realty was about to receive nationwide advertising through HGTV’s airing of ‘Fixer Upper,’ ” the suit alleges.
Two days later, Gaines sent an email to Lewis that said, “I’d be scared to see how this would work if it (Magnolia Realty) was worth something. . . . The only thing I have to have is Magnolia when the dust clears.”
Doug Eastland, a Magnolia Realty employee, wrote to Clark on May 1, 2013, that the transfer of ownership had to be completed by May 6, 2013, the suit contends.
Gaines paid Clark and Lewis $2,500 each for their collective share of the business, and two days later, Gaines publicly announced that his show was picked up to be broadcast across the nation on HGTV, according to the lawsuit.
In an email, Gaines said the decision to air “Fixer Upper” had been made three weeks earlier, Lewis and Clark claim in the lawsuit.
The suit alleges that the Gaineses had plans to build the Magnolia name into an “empire,” along the same lines as the Olsen twins, Martha Stewart and the Kardashians.
“While Chip fully intended to monetize the Magnolia Realty name, the thought of sharing with his business partners any benefits that flowed from ‘Fixer Upper’ was apparently repulsive to him,” the suit states. “As has become clear, Chip regarded his business partners — longstanding friends — as an impediment because they owned two-thirds of Magnolia Realty. Simply put, Chip wanted the entire pie for himself. Sharing the Magnolia name with anyone else was unacceptable.”
As the negotiations for the buyout proceeded, Clark balked at the plan, and Gaines said if they refused to sell their interests to him, he would start a competing real estate company and take Eastland, their only employee, with him, the suit claims.
Later, Gaines texted Lewis, “You better tell Rick to be careful. I don’t come from the nerdy prep school he’s from. And when people talk to me that way they get their asses kicked. And if he’s not ready to do that he better shut his mouth. I’m not the toughest guy there is, but I can assure you that would not end well for Rick,” according to the lawsuit.
Tekell also represented the owner of a downtown vacant lot adjacent to the Gaineses’ Magnolia Market at the Silos who sued Chip Gaines last year after Gaines blocked off access to an alley between their properties. The owner was charging people to park on his lot, and the Gaineses didn’t want their customers thinking they were charging people to park, Little said at the time.
That suit has since been resolved, and the Gaineses have since bought that land from the owner. The lawsuit is in the process of being dismissed, Tekell said.