Houston and Francis were re-introduced at the party and all seemed fine until Ray J entered the conversation.
"Whitney just got belligerent," a witness told The Hollywood Reporter. "Ray was trying to defend Stacy, telling Whitney, 'Stacy's family!', but Whitney was feeling crowded out and hands were raised."
The witness said that no punches were ultimately thrown, but that it was a tense exchange.
Photos taken later that night showed Houston disheveled, agitated and bloated as she left, and she reportedly had to be escorted from the club with blood dripping down her leg and scratches on her wrist.
Friends said she was simply sweating from the performance.
"There was nothing wrong. She was singing, she was dancing, she was laughing, she was playing," Price said. "I'm going to remember her just like that because that's the Whitney I always had the pleasure of being around."
On Saturday afternoon, Houston's lifeless body was discovered in her bathroom at the Beverly Hilton, where she was planning to attend friend and mentor Clive Davis' annual pre-Grammy party. A cause of death has not yet been determined.
ABC News' Luchina Fisher contributed to this report.