in Re: Merfish Holdings, Ltd., Jacobson Holdings Ltd. and RMG Properties, Inc. ( 2002 )

Opinion issued May 9, 2002

In The

Court of Appeals

For The

First District of Texas  

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NO. 01-02-00146-CV

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IN RE MERFISH HOLDINGS, LTD.,

JACOBSON HOLDINGS, LTD.,

AND RMG PROPERTIES, INC., Relators

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Original Proceeding on Petition for Writ of Mandamus

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O P I N I O N  

  By petition for writ of mandamus, relators, Merfish Holdings, Ltd., Jacobson Holdings, Ltd., and RMG Properties, Inc. (collectively "the Merfish Group"), challenge the trial court's December 17, 2001order denying their motion to stay the proceeding and compel arbitration between them and the real parties in interest, ViSteel I, Ltd., Tex-Tube Company, and TT Investment Company (collectively "the ViSteel Group").

We deny the petition for mandamus relief.

Background

On December 14, 1994, ViSteel and GMR Enterprises, Inc. entered into a joint venture to acquire and operate a pipe manufacturing business to be known as Tex-Tube Company. ⁽¹⁾ ViSteel owned a 51 percent interest, and GMR owned the remaining 49 percent. Three years later, GMR assigned its interest equally between Merfish Holdings and Jacobson Holdings, leaving them each with a 24.5 percent interest in Tex-Tube.

Also on December 14, 1994, ViSteel and RMG entered into a joint venture, creating TT Investment Company which would acquire the real property, equipment, and other assets of Tex-Tube. Again, ViSteel had a 51 percent interest, and RMG had a 49 percent interest.

Tex-Tube and TT Investment Company shared the same executive committee. ViSteel appointed three individuals to the executive committee, and the Merfish Group appointed two members, Gerald Merfish and Rochelle Jacobson. Merfish was the president and one of ViSteel's appointments was the chief executive officer. In July of 2000, ViSteel replaced two of its appointments, and, within a month, the executive committee eliminated the office of president, removing Merfish as an officer, and created the position of vice president of operations. One of ViSteel's appointments became the vice president of operations, and the relationship between ViSteel and the Merfish Group began to deteriorate.

In December of 2000, the executive committee informed the Merfish Group that no distributions would be made to venturers that year to cover the income tax owed on the venture's profits. The Merfish Group filed suit asserting a claim for distribution. That suit was dismissed and sent to arbitration.

Less than a month later, the Merfish Group sent the ViSteel Group a notice of withdrawal from both joint ventures. ViSteel contended that the attempted withdrawal was null and void because withdrawal by the Merfish Group violated security agreements executed by the Merfish Group in connection with various loan documents. ⁽²⁾ Article 4 of both joint venture agreements made null and void any attempted disposition of a joint venture interest which violated any loan covenants.

In November of 2001, the ViSteel Group filed suit seeking judgment that the attempted withdrawal by the Merfish Group was null and void, and, in response, the Merfish Group moved to compel arbitration. The arbitration clauses at issue are found in the 1994 joint venture agreements. The clauses specify that

All disputes arising in connection with this Agreement shall be finally settled under the Rules of Conciliation and Arbitration of the International Chamber of Commerce. . . . Notwithstanding the provisions hereof, the right of [the Merfish Group] to withdrawal [sic] as a Venturer and require [the ViSteel Group] to purchase [the Merfish Group's] Interest as set forth in Article 9 shall not be subject to arbitration.

(Emphasis added.) In its December 17, 2001 order, the trial court denied the Merfish Group's motion to compel arbitration. It is this interlocutory ruling that the Merfish Group challenges.

Order Denying Arbitration

The Merfish Group argues the trial court deprived them of the benefits of the arbitration for which they contracted.

All parties agree that the business of the joint ventures involved interstate commerce. The Federal Arbitration Act (FAA) applies to all suits in state and federal court when the dispute concerns a "contract evidencing a transaction involving commerce." Jack B. Anglin Co. v. Tipps, 842 S.W.2d 266, 269-70 (Tex. 1992) (orig. proceeding). Thus, assuming the dispute falls within the scope of the parties' arbitration agreement, the FAA applies.

Standard of Review

Mandamus is the proper means for reviewing an order denying arbitration under the FAA. Cantella & Co. v. Goodwin, 924 S.W.2d 943, 945 (Tex. 1996) (orig. proceeding); Anglin, 842 S.W.2d at 272. Mandamus will issue only to correct a clear abuse of discretion or violation of a duty imposed by law when that abuse cannot be remedied by appeal. Anglin, 842 S.W.2d at 271. A trial court abuses its discretion when it fails to analyze or apply the law correctly. Walker v. Packer, 827 S.W.2d 833, 840 (Tex. 1992).  

Federal and state law strongly favor arbitration. Cantella, 924 S.W.2d at 944. A presumption exists in favor of agreements to arbitrate under the FAA. Prudential Sec., Inc. v. Marshall, 909 S.W.2d 896, 898 (Tex. 1995). Courts must resolve any doubts about an agreement to arbitrate in favor of arbitration. Cantella, 924 S.W.2d at 944; Marshall, 909 S.W.2d at 899. Once a party seeking to compel arbitration establishes that an agreement exists under the FAA, and that the claims raised are within the scope of the agreement, a trial court has no discretion but to compel arbitration and stay its proceedings pending arbitration. Cantella, 924 S.W.2d at 944.

However, the strong federal policy of resolving doubts in favor of arbitration cannot serve to stretch a contractual clause beyond the scope intended by the parties or to allow modification of the plain and unambiguous provisions of an agreement. Belmont Constructors, Inc. v. Lyondell Petrochemical Co., 896 S.W.2d 352, 356 (Tex. App.--Houston [1st Dist.] 1995, no writ). While courts may enforce arbitration agreements, a court may not order arbitration in the absence of such an agreement. Freis v. Canales, 877 S.W.2d 283, 284 (Tex. 1994); Hou-Scape, Inc. v. Lloyd, 945 S.W.2d 202, 205 (Tex. App.--Houston [1st Dist.] 1997, orig. proceeding) ("A party cannot be required to arbitrate unless it has agreed to do so.").  

Arbitration is a creature of contract, and a clause requiring arbitration will be interpreted under contract principles. Belmont Constructors, 896 S.W.2d at 357. A party seeking to compel arbitration must establish its right to that remedy under the contract. Id. Contractual language will be enforced according to its plain meaning, unless such a reading would defeat the intention of the parties. Lyons v. Montgomery, Inc., 701 S.W.2d 641, 643 (Tex. 1985). The parties' agreement and intent to submit to arbitration must be unambiguous. Porter & Clements, L.L.P. v. Stone, 935 S.W.2d 217, 220 (Tex. App.--Houston [1st Dist.] 1997, orig. proceeding). Construction of an unambiguous contract is a question of law. See MCI Telecommunications Corp. v. Tex. Utils. Elec. Co., 995 S.W.2d 647, 650-51 (Tex. 1999).  

Scope of Arbitration

The provisions of the joint venture agreements regarding arbitration contain both broad form and specific clauses. The first part of the arbitration clauses in the joint ventures are "broad form" clauses, ⁽³⁾ stating that "all disputes arising in connection with this Agreement shall be finally settled under the Rules of Conciliation and Arbitration of the International Chamber of Commerce." The controversy stems from the parties' interpretation of the last sentence of the clauses. The clauses warn, "Notwithstanding the provisions hereof, the right of [the Merfish Group] to withdrawal as a Venturer and require [the ViSteel Group] to purchase [the Merfish Group's] Interest as set forth in Article 9 shall not be subject to arbitration."

All parties refer to the Merfish Group's right to withdraw as exercising a "put." When notified of the Merfish Group's intent to withdraw, the ViSteel Group must buy out the Merfish Group's interest at fair market value. As the ViSteel Group points out, however, article 4.2 in the joint venture agreements prevent exercising the put if doing so would cause a default in a loan agreement. Article 4.2 further states the withdrawal is "null and void ab initio" if it would cause a default. ⁽⁴⁾

The Merfish Group contends the last sentence of the arbitration clauses is a "reiteration that the basic 'right' to withdraw could not be subject to attack at all - whether in arbitration or elsewhere." At the hearing on their motion to compel arbitration, the Merfish Group argued that "the existence of the right to withdraw shall be inviolate."

The ViSteel Group, however, contends the last sentence should be read as an exception to the broad arbitration clause. They assert the Merfish Group "conveyed away its unfettered right to exercise the put in Article 9 by entering into a later security agreement" in which it agreed not to sell or dispose of its interests in the joint ventures. The ViSteel Group argues simply that the Merfish Group does not have the right to withdraw, and the argument surrounding their right to withdraw is not arbitrable. In the alternative, the Merfish Group, while not conceding that the last sentence of the arbitration clause is an exception, contends the ViSteel Group's declaratory judgment did not dispute the Merfish Group's "right to withdrawal." Instead, it seeks a declaration that a particular notice of withdrawal made in February 7, 2001 is void. This is a distinction without a difference. The ViSteel Group is contesting the Merfish Group's right to withdraw because, it alleges, the Merfish Group cannot withdraw due to its covenant with HSBC Business Loans, Inc.

The trial court, applying the plain language of the contract, denied the motion to compel arbitration because, as applied to these facts, the Merfish Group's right to withdraw was not subject to arbitration.

As noted by this Court in Belmont Constructors, the strong federal policy for resolving doubts in favor of arbitration cannot serve to stretch a contractual clause beyond the scope intended by the parties. Belmont Constructors, 896 S.W.2d at 356. We must enforce the language in the parties' joint venture agreements according to their plain meaning. See Lyons, 701 S.W.2d at 643.

We hold the trial court did not err in denying the Merfish Group's motion to compel arbitration. We overrule the Merfish Group's issue.

Conclusion

We deny the Merfish Group's petition for mandamus relief.

   Frank C. Price

Justice

Panel consists of Justices Nuchia, Radack, and Price. ⁽⁵⁾  

Do not publish. Tex. R. App. P. 47.

1.

The original venturers were VillaCo, which later became ViSteel, and MerfCo, which later became the Merfish Group.

2.

In 1996, Tex-Tube and TT Investment Company negotiated a credit facility with HSBC Business Loans, Inc. The Loan and Security agreement setting forth the terms of the credit contained a covenant expressly prohibiting the Merfish Group from disposing of their joint venture interest.

3.

See, e.g., Belmont Constructors, 896 S.W.2d at 358 n.2.

4.

4.2 Restrictions on the Disposition of an Interest. No Venturer shall have the right to effect a Disposition of its Interest in the Joint Venture unless and until authorized by the Executive Committee. Any attempted Disposition by a Person of an interest or right, or any part thereof, in or in respect of the Joint Venture in contravention of this Section 4.2 shall be, and is hereby declared, null and void ab initio.

Notwithstanding anything to the contrary contained in this Agreement, no Venturer shall effect or permit a disposition of any interest in and to the Venture or the Venturers themselves so as to cause an event of default or a breach of any term, condition or representation contained in any lease agreement, loan document or other agreement entered into by the Joint Venture.

5.

The Honorable Frank C. Price, former Justice, Court of Appeals, First District of Texas at Houston, participating by assignment.