Paul Jacobs, P.C. and Paul Steven Jacobs v. Encore Bank, N.A. ( 2013 )

Opinion issued July 9, 2013.
In The
Court of Appeals
For The
First District of Texas
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NO. 01-12-00699-CV
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PAUL JACOBS, P.C. AND PAUL STEVEN JACOBS, Appellants
V.
ENCORE BANK, N.A., Appellee
On Appeal from the 127th District Court
Harris County, Texas
Trial Court Case No. 2011-53957
MEMORANDUM OPINION
After the trial court granted two interlocutory summary judgments to Encore
Bank, N.A. [“Encore Bank”] relating to its suit on a note against Paul Jacobs, P.C.
and its guarantor, Paul Jacobs [collectively, “Jacobs”], Jacobs moved to compel
arbitration. In this appeal, we consider whether Jacobs waived its arbitration rights
by substantially invoking the judicial process. We reverse and remand.
BACKGROUND
Paul Jacobs, P.C. executed a promissory note for $600,000 to Encore Bank,
and Paul Jacobs, individually, executed a commercial guaranty, guaranteeing
payment of the note to Encore Bank. Alleging that Jacobs had failed to pay the
amount owing on the note and guaranty, Encore Bank filed suit on September 9,
2011, asserting claims for breach of contract, unjust enrichment, and seeking a
declaratory judgment.
On October 10, 2011, Jacobs filed an original answer, plea to the
jurisdiction, and special exceptions. In several paragraphs, Jacobs alleged that
Encore Bank had no standing to sue and that the trial court lacked jurisdiction. On
November 22, 2011, Jacobs amended its answer to include a request for disclosure
under Tex. R. Civ. P. 194. Again, Jacobs asserted that Encore Bank lacked
standing to enforce the note.
On November 7, 2011, Encore Bank served Jacobs a copy of its motion for
summary judgment and notice of oral hearing on the motion for December 9, 2011.
On December 2, 2011, Jacobs filed a response to Encore Bank’s motion for
summary judgment. Jacobs opposed Encore Bank’s motion, alleging that
“Plaintiff fails to plead or establish Plaintiff has standing to properly bring a breach
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of contract action against Defendants in this suit.” On that same date, Jacobs filed
another plea to the jurisdiction and motion to dismiss based on Encore Bank’s
alleged lack of standing. Neither Jacobs’s response to the motion for summary
judgment, nor its plea to the jurisdiction, requested or moved to compel arbitration.
At the scheduled December 9, 2011 hearing on Encore Bank’s motion for
summary judgment, the trial court was made aware that, even though Encore Bank
had served Jacobs with a copy of its motion for summary judgment on November
7, 2011, the motion was not actually filed until December 7, 2011. Therefore, the
court reset the submission of Encore Bank’s motion for summary judgment for
December 12, 2011
On January 17, 2012, the trial court signed an interlocutory summary
judgment for Encore Bank as to Jacobs, P.C.’s liability on the note and Jacobs’
liability, individually, on the guaranty, and awarded the bank $330,000 for the
unpaid principal balance on the note, plus accrued interest. The court did not rule
on Encore Bank’s claim for attorney’s fees.
On February 16, 2012, Jacobs moved for a new trial, alleging that (1) Encore
bank lacked standing, the trial court lacked jurisdiction, and that the trial court
should have addressed its plea to the jurisdiction before ruling on Encore Bank’s
motion for summary judgment, and that (2) it received insufficient notice of the
summary judgment hearing.
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On March 22, 2012, Encore Bank filed a motion for summary judgment on
the remaining attorney’s fee issue, which was set for submission on April 16, 2012.
Jacobs had the motion reset for April 27th, 2011, but it did not file a response to
the Bank’s motion.
On May 4, 2012—after the April 27th hearing, but before the trial court
ruled on the Bank’s second summary judgment motion— Jacobs, P.C. filed its
second amended answer, asserting for the first time a motion to compel arbitration.
Again, several paragraphs of the amended petition alleged that Encore Bank lacked
standing and the trial court lacked jurisdiction.
On May 15, 2012, the trial court denied Jacobs’s plea to the jurisdiction,
motion to dismiss, and motion for new trial. On the same date, the trial court
granted Encore Bank’s second motion for summary judgment awarding it
attorney’s fees.
On May 23, 2012, Encore Bank responded to Jacobs, P.C.’s motion to
compel arbitration, arguing that its conduct in the litigation had waived its right to
compel arbitration. On the same date, Encore Bank filed a third motion for
summary judgment seeking to dispose of Jacobs’s counterclaims and third-party
claims.
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On July 12, 2012, Jacobs, individually, moved to compel arbitration in his
third amended answer. The petition again alleged that Encore Bank lacked
standing and the trial court lacked jurisdiction.
On July 13, 2012, the trial court denied the motions to compel arbitration.
On the same date, the trial court granted summary judgment in Encore Bank’s
favor on Jacobs’s counterclaims and third-party claims and dismissed Encore
Bank’s request for declaratory judgment, thereby making the case final and
appealable.
Thereafter, Jacobs timely perfected this appeal.
WAIVER OF RIGHT TO COMPEL ARBITRATION
In two related issues on appeal, Jacobs contends the trial court erred in
denying its motion to compel arbitration, arguing that “Encore Bank failed to
overcome the presumption against waiver.”
Applicable Law and Standard of Review
“[A] party waives an arbitration clause by substantially invoking the judicial
process to the other party’s detriment or prejudice.” Perry Homes v. Cull, 258
S.W.3d 580, 589–90 (Tex. 2008). Prejudice refers to the inherent unfairness
caused by “a party’s attempt to have it both ways by switching between litigation
and arbitration to its own advantage.” Id. at 597.
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Whether a party has participated in the litigation process to the extent that it
will be held to have waived the right to arbitrate is a question of law for the court.
See id. at 587. There is a strong presumption against waiver of arbitration. Id. at
584. Any doubts regarding waiver are resolved in favor of arbitration. In re Bruce
Terminix Co., 988 S.W.2d 702, 705 (Tex. 1998). In this context, for there to have
been a waiver, appellant “must [have], at the very least, engage[d] in some overt
act in court that evince[d] a desire to resolve the [same] arbitrable dispute through
litigation rather than arbitration.” Haddock v. Quinn, 287 S.W.3d 158, 177 (Tex.
App.—Fort Worth 2009, pet. denied). Waiver is a question of law based on the
totality of the circumstances. In re Citigroup Global Mkts., Inc., 258 S.W.3d 623,
625 (Tex. 2008).
In determining whether a party waived an arbitration clause, the courts can
consider, among other factors: (1) whether the movant for arbitration was the
plaintiff (who chose to file in court) or the defendant (who merely responded), (2)
when the movant learned of the arbitration clause and how long the movant
delayed before seeking arbitration, (3) the amount of pretrial activity related to the
merits rather than arbitrability or jurisdiction, (4) the amount of discovery
conducted, and (5) whether the movant sought judgment on the merits. See Perry
Homes, 258 S.W.3d at 591–92; In re Hawthorne Townhomes, L.P., 282 S.W.3d
131, 141 (Tex. App.—Dallas 2009, no pet.).
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Analysis
In this case, Jacobs is the defendant and, thus, did not choose to file the
litigation in the trial court. Therefore, this factor weighs against finding waiver.
Jacobs was, however, aware of the arbitration clause at least from the time
suit was filed because the promissory note, which contained the arbitration clause,
was attached as an exhibit to Encore Bank’s petition. Jacobs, P.C. did not move to
compel litigation until eight months after suit was filed and Jacobs, individually,
two months after that. However, delay alone will not establish waiver, and the
Texas Supreme Court has held that a delay of two years, without more, will not
establish waiver. See In re Vesta,192 S.W.3d 759, 763 (Tex. 2006). This factor is
neutral at best because, even though Jacobs was aware of the arbitration clause
early in the litigation, its delay in moving to compel arbitration was not overly
long.
Encore Bank argues that the amount of pretrial activity related to the merits
is the key factor in concluding that Jacobs waived arbitration. Specifically, Encore
Bank contends that Jacobs “aggressive[ly] challenge[d] the Bank’s suit through the
judicial process” by (1) asserting counterclaims and third party claims, (2)
responding to the Bank’s first motion for summary judgment on the merits, and (3)
filing a motion for new trial after the Bank’s first motion for summary judgment
was granted. The Bank argues that “Jacobs was determined to test the strength of
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the Bank’s case through the judicial proceedings first, instead of arbitration,” and
only moved to compel arbitration after it lost the first summary judgment on the
merits and the Bank’s second motion for summary judgment was filed.
Jacobs responds that its actions in the litigation were “purely defensive” and
that its actions in the litigation did not substantially invoke the judicial process. On
the record in this case, we agree with Jacobs. In each of the pleadings filed by
Jacobs—its original answer, amended answers, pleas to the jurisdiction, response
to summary judgment, and motion for new trial—Jacobs asserted that Encore Bank
did not have standing to bring a suit on the note and the trial court thus lacked
jurisdiction. And, its third party claims against other Encore Bank entities is
consistent with Jacobs’s position that Encore Bank was not the holder of the note
and thus lacked standing to bring the suit. The Texas Supreme Court has held that
seeking to have a case dismissed for want of jurisdiction based on a lack of
standing does not substantially invoke the judicial process. Vesta, 192 S.W.3d at
764. When a party’s litigation conduct seeks “to avoid litigation activity rather
than duplicate it,” that party has not substantially invoked the judicial process. See
In re Citigroup Global Mkts, 258 S.W.3d at 626. Here, at each step of the judicial
proceeding Jacobs urged that the case should be dismissed for lack of standing. As
such, Jacobs was not seeking to duplicate litigation, but was seeking to avoid it.
This factor weighs against a finding of waiver.
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Here, neither party engaged in any discovery, other than filing written
requests for disclosure. As Encore Bank points out, the “parties did not engage in
protracted discovery because none was needed.” Even accepting that argument as
true, the lack of discovery in this case is either a neutral factor or one that weighs
against a finding of waiver.
Finally, we note that Jacobs did not seek judgment on the merits in this case,
Encore Bank did. Although Jacobs responded to Encore Bank’s motion, as noted
earlier, it did so by continuing to assert its position that Encore Bank had no
standing because it was not the holder of the note. By arguing that Encore Bank
had no standing, it did not oppose the summary judgment on the merits, but instead
sought to prevail on a jurisdictional argument. See Vesta, 192 S.W.3d at 764
(seeking “dismissal for lack of standing rather than on the merits” did not
substantially invoke judicial process). Thus, this factor weighs against a finding of
waiver.
Considering the totality of the circumstances and the factors set forth in
Perry Homes, 258 S.W.3d at 591–92, we conclude that Jacobs did not waive its
right to compel arbitration by substantially invoking the judicial process. Our
conclusion is supported by a review of the cases in which the Texas Supreme
Court has considered the issue of waiver.
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Specifically, in Perry Homes, the court noted that (1) filing suit, In re D.
Wilson Constr. Co., 196 S.W.3d 774, 783 (Tex. 2006); (2) moving to dismiss for
lack of standing, In re Vesta, 192 S.W.3d at 764; (3) moving to set aside a default
judgment and requesting a new trial, In re Bank One, N.A., 216 S.W.3d 825, 827
(Tex. 2007); (4) opposing a trial setting and seeking to move the litigation to
federal court, In re Serv. Corp. Int’l, 85 S.W.3d 171, 174–75 (Tex. 2002); (5)
moving to strike an intervention and opposing discovery, Prudential Sec. Inc. v.
Marshall, 909 S.W.2d 896, 898–99 (Tex. 1995); (6) sending 18 interrogatories and
19 requests for production, Bruce Terminix Co., 988 S.W.2d at 704; (7) requesting
an initial round of discovery, noticing but not taking a single deposition, and
agreeing to a trial resetting, EZ Pawn Corp., v. Mancias, 934 S.W.2d 87, 90 (Tex.
1996); (8) seeking initial discovery, taking four depositions, and moving for
dismissal based on standing, Vesta, 192 S.W.3d at 763, do not waive the right to
compel arbitration. Perry Homes, 258 S.W.3d at 590.
In contrast, the Texas Supreme Court has found wavier of arbitration in only
one case. Perry Homes, 258 S.W.3d at 592. In that case, the plaintiffs filed suit in
the trial court, “vigorously opposed” the defendants’ motion to compel arbitration,
conducted nearly complete discovery, and the case was set for trial. See Perry
Homes, 258 S.W.3d at 585. Then, after 14 months of litigation, the plaintiffs
changed their mind about pursuing litigation in the trial court and moved to compel
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arbitration. The trial court granted the motion four days before the case was set for
trial. Id. The Texas Supreme Court held that the plaintiff had waived their right to
arbitrate, set aside the arbitration award, and remanded the case for trial. Id. at
601.
This case is not like Perry Homes because Jacobs never filed suit, opposed
arbitration, conducted any discovery, or waited until the eve of trial to file its
motion to compel. Additionally, Jacobs never sought judgment on the merits, and
opposed Encore Bank’s motion for summary judgment by challenging its standing
to bring the suit. In fact, in every pleading filed by Jacobs, it argued that Encore
Bank did not have standing. As such, this case is more like In re Vesta than it is
like Perry Holmes. In Vesta, the litigation proceeded for two years, during which
Vesta sought initial discovery, took four depositions, and moved to dismiss the
case for lack of standing before it moved to compel arbitration. 192 S.W.3d at
763–64. Despite more pretrial activity by Vesta than is present by Jacobs in this
case, the Texas Supreme Court concluded that Vesta had not waived its right to
compel arbitration. Id. at 764. Similarly, we conclude that Jacobs has not waived
its right to compel arbitration.
We sustain Jacobs’ first two issues on appeal. Because Jacobs did not
substantially invoke the judicial process, the trial court erred in finding that Jacobs
had waived its right to compel arbitration. We need not determine whether Encore
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Bank suffered prejudice. Similarly, we need not address Jacobs’ issue regarding
whether it had adequate notice of the summary judgment hearing.
CONCLUSION
We reverse the judgment of the trial court and remand with instructions for
the trial court to enter an order compelling arbitration.
Sherry Radack
Chief Justice
Panel consists of Chief Justice Radack and Justices Sharp and Massengale.
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