Natalya Read v. Stephen Sibo ( 2019 )

Affirmed and Memorandum Opinion filed June 20, 2019.
In The
Fourteenth Court of Appeals
NO. 14-18-00106-CV
NATALYA READ, Appellant
V.
STEPHEN SIBO, Appellee
On Appeal from the 127th District Court
Harris County, Texas
Trial Court Cause No. 2016-01772
MEMORANDUM OPINION
Pro se appellant Natalya Read appeals from the trial court’s interlocutory
order denying her motion to compel arbitration of appellee Stephen Sibo’s claims
against her. Finding no error, we affirm the trial court’s order denying Read’s
motion to compel arbitration.
BACKGROUND
Sibo began loaning Read money in 2009. They executed a loan agreement
in July 2009. Read promised in this loan agreement to repay Sibo $50,000 plus
interest. While Read made some payments on that debt, she failed to make all of
the required monthly payments. Sibo and Read then signed a second loan
agreement in February 2010. (In the second loan agreement, Read promised to
repay Sibo $82,500 plus interest.1 Read was to make $2,500 monthly installment
payments. The second loan agreement provided for a 2% late charge for any late
installment payments. Neither of the loan agreements contain an arbitration clause.
Sibo continued to loan Read additional money, which Sibo labeled “microloans,”
after the second loan agreement was signed. This additional amount totaled
$175,343. While Read made some payments to Sibo, these amounts remained
largely unpaid.
In late 2013 and early 2014, Read convinced Sibo to fund TerraStoch, Inc., a
software start-up company, through loans totaling $57,508.60. Among other
agreements, Sibo and TerraStoch entered into a Restricted Stock Purchase
Agreement, which contains an arbitration agreement.2 Read, as president of
TerraStoch, hired Sibo as TerraStoch’s director of operations.
Faced with Read’s failure to repay the debt she personally owed to him, and
the lack of progress in getting TerraStoch started as a functioning business, Sibo
informed Read that he would not be providing additional funds. Read then
terminated Sibo’s TerraStoch employment. As a result of the deteriorating
relationship, Sibo filed suit against both Read and TerraStoch in January 2016.
Sibo sued Read, individually, alleging breach of the second loan agreement and
failure to repay the microloans. In addition, Sibo sued both Read and TerraStoch
1
The $82,500 included $32,000 remaining from the July 2009 loan agreement plus an
additional $50,000 loan.
2
Sibo eventually purchased a total of 800,000 shares of TerraStoch common stock. The
record indicates that he paid a total of $80.00 for the shares.
2
for common law and statutory fraud, as well as alleged violations of the Texas
Securities Act, and the Deceptive Trade Practices Act for their actions related to
getting the TerraStoch business up and running. Read and TerraStoch separately
filed general denials.
Read’s and TerraStoch’s attorneys withdrew their representation for non-
payment of fees. Later, a new law firm entered an appearance on behalf of both
Read and TerraStoch. Read and TerraStoch filed their first Motion to Compel
Arbitration and Stay Proceedings in October 2016. They did not, however, set the
motion for submission or oral hearing. Read and TerraStoch’s second set of
attorneys withdrew in early 2017. The trial court required TerraStoch to retain
counsel within 45 days of the trial court’s order. The record does not indicate
whether TerraStoch ever complied with this order. Read did not retain new
counsel; she proceeded pro se from that point forward.
Sibo eventually filed a motion for partial summary judgment on his breach
of contract claim against Read individually. The trial court granted Sibo a partial
summary judgment on his breach of contract claim against Read in the amount of
$279,351.83. Read filed a motion asking the trial court to reconsider the partial
summary judgment. While her motion to reconsider was pending, Read filed a
notice of interlocutory appeal to this court. The trial court passed the scheduled
hearing on Read’s motion to reconsider in light of Read’s pending interlocutory
appeal. This court dismissed Read’s interlocutory appeal of the partial summary
judgment for lack of jurisdiction. See Read v. Sibo, No. 14-17-00731-CV, 2017
WL 5472826, at *1 (Tex. App.—Houston [14th Dist.] Nov. 14, 2017, no pet.)
(“Neither appellant’s brief nor the record in this case indicates that the order at
issue here corresponds to one of the appealable interlocutory orders identified in
section 51.014(a).”). The trial court subsequently denied Read’s motion to
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reconsider.
Sibo later filed a motion for final summary judgment on all of his remaining
claims against Read and TerraStoch. Sibo set his motion for submission in
December 2017. The trial court has not yet ruled on the motion, so Sibo’s partial
summary judgment remains an interlocutory order. Only at this point-in-time,
nearly two years after the start of the litigation, did Read file her second motion to
compel arbitration.3 This time, Read set her motion to compel arbitration for oral
hearing. After filing her second motion to compel arbitration, Read filed a motion
for sanctions against Sibo and his counsel, which the trial court ultimately denied.
The trial court denied Read’s motion to compel arbitration and Read filed her
notice of interlocutory appeal soon thereafter.
ANALYSIS
Read brings three issues on appeal.4 In her first two issues, Read once again
tries to challenge the interlocutory partial summary judgment order signed by the
trial court on June 8, 2017. Because that order remains interlocutory, we do not
have jurisdiction to address Read’s issues challenging it. See Read, 2017 WL
5472826, at *1. We therefore turn to Read’s third issue, in which she challenges
the trial court’s denial of her second motion to compel arbitration, which we do
have jurisdiction to address. Tex. Civ. Prac. & Rem. Code § 51.016; Branch Law
Firm, L.L.P. v. Osborn, 532 S.W.3d 1, 10 (Tex. App.—Houston [14th Dist.] 2016,
pet. denied).
I. The trial court did not abuse its discretion when it denied Read’s
3
Read was the only defendant to file the second motion to compel arbitration.
4
TerraStoch is not a party to this appeal and Read cannot present arguments on its behalf.
See Sherman v. Boston, 486 S.W.3d 88, 95–96 (Tex. App.—Houston [14th Dist.] 2016, pet.
denied) (“As a result, courts hold that a non-attorney representative cannot appear for a limited
liability company or present a claim on its behalf.”).
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motion to compel arbitration.
A. Standard of review and applicable law
We review the trial court’s order denying Read’s motion to compel
arbitration under an abuse-of-discretion standard, deferring to the trial court on
factual determinations that are supported by the evidence and reviewing legal
determinations de novo. See Perry Homes v. Cull, 258 S.W.3d 580, 598 (Tex.
2008); Smart Call, LLC v. Genio Mobile, Inc., No. 14-13-00223-CV, 2014 WL
3955083, at *4 (Tex. App.—Houston [14th Dist.] Aug. 14, 2014, pet. denied)
(mem. op.). A party cannot be forced to arbitrate absent a binding agreement to do
so. Jody James Farms, JV v. Altman Group, Inc., 547 S.W.3d 624, 632 (Tex.
2018). Thus, a party seeking to compel arbitration has the burden first of
establishing the existence of a valid arbitration agreement. In re FirstMerit Bank,
N.A., 52 S.W.3d 749, 753 (Tex. 2001). A trial court’s determination regarding the
existence of an agreement is a legal question that we review de novo. J.M.
Davidson, Inc. v. Webster, 128 S.W.3d 223, 227 (Tex. 2003).
In determining whether an agreement to arbitrate exists, courts apply
ordinary principles regarding contract formation. See J.M. Davidson, 128 S.W.3d
at 227 (“Arbitration agreements are interpreted under traditional contract
principles.”). The primary concern in construing the contract is to ascertain the
intention of the parties as expressed in the agreement. Jody James Farms, 547
S.W.3d at 633 (“Who is bound by an arbitration agreement is normally a function
of the parties’ intent, as expressed in the agreement’s terms.”).
The evidentiary standards applicable to a motion to compel arbitration are
the same as those applicable to a motion for summary judgment. In re Estate of
Guererro, 465 S.W.3d 693, 703 (Tex. App.—Houston [14th Dist.] 2015, pet.
denied) (en banc). Thus, a party moving to compel arbitration must present proof
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that an agreement to arbitrate exists and requires arbitration of the dispute. Id.
B. The second loan agreement does not contain an arbitration clause.
To the extent Read argues on appeal that the trial court abused its discretion
when it denied her motion to send Sibo’s breach of contract claim arising out of the
second loan agreement and microloans to arbitration, we disagree. We begin by
pointing out that the second loan agreement does not contain an arbitration clause.
It also does not mention TerraStoch. Despite that, Read argues on appeal that a
signatory to an arbitration agreement, such as Sibo, cannot avoid arbitration when
his right to recover, and his damages, “depend on the agreement containing the
arbitration clause.”
Assuming without deciding that, in her individual capacity, Read is a party
who can seek to compel arbitration pursuant to those contracts, we conclude that
she has not shown an abuse of discretion by the trial court. None of the TerraStoch
documents containing arbitration clauses referenced by Read mention the personal
loans from Sibo to Read. Instead, those arbitration agreements were limited to
disputes related to the specific contract in which the clause was included.5 To
compel arbitration of the personal loan dispute because the TerraStoch stock
5
Read references only the TerraStoch Restricted Stock Purchase Agreement in her
appellate briefing. That contract’s arbitration clause is limited to disputes “arising out of,
relating to, or resulting from this agreement.” Sibo’s personal loans to Read predate this
agreement. Read also did not present any evidence in her motion establishing a connection
between the stock purchase agreement and Sibo’s personal loans to her. There are two additional
TerraStoch agreements with Sibo containing arbitration clauses. Both are similarly limited. The
first, Sibo’s Consulting Agreement, requires arbitration only of “any dispute or controversy
arising out of, relating to or in connection with the interpretation, validity, construction,
performance, breach or termination of this Agreement . . . .” The second, Sibo’s Employee
Proprietary Information Agreement, provides that arbitration is required for “any dispute or
controversy arising out of, relating to, or concerning any interpretation, construction,
performance, or breach of this agreement, or otherwise relating to my employment with the
company . . . .” Sibo’s claims against Read seeking repayment of his personal loans to her, do
not relate in any way to the subjects covered by these latter contracts.
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purchase agreement contains an arbitration clause, would effectively require this
court to rewrite both the second loan agreement and the stock purchase agreement.
See In re Merrill Lynch Trust Co., FSB, 235 S.W.3d 185, 191 (Tex. 2007). This
we cannot do. See HECI Exploration Co. v. Neel, 982 S.W.2d 881, 888 (Tex.
1998) (stating that courts cannot make contracts for the parties). We conclude that
Sibo’s breach of contract claim against Read seeking repayment of the personal
loans he made to her, does not depend on any contract containing an arbitration
agreement. See In re Rubiola, 334 S.W.3d 220, 226 (Tex. 2011) (“To determine
whether a claim falls within the scope of the agreement, courts must focus on the
factual allegations of the complaint rather than the legal causes of action
asserted.”) (internal quotation marks omitted). We therefore hold that the trial
court did not abuse its discretion when it denied Read’s second motion to compel
arbitration with respect to Sibo’s breach of contract claim.
II. Read waived arbitration of Sibo’s claims arising out of his loans to, and
investment in, TerraStoch.
We turn next to Sibo’s remaining claims against Read, which relate to his
investment in, and loans to TerraStoch. Assuming without deciding that these
claims fall within the scope of the arbitration clause in the Restricted Stock
Purchase Agreement between Sibo and TerraStoch, and that Read, who signed the
agreement as TerraStoch’s president, is a party who properly may seek to compel
arbitration of Sibo’s claims against her related to his involvement with TerraStoch
pursuant to the arbitration clause, we now consider whether Read waived her right
to arbitration.
Waiver of arbitration is a question of law that this Court reviews de novo.
Perry Homes, 258 S.W.3d at 598; In re Bruce Terminix Co., 988 S.W.2d 702, 703–
04 (Tex. 1998) (orig. proceeding) (per curiam). Arbitration rights are contractual,
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and the law includes a strong presumption against the waiver of those rights. See
Bruce Terminix, 988 S.W.2d at 704. When presented with questions of waiver, we
are required to resolve any doubts in favor of arbitration. In re Oakwood Mobile
Homes, 987 S.W.2d 571, 574 (Tex. 1999) (orig. proceeding) (per curiam),
abrogated in part on other grounds by In re Halliburton Co., 80 S.W.3d 566, 572
(Tex. 2002) (orig. proceeding). The standard for determining waiver is the same
under federal and state law. See Holmes, Woods & Diggs v. Gentry, 333 S.W.3d
650, 654 (Tex. App.—Dallas 2009, no pet.). Waiver may be implied from a
party’s conduct, so long as that conduct is unequivocal. Perry Homes, 258 S.W.3d
at 593. In close cases, the strong presumption against waiver should govern. Id.
Finally, to establish waiver, the party opposing arbitration must prove that it would
suffer prejudice if the case was sent to arbitration. Id.
Courts analyze whether waiver of arbitration has occurred on a case-by-case
basis, based on the totality of the circumstances presented. Perry Homes, 258
S.W.3d at 591. The Supreme Court of Texas has determined that “allowing a party
to conduct full discovery, file motions going to the merits, and seek arbitration,
only on the eve of trial would be sufficient” to establish waiver of a right to
arbitration. Id. at 590 (internal quotation marks omitted). The court recognized,
however, that a case rarely presents all of these factors. Id. at 591. It therefore
stated that when determining whether a party has waived an arbitration clause,
courts can consider numerous factors, including: (1) how long the movant knew of
the arbitration clause; (2) how long the movant delayed before seeking arbitration;
(3) the amount of the movant’s pretrial activity related to the merits rather than
arbitrability or jurisdiction; (4) the amount of discovery conducted and who
initiated it; (5) what discovery, if any, would be unavailable in arbitration; (6)
whether activity in court would be duplicated in arbitration; (7) whether the
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movant filed affirmative claims or dispositive motions; (6) how much time and
expense has been incurred in the litigation; (7) whether the movant sought or
opposed arbitration earlier in the case; and (8) when the case was to be tried. See
id. at 591–92. The supreme court has recognized that waiver of arbitration
“involves substantial invocation of the judicial process, not just judgment on the
merits.” Id. at 592. It also pointed out that substantial invocation “depends very
much on the context; three or four depositions may be all the discovery needed in
one case, but purely preliminary in another.” Id. at 593. In addition to substantial
invocation of the judicial process by the party seeking arbitration, the Supreme
Court of Texas also requires the party opposing arbitration to show that the
movant’s conduct has “caused it to suffer detriment or prejudice.” G. T. Leach
Builders, LLC v. Sapphire V.P., LP, 458 S.W.3d 502, 512 (Tex. 2015).
It is undisputed that Read knew various arbitration agreements existed from
the beginning of the litigation. Despite that knowledge, Read waited nearly two
years before filing her motion to compel arbitration, which she brought to the trial
court’s attention. See Murphree v. Cooper, No. 14-11-00416-CV, 2012 WL
2312706, at *1 (Tex. App.—Houston [14th Dist.] June 19, 2012, no pet.) (mem.
op.) (“Showing that a motion was filed with the court clerk does not constitute
proof that the motion was brought to the trial court’s attention or presented to the
trial court with a request for a ruling.”). While Read previously had filed a motion
to compel arbitration, about ten months after Sibo filed his lawsuit against her and
six months after she had filed her answer, she never presented the motion to the
trial court for a ruling.
Prior to the filing of her second motion to compel arbitration, much had
happened in the case. The parties had conducted discovery, including discovery
Read had served. Sibo had obtained a partial summary judgment on his breach of
9
contract claim against Read personally. Read had sought reconsideration of the
trial court’s decision, and even had attempted to appeal the trial court’s
interlocutory order, all without mentioning the existence of the various arbitration
agreements. See Adams v. StaxxRing, Inc., 344 S.W.3d 641, 650 (Tex. App.—
Dallas 2011, pet. denied) (“Although the rule-12 motion and Adams’s immediate
detour to the appellate court did not implicate the merits of the underlying dispute,
the journey delayed and frustrated the trial court’s ability to resolve the case and
increased the litigation costs for the parties.”). It was only after Sibo filed his
motion for final summary judgment, approximately twenty-three months after the
lawsuit was initiated, that Read filed her second motion to compel arbitration and
brought it to the trial court’s attention by setting it for a hearing. Even then, Read
continued to participate in the litigation process, and even sought affirmative relief
by filing a motion for sanctions against Sibo. See CTL/Thompson Texas, LLC v.
Starwood Homeowner’s Ass’n, Inc., 390 S.W.3d 299, 300 (Tex. 2013) (stating, in a
case addressing effect of a nonsuit, that a motion for sanctions is a claim for
affirmative relief). Read then filed an “Emergency Motion for Expedited
Discovery” to obtain discovery relevant to her motion for sanctions. Finally, Sibo
already has incurred approximately $18,500 in legal fees prosecuting his claims
against Read and TerraStoch.
We conclude that, based on the totality of the circumstances, Sibo
established Read substantially invoked the judicial process. See Hogg v. Lynch,
Chappell & Alsup, P.C., 480 S.W.3d 767, 791 (Tex. App.—El Paso 2015, no pet.)
(“Further, in light of the fact that Ms. Hogg admittedly knew about the arbitration
clause from the outset of the litigation, we conclude that her conscious and
informed decision to litigate her dispute in a judicial proceeding and to invoke the
arbitration clause only after receiving the trial court’s adverse ruling was more
10
consistent with a late game tactical decision than a true intent to preserve the right
to compel arbitration.”) (internal quotation marks omitted); Adams, 344 S.W.3d at
650 (concluding party seeking arbitration substantially invoked the judicial
process); Citizens Nat’l Bank v. Bryce, 271 S.W.3d 347, 356 (Tex. App.—Tyler
2008, no pet.) (concluding party requesting arbitration substantially invoked
judicial process by, among other things, participating in discovery and waiting
twenty months after start of litigation to seek arbitration).
Sibo also was required to show that he would be prejudiced if the dispute
was sent to arbitration. Perry Homes, 258 S.W.3d at 595. In this context,
prejudice refers to the inherent unfairness in terms of delay, expense, or damage to
a party’s legal position that occurs when the party’s opponent forces it to litigate an
issue and later seeks to arbitrate the same issue. Id. at 597 n.93. Seeking
arbitration only after that party has received an adverse ruling can establish
prejudice. Hogg, 480 S.W.3d at 794. Such an action prejudices the nonmovant
because it deprives “the plaintiff of benefits of the summary judgment order that
had been entered in her favor.” Id. at 795 (citing Sedillo v. Campbell, 5 S.W.3d
824, 829 (Tex. App.—Houston [14th Dist.] 1999, no pet.)). Because Sibo would
have to re-litigate the issues resolved by the partial summary judgment and incur
additional legal fees in the process, we conclude that he established he would be
prejudiced if the dispute was sent to arbitration. We hold that the trial court did
not err when it determined that Read waived arbitration of her dispute with Sibo.
See G. T. Leach Builders, LLC, 458 S.W.3d at 512. We therefore overrule her
third issue.
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CONCLUSION
Having overruled Read’s third issue, the only issue necessary to resolve the
appeal, we affirm the judgment of the trial court. See Tex. R. App. P. 47.1.
/s/ Jerry Zimmerer
Justice
Panel consists of Chief Justice Frost and Justices Zimmerer and Hassan.
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