Texas REIT, LLC, Ali Choudhri, Dalio Holdings I, LLC and Dalio Holdings II, LLC v. Mokaram-Latif West Loop, Ltd. and Ali Mokaram ( 2022 )

Affirmed and Memorandum Opinion filed December 6, 2022.
In The
Fourteenth Court of Appeals
NO. 14-22-00014-CV
TEXAS REIT, LLC, ALI CHOUDHRI, DALIO HOLDINGS I, LLC AND
DALIO HOLDINGS II, LLC, Appellants
V.
MOKARAM-LATIF WEST LOOP, LTD. AND ALI MOKARAM, Appellees
On Appeal from the 333rd District Court
Harris County, Texas
Trial Court Cause No. 2012-27197-A
MEMORANDUM OPINION
Appellants Texas REIT, LLC, Ali Choudhri, Dalio Holdings I, LLC, and
Dalio Holdings II, LLC appeal the trial court’s order confirming an arbitration award
and denying their motion to vacate the award. We affirm.
BACKGROUND
We present the facts as found by the arbitrators. In June 2008, Texas REIT,
an entity formed for the purpose of buying and selling real estate, executed a
promissory note in favor of International Bank of Commerce (IBC) in the amount of
$8,640,000 (the Note). Choudhri owned a 65% interest in Texas REIT and was the
sole manager of Texas REIT at all times. Appellee Ali Mokaram1 owned a 30%
interest in Texas REIT, and the Estate of Ede I. Nemeti owned a 5% interest.2
Mokaram’s 30% interest was transferred via two different written agreements, each
of which assigned a 15% interest in Texas REIT to Mokaram. The Note was secured
by a retail strip center and a contiguous Walgreen’s on Westheimer Road in Houston
(the Property). WCW Houston Properties, LLC, not a party to this action, acquired
a second lien on the Property and subsequently sought to foreclose.3 According to
the award, Choudhri then embarked on a “purposefully orchestrated” plan to
wrongfully deprive Mokaram of his lawful ownership interest in Texas REIT.
The Note was secured by the Property pursuant to a deed of trust executed by
Texas REIT (the Deed of Trust). Choudhri personally guaranteed the Note by
executing a guaranty (the Guaranty). The Deed of Trust and the Guaranty were
executed as part of one transaction for Texas REIT to acquire the Property
(collectively, the Loan Documents). All three documents contained similar, if not
identical, arbitration clauses, and because Choudhri signed the Guaranty he was
individually subject to arbitration.
Ten years later, on May 25, 2018, Dalio I acquired the Note and Deed of Trust
for $6,334,189.88, the full amount due and owing under the Note at the time. Thirty-
nine days later, on July 3, 2018, Dalio I foreclosed on the Property. The arbitrators
1
We include Mokaram-Latif West Loop, Ltd. in the style of this appeal because it is listed
as a party on the trial court’s confirmation of the arbitration award. The claims at issue in this
appeal, however, were filed by Mokaram on behalf of Texas REIT.
2
Nemeti’s estate was represented below by Erika Nemeti, the executrix of the estate.
Nemeti is not a party to this appeal.
3
Texas REIT executed this note in favor of Architectural Services Inc., another non-party,
in the amount of $1,500,000.
2
determined, and Choudhri admitted, that Choudhri was the true owner of Dalio I and
Dalio II (collectively, the Dalio Entities), and had installed his girlfriend as a “front”
to hide his ownership in Dalio I.
At the time of the foreclosure, multiple persons attended the auction and were
ready, willing, and able to bid on and purchase the Property. Despite the presence of
those bidders, who could offer immediate cash or the equivalent, Dalio I took steps
to ensure that it would take title to the Property without paying for it by making
credit bids for amounts that were not owed to Dalio I, and that would prevent other
bidders from purchasing the Property. On July 3, 2018, the same day that Dalio I
foreclosed and received the trustee’s deed for the Property, Dalio I granted and
conveyed a deed of trust to Dalio II to give it a “first lien” on the Property to secure
a non-existent $10,000,000 obligation. On September 3, 2019, Dalio II foreclosed
on its bogus lien on the Property and the Dalio II Trustee conveyed the Property, as
Trustee, to Dalio II by a Trustee’s Deed dated September 3, 2019. Choudhri
orchestrated each of the foreclosures.
Choudhri, through the Dalio Entities, conducted a wrongful foreclosure of the
Property using credit bids for funds that were not owed by Texas REIT with the
purpose and intent of depriving Texas REIT and WCW Houston Properties of the
Property and any lien on the Property. At the time of the foreclosure, the true balance
due and owing on the Note was $5,727,474.22, and the Property was worth $14
million.
Choudhri owed a fiduciary duty to Texas REIT to minimize its debts and to
settle and compromise claims by creditors if it was in the best interest of Texas REIT
to do so. “Instead of taking steps in the best interest of [Texas REIT], Choudhri
instead planned and orchestrated his fraudulent foreclosure scam to deprive [Texas
REIT] and its members and creditors of the Property and its equity.”
3
Mokaram subsequently asserted claims, individually, and on behalf of Texas
REIT, alleging Choudhri, through the Dalio Entities and other entities, breached the
Texas REIT agreement, wrongfully foreclosed on the Property, conspired to
wrongfully foreclose, and breached fiduciary duties owed to Texas REIT.
After the Dalio Entities moved to compel arbitration, on December 3, 2018,
the trial court ordered the following claims to arbitration:
1. Mokaram’s wrongful foreclosure claim against Dalio I;
2. Mokaram’s conspiracy claim against the Dalio Entities and
Choudhri;
3. Mokaram’s claim of knowing participation in a breach of
fiduciary duty against the Dalio Entities;
4. Mokaram’s breach of fiduciary duties claims against Choudhri
relating to or arising out of any of the Arbitrable Claims;
5. Mokaram’s breach of the Texas REIT limited liability company
agreement against Choudhri relating to or arising out of any of the
Arbitrable Claims;
6. Nemeti’s breach of fiduciary duties claims against Choudhri
relating to or arising out of any of the Arbitrable Claims;
7. Nemeti’s breach of the Texas REIT limited liability company
agreement against Choudhri relating to or arising out of any of the
Arbitrable Claims; and
8. Nemeti’s application for receivership.
The arbitrators held a five-day hearing, and concluded that (1) Mokaram had
standing to assert derivative claims on behalf of Texas REIT; (2) the foreclosure
orchestrated by Choudhri and the Dalio Entities was wrongful; (3) Choudhri
breached the company agreement of Texas REIT; (4) Choudhri breached fiduciary
duties owed to Texas REIT; (5) the Dalio Entities knowingly participated in
Choudhri’s breaches of fiduciary duties; (6) Choudhri committed constructive fraud;
4
and (7) Choudhri and the Dalio Entities conspired to wrongfully transfer the Property
and conceal Choudhri’s involvement in the transfers.
The arbitrators further concluded that Choudhri did not meet his burden of
proof on any of his affirmative defenses. Finally, in awarding damages, the
arbitrators concluded that if they awarded damages to Texas REIT, Choudhri was
“likely to take whatever steps he can, lawful or not, to deprive Mokaram of the
benefits of his ownership interest in [Texas REIT], which means causing damage
and harm to [Texas REIT].” The arbitrators concluded that Mokaram could recover
individually on all claims including the derivative claims. The arbitrators also
concluded that Mokaram was entitled to recover attorney’s fees.
Mokaram subsequently moved to confirm the arbitrators’ award, and
Choudhri and the Dalio Entities moved to vacate it. After a hearing, the trial court
granted Mokaram’s motion in its entirety, confirmed the arbitrators’ award, denied
appellants’ motion to vacate, and signed an order in favor of Mokaram. Appellants
filed this interlocutory appeal.4 See Tex. Civ. Prac. & Rem. Code § 171.098(a)(3)
(permitting interlocutory appeal of order confirming or denying confirmation of an
award).
ANALYSIS
Appellants challenge the trial court’s confirmation of the arbitration award on
the grounds that (1) the arbitration agreement did not include Mokaram as a party to
the agreement; (2) the scope of the agreement did not include the claims asserted;
(3) the arbitrators exceeded their authority; (4) the arbitrators denied appellants’
motion to continue the final hearing; and (5) the arbitrators committed material
4
The trial court’s confirmation of the arbitration award is not a final judgment because not
all of the parties’ claims were resolved by the underlying arbitration proceeding.
5
errors of law. Before addressing appellants’ issues we must first determine whether
the Federal Arbitration Act (FAA) or the Texas Arbitration Act (TAA) governs
confirmation of the arbitration award.
I. The FAA governs confirmation of the arbitration award.
In the arbitrators’ final award, they found that the Note and the Deed of Trust
contained similar mandatory arbitration clauses encompassing Mokaram’s and
Nemeti’s derivative claims on behalf of Texas REIT. The Note specified the disputes
covered by the arbitration provision:
Arbitrable disputes include any and all controversies or claims between
the parties of whatever type or manner, including without limitation,
any claim arising out of or relating to this note, all past, present and/or
future credit facilities and/or agreements involving the parties, any
transactions between or involving the parties, and/or any aspect of any
past or present relationship of the parties, whether banking or
otherwise, specifically including any alleged tort committed by any
party.
Similarly, the arbitration provision in the Deed of Trust provided:
Any and all commercial controversies between the parties, shall be
resolved by arbitration in accordance with the commercial arbitration
rules of the American Arbitration Association in effect at the time of
filing, unless the commercial arbitration rules conflict with this
provision, and in such event the terms of this provision shall control, to
the extent of the conflict.
The Deed of Trust likewise specified the disputes covered by the arbitration
provision:
Arbitrable disputes include any and all controversies or claims between
the parties of whatever type or manner, including without limitation,
any claim arising out of or relating to this deed of trust, all past, present
and/or future credit facilities and/or agreements involving the parties,
any transactions between or involving the parties, and/or any aspect of
any past or present relationship of the parties, whether banking or
6
otherwise, specifically including any alleged tort committed by any
party.
Both the Note and Deed of Trust defined “the parties” for purposes of the
arbitration provisions as Texas REIT, IBC, and the following additional parties:
For purposes of this provision, “the parties” means borrower and
lender, and each and all persons and entities signing this agreement or
any other agreements between or among any of the parties as part of
this transaction. “The parties” shall also include individual partners,
affiliates, officers, directors, employees, agents and/or representatives
of any party to such documents, and shall include any other owner and
holder of this agreement.
All the Loan Documents were signed by Choudhri as manager of Texas REIT.
The arbitrators found that Mokaram’s and Nemeti’s derivative claims on behalf of
Texas REIT related to or arose out of Dalio I’s foreclosure of the Property; therefore,
the claims fell within the scope of the arbitration provisions of the Note and Deed of
Trust.
Both the Note and the Deed of Trust also contained the following clause
stating that the FAA governed arbitration under the documents:
The parties acknowledge that this agreement evidences a transaction
involving interstate commerce. The Federal Arbitration Act shall
govern the interpretation, enforcement, and proceedings pursuant to the
arbitration clause of this agreement.
The Loan Documents also contained a clause stating that “material errors of law
shall be grounds [in addition to all others] for vacatur of an award rendered pursuant
to this agreement.”
Appellants assert that the above clause permits them to seek vacatur for
material errors of law, which are not statutory grounds for vacatur under either the
FAA or TAA. We disagree. Both the FAA and TAA provide specific statutory
grounds for vacating an arbitration award. See 9 U.S.C. § 10; Tex. Civ. Prac. & Rem.
7
Code § 171.088. Under the FAA, the statutory grounds provide the exclusive
regimes for vacating or modifying an arbitration award. Hall St. Associates, L.L.C.
v. Mattel, Inc., 552 U.S. 576, 590 (2008). However, as to arbitration agreements to
which only the TAA applies or to which both the TAA and FAA apply, parties may
contract for expanded court review of the arbitration award by agreeing that the
arbitrators do not have the power or authority to reach a decision based on reversible
error. See Nafta Traders, Inc. v. Quinn, 339 S.W.3d 84, 91–101 (Tex. 2011). Our
review, therefore, turns on whether the FAA or TAA governs vacatur of the award
in this case.
The above-quoted clause stating that, “The Federal Arbitration Act shall
govern the interpretation, enforcement, and proceedings pursuant to the arbitration
clause of this agreement” indicates the parties unequivocally contracted for the FAA
to govern arbitration. See Nafta Traders, 339 S.W.3d at 98 n. 64 (parties’ choice of
FAA controls; otherwise both FAA and TAA may govern).
Appellants challenge the applicability of the FAA asserting (1) the clause does
not provide that the FAA exclusively applies; (2) the term “proceedings” refers to
the arbitration proceedings, not confirmation of the arbitration award; and (3)
Mokaram invoked the TAA in the trial court.
Appellants first assert that because the documents contained a choice-of-law
provision stating that Texas law would apply, the parties necessarily intended that
only the TAA would govern arbitration. The Supreme Court of Texas has rejected
appellants’ argument. See In re L & L Kempwood Associates, L.P., 9 S.W.3d 125,
127 (Tex. 1999). The court in L & L Kempwood held that because the choice-of-law
provision did not specifically exclude the application of federal law, the court
declined to read the choice-of-law clause as having such an effect. Id. The choice-
of-law clause in the Loan Documents here similarly does not preclude application
8
of federal law. Therefore, the choice-of-law provision stating that Texas law
generally applied to the contract did not override the specific clause requiring
governance by the FAA.
Appellants next assert that the term “proceedings” as used in the clause
invoking the FAA does not apply to confirmation or vacatur of the arbitration award
but solely to the arbitration proceeding before the arbitrators. We recently rejected a
similar argument holding that confirmation of an arbitration award is “part and
parcel” of the arbitration process. See Crown Bus. Park, Inc. v. Muhammed, No. 14-
21-00317-CV, 2022 WL 3452900, at *6 (Tex. App.—Houston [14th Dist.] Aug. 18,
2022, no pet.) (mem. op.). In Crown Business, a party sought additional attorney’s
fees incurred while seeking confirmation of the arbitration award, arguing that the
contract provided for attorney’s fees in “arbitration or other legal proceeding.” Id.The party argued that confirmation of the award and defense of a motion to vacate
constituted another “legal proceeding.” Id. We held that seeking confirmation of the
award and responding to a motion to vacate were not separate legal proceedings but
part of the arbitration process. Id. We therefore reject appellants’ argument that the
clause requiring governance by the FAA did not apply to confirmation of the
arbitrators’ award.
Finally, appellants assert that Mokaram waived his right to assert that the FAA
governs because he invoked the “protections of Section 171.086 of the Texas Civil
Practice and Remedies Code.” The objective intent of the parties as expressed in the
agreement controls the construction of an unambiguous contract, not a party’s after-
the-fact conduct. In re Dillard Dep’t Stores, Inc., 186 S.W.3d 514, 515 (Tex. 2006).
Any conduct after signing the agreement would not waive applicability of the FAA
as agreed by the parties. Mokaram therefore did not waive applicability of the FAA
by citing to a provision in the TAA after entering into the Loan Documents.
9
Because none of appellants’ arguments can overcome the contracts’ specific
invocation of the FAA, we conclude the FAA applied to the arbitration proceedings
and the trial court’s confirmation of the arbitrators’ award.
II. Statutory grounds for vacatur of arbitration award and standard of
review
An arbitration award has the same effect as the judgment of a court of last
resort, and a court reviewing the award may not substitute its judgment for that of
the arbitrators merely because it would have reached a different result. Baker Hughes
Oilfield Operations, Inc. v. Hennig Prod. Co., 164 S.W.3d 438, 442 (Tex. App.—
Houston [14th Dist.] 2005, no pet.). Under the terms of the FAA, an arbitration
award must be confirmed unless it is vacated, modified, or corrected under one of
the limited grounds set forth in sections 10 and 11 of the FAA. 9 U.S.C. §§ 9–11;
Broemer v. Houston Law. Referral Serv., 407 S.W.3d 477, 484 (Tex. App.—
Houston [14th Dist.] 2013, no pet.).
The FAA provides the following statutory grounds for vacatur:
(1) where the award was procured by corruption, fraud, or undue
means;
(2) where there was evident partiality or corruption in the arbitrators, or
either of them;
(3) where the arbitrators were guilty of misconduct in refusing to
postpone the hearing, upon sufficient cause shown, or in refusing to
hear evidence pertinent and material to the controversy; or of any other
misbehavior by which the rights of any party have been prejudiced; or
(4) where the arbitrators exceeded their powers, or so imperfectly
executed them that a mutual, final, and definite award upon the subject
matter submitted was not made.
9 U.S.C.A. § 10.
These statutory grounds provide the exclusive regimes for vacating an arbitration
10
award under the FAA. Hall St. Assoc., 552 U.S. at 590.
We review de novo a trial court’s order confirming or vacating an arbitration
award; however, our review of the underlying award is extremely deferential. See
CVN Grp., Inc. v. Delgado, 95 S.W.3d 234, 238 (Tex. 2002); In re Marriage of
Piske, 578 S.W.3d 624, 629 (Tex. App.—Houston [14th Dist.] 2019, no pet.).
Judicial review of the arbitration process is limited, and even a mistake of law or
fact by the arbitrator in applying substantive law is not a proper ground for vacating
an award. See Aston Solar, LLC v. Sunnova Energy Corp., No. 14-21-00074-CV,
2022 WL 1256427, at *2 (Tex. App.—Houston [14th Dist.] Apr. 28, 2022, no pet.)
(mem. op.). We indulge all reasonable presumptions in favor of the award and none
against it. See Delgado, 95 S.W.3d at 238.
Having determined the FAA applies, we turn to appellants’ grounds for
vacatur.
III. The arbitrators did not exceed their authority.
In appellants’ first and second issues they assert the arbitrators exceeded their
authority because the arbitration agreements did not include Mokaram or the claims
asserted.
An arbitrator’s authority is derived from the parties’ agreement to submit to
arbitration. Nafta Traders, 339 S.W.3d at 90. Therefore, we look to the arbitration
agreement to determine whether the arbitrators had authority to decide the issue. See
id.; D.R. Horton-Tex., Ltd. v. Bernhard, 423 S.W.3d 532, 534 (Tex. App.—Houston
[14th Dist.] 2014, pet. denied).
Arbitrators exceed their authority when they disregard the contract and
dispense their own idea of justice. Bernhard, 423 S.W.3d at 534. However, “an
arbitrator does not exceed his authority simply because he may have misinterpreted
11
the contract or misapplied the law.” Id. The proper inquiry is not whether the
arbitrator correctly decided an issue, but whether the arbitrator had authority to
decide the issue at all. Forest Oil Corp. v. El Rucio Land & Cattle Co., 518 S.W.3d
422, 431 (Tex. 2017). Arbitrators do not exceed their authority when the matter they
address is one that the parties agreed to arbitrate. Nafta Traders, 339 S.W.3d at 89.
We resolve any doubts regarding the scope of what is arbitrable in favor of
arbitration. See In re FirstMerit Bank, N.A., 52 S.W.3d 749, 753 (Tex. 2001).
A. The arbitration agreements bind all parties.
Appellants first assert that there is no arbitration agreement between any of
the Dalio Entities and Mokaram. The Dalio Entities, however, moved to compel
arbitration and alleged that Mokaram’s claims fell within the scope of the arbitration
agreements in the Note and Deed of Trust, and that the Dalio Entities, Choudhri,
Mokaram, and Nemeti were all bound by the arbitration agreements. By moving to
compel arbitration the Dalio Entities waived any complaint that they were not bound
by the arbitration agreements or that the claims were not arbitrable. See Thomas
Petroleum, Inc. v. Morris, 355 S.W.3d 94, 97 (Tex. App.—Houston [1st Dist.] 2011,
pet. denied).
Waiver is “an intentional relinquishment of a known right or intentional
conduct inconsistent with claiming that right.” Sun Exploration & Prod. Co. v.
Benton, 728 S.W.2d 35, 37 (Tex. 1987). The reason for finding waiver lies in the
“inherent unfairness caused by ‘a party’s attempt to have it both ways by switching
between litigation and arbitration[.]’” In re Citigroup Global Mkts, Inc., 258 S.W.3d
623, 625 (Tex. 2008) (quoting Perry Homes v. Cull, 258 S.W.3d 580, 597 (Tex.
2008)). “This reason equally applies when a party substantially invokes the arbitral
process to the other party’s detriment.” Thomas Petroleum, 355 S.W.3d at 97.
Having sought to compel arbitration in the trial court, the Dalio Entities cannot claim
12
on appeal that they were not subject to arbitration. Id.
In appellants’ reply brief they concede that derivative claims on behalf of
Texas REIT are arbitrable. As a derivative plaintiff, Mokaram stepped into the shoes
of Texas REIT and was therefore bound by the arbitration agreements. See Cedillo
v. Immobiliere Jeuness Establissement, 476 S.W.3d 557, 566 (Tex. App.—Houston
[14th Dist.] 2015, pet. denied) (“Generally, a plaintiff bringing claims derivatively
“steps into the shoes” of the party on behalf of whom the derivative plaintiff sues
and is bound by any agreements to which that party has agreed.”).
Appellants assert, however, that Mokaram could not bring a derivative claim
because he was not a “member” of Texas REIT. The arbitrators determined that
Mokaram owned a 30% interest in Texas REIT and was a member of Texas REIT.
The issue of Mokaram’s membership in Texas REIT, a matter of contract
interpretation, was an issue for the arbitrators, not the trial court, or this court, to
decide. See Petrobras Am., Inc. v. Astra Oil Trading NV, No. 01-11-00073-CV, 2012
WL 1068311, at *17 (Tex. App.—Houston [1st Dist.] Mar. 29, 2012, no pet.) (mem.
op.) (“In actuality, what Petrobras is asking this Court to do is exactly what we
cannot: second-guess the Panel’s decision on the merits of contract interpretation.”).
Therefore, Mokaram, as a member of Texas REIT, was bound as a party to the
arbitration agreement.
Finally, Choudhri asserts there is no arbitration agreement between him and
Mokaram. To the contrary, Choudhri signed the Note and the Deed of Trust on Texas
REIT’s behalf. As part of the same transaction Choudhri signed the Guaranty in his
individual capacity. The Guaranty contained a similar arbitration clause requiring all
disputes under the contracts to be arbitrated. The arbitrators found that Choudhri was
bound by his signature on the Guaranty. Again, we cannot disturb this decision based
on the contracts’ interpretation. See id. We conclude that all parties were bound by
13
the arbitration agreements or, as in the case of the Dalio Entities, waived the right to
complain about arbitrability by seeking arbitration in the trial court.
B. Mokaram’s claims were arbitrable under the Loan Documents’
definition of arbitrable disputes.
Appellants next assert that Mokaram’s claims did not fall within the scope of
the arbitration agreement because the arbitrators awarded Mokaram damages
directly rather than derivatively.
We “resolve any doubts about an arbitration agreement’s scope in favor of
arbitration.” In re FirstMerit Bank, 52 S.W.3d at 753. To determine whether a claim
falls within the scope of the agreement, courts must focus on the factual allegations
of the pleadings rather than the legal causes of action asserted. See Henry v. Cash
Biz, LP, 551 S.W.3d 111, 115 (Tex. 2018). If the facts alleged touch matters, have a
significant relationship to, are inextricably enmeshed with, or are factually
intertwined with the contract containing the arbitration agreement, then the claim is
arbitrable. Rodriguez v. Tex. Leaguer Brewing Co., 586 S.W.3d 423, 432 (Tex.
App.—Houston [14th Dist.] 2019, pet. denied).
The arbitration agreement provides that arbitrable disputes are “any and all
controversies or claims between the parties of whatever type or manner[.]” The use
of such broad language evidences the parties’ intent to be inclusive rather than
exclusive. Branch Law Firm L.L.P. v. Osborn, 532 S.W.3d 1, 19–20 (Tex. App.—
Houston [14th Dist.] 2016, pet. denied) (regarding an agreement to arbitrate “any
disputes” arising out of or in connection with the agreement); FD Frontier Drilling
(Cyprus), Ltd. v. Didmon, 438 S.W.3d 688, 695 (Tex. App.—Houston [1st Dist.]
2014, pet. denied) (regarding an agreement to arbitrate “[a]ny dispute arising out of
or in connection with this contract” and concluding that the agreement “embrace[d]
all disputes between the parties having a significant relationship to the contract
14
regardless of the label attached to the dispute”).
Appellants’ argument that Mokaram’s disputes did not fall within the scope
of the agreement because he received damages directly rather than derivatively is
based on a false premise. Acknowledging that the derivative claims were within the
scope of the agreement, appellants contend that the arbitrators nevertheless exceeded
their powers because the award required appellants to pay Mokaram directly, rather
than awarding relief to Texas REIT.
The record reflects that Mokaram brought his claims derivatively on behalf of
Texas REIT. The arbitrators concluded that Mokaram could recover individually on
all claims including the derivative claims because they anticipated Choudhri, as
manager of Texas REIT, would take steps to deprive Mokaram of the benefits of his
ownership interest in Texas REIT and would damage Texas REIT in the process.
Texas law allows such an award “if justice requires.” Tex. Bus. Orgs. Code §
101.463 (“a recovery in a direct or derivative proceeding by a member may be paid
directly to the plaintiff or to the limited liability company if necessary to protect the
interests of creditors or other members of the limited liability company.”). A court’s
decision to treat an action as a direct action so as to allow recovery to be paid directly
to a shareholder plaintiff, as opposed to the corporation, does not mean that the
action is no longer a derivative proceeding. Sneed v. Webre, 465 S.W.3d 169, 188
(Tex. 2015). Therefore, the arbitrators’ award of damages directly to Mokaram did
not change the arbitrability of the derivative claims. Mokaram’s derivative claims
fell within the scope of the arbitration agreement.
We overrule appellants’ first two issues.
IV. Termination of the arbitration agreement was a matter for the
arbitrators to decide.
In appellants’ third issue they assert the trial court erred in denying their
15
motion to vacate the arbitration award because the arbitrators “refused to recognize
the validity of the termination of the arbitration agreements.” On September 1, 2020,
Choudhri attempted to terminate the arbitration agreement on behalf of himself,
Texas REIT, and the Dalio Entities. The arbitrators determined this attempt was not
effective because Choudhri could not act unilaterally on Texas REIT’s behalf.
As discussed above, the arbitration agreement was broad and included “any
and all controversies or claims between the parties of whatever type or manner[.]”
Where the agreement contains a sweeping arbitration clause covering all disputes
and where the arbitration clause does not expressly exclude disputes over the
termination provision, disputes over these matters should be submitted to arbitration.
Abram Landau Real Estate v. Bevona, 123 F.3d 69, 73 (2d Cir. 1997). A dispute
about whether the parties agreed to terminate the arbitration agreement, is a question
for the arbitrator, not the court. Teamsters Loc. Union No. 89 v. Kroger Co., 617
F.3d 899, 906 (6th Cir. 2010).
Whether the arbitration agreement was effectively terminated is an issue of
contract interpretation, which was for the arbitrators, not the trial court or this court,
to decide. See Aston Solar, 2022 WL 1256427, at *4 (interpretation of the parties’
contract was a matter for the arbitrators). Because the contract gave the arbitrators
the authority to decide any controversy arising under the contract, appellants have
not established that the arbitrators did not have authority to decide the issue of
termination of the agreement. We overrule appellants’ third issue.
V. The arbitrators did not engage in misconduct by declining to postpone
the arbitration hearing.
In appellants’ fourth issue they assert the trial court erred in failing to vacate
the arbitration award because the arbitrators failed to postpone the hearing after
Choudhri’s counsel withdrew.
16
On October 3, 2020, the arbitrators held a telephonic hearing at which counsel
for Choudhri, the Dalio Entities, and Mokaram appeared. At the beginning of the
hearing Choudhri was represented by three attorneys: Jeff Joyce, Bo Dawson, and
Kate David. Joyce, who was substituting for Choudhri’s previous attorney, sought a
continuance on behalf of Choudhri because Choudhri was under a doctor’s care and
could not attend the arbitration. Following discussion of several procedural matters,
the arbitrators adjourned. On November 19, 2020, the trial court signed an agreed
order relating to the final hearing in the arbitration. The trial court’s order stated that
the arbitration would proceed to a preferential final hearing on February 8-12, 2021
unless rescheduled by further order of the panel. At that time Choudhri was
represented by Joyce, Dawson, and David.
The final hearing began on February 8, 2021. Choudhri filed a motion to
continue the hearing on the grounds that his counsel had withdrawn and his new
counsel, Lloyd Kelley and Michele Fraga, needed additional time to prepare for the
hearing. One month earlier, Choudhri’s previous attorneys (Joyce, Dawson, and
David) had filed motions to withdraw, which were granted by the panel. Mokaram’s
attorney responded, stating that since the last delay—in October 2020—attempts
were made by appellants to prevent witnesses from testifying in addition to the
additional expense incurred in continuing the arbitration, which was borne by
Mokaram. After lengthy arguments from counsel the arbitrators denied Choudhri’s
motion for continuance. In an interim procedural order the arbitrators noted:
All Parties were made aware on several previous occasions and
Procedural Orders that no further continuances would be granted. Mr.
Choudhri requested he receive a list of witnesses and order of
presentation, procedural orders and exhibits. The Panel stated he could
receive orders previously issued by the Panel [from the Dalio Entities’
counsel] and [Mokaram’s counsel] advised he would supply a copy of
the new exhibits, witness list and opening statement notebook to Mr.
Choudhri.
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The final hearing proceeded on February 8, 2021.
The FAA allows courts to vacate an arbitration award “where the arbitrators
were guilty of misconduct in refusing to postpone the hearing, upon sufficient cause
shown . . . .” 9 U.S.C. § 10(a)(3); Laws v. Morgan Stanley Dean Witter, 452 F.3d
398, 399 (5th Cir. 2006). To establish a panel was “guilty of misconduct” pursuant
to section 10(a)(3) in denying postponement of an arbitration hearing, the party
seeking vacatur of the award must show there was no reasonable basis for the panel’s
refusal to postpone the hearing. Laws, 452 F.3d at 400; SunGard Energy Sys., Inc.
v. Gas Transmission Nw. Corp., 551 F.Supp.2d 608, 613 (S.D. Tex. 2008). In
addition, the party seeking vacatur on such basis must establish it suffered prejudice
as a result of the refusal to postpone. See 9 U.S.C. § 10(a)(3); Laws, 452 F.3d at 401;
SunGard, 551 F.Supp.2d at 613. To establish prejudice, the party must “prove a
‘continuance might have altered the outcome of the arbitration.’” SunGard, 551
F.Supp.2d at 613 (quoting Laws, 452 F.3d at 400); In re Chestnut Energy Partners,
Inc., 300 S.W.3d 386, 400 (Tex. App.—Dallas 2009, pet. denied).
Even if appellants could have benefited from a continuance in this case, they
have not shown misconduct on the part of the arbitrators. Appellants rely on the
supreme court’s opinion in Villegas v. Carter, 711 S.W.2d 624, 626 (Tex. 1986) to
demonstrate the arbitrators’ misconduct in failing to postpone the hearing. In
Villegas, reviewing a trial court’s denial of a motion for continuance due to absence
of counsel, the court noted that the right to counsel is a valuable right and its
unwarranted denial is reversible.5 Id. In Villegas, a party appeared at trial without an
attorney and requested time to obtain an attorney after the trial court allowed his
5
The grounds a court would find sufficient to support a motion for continuance in a trial
court are instructive when reviewing whether an arbitration panel engaged in misconduct in failing
to postpone an arbitration hearing. Hoggett v. Zimmerman, Axelrad, Meyer, Stern & Wise, P.C.,
63 S.W.3d 807, 811 (Tex. App.—Houston [14th Dist.] 2001, no pet.).
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attorney to withdraw two days before trial. Villegas, 711 S.W.2d at 625. The Villegas
court held that the trial court abused its discretion in denying Villegas’s request for
a continuance, because the evidence showed that (1) Villegas was not negligent or
at fault for causing his attorney’s withdrawal, (2) two days was too short a time to
find a new attorney and for the new attorney to investigate the case, and (3) Villegas
was prevented from obtaining a new attorney because his former attorney refused to
turn over Villegas’s file. Id. at 626–27. Accordingly, the court held that the trial court
“should either have denied the attorney’s motion to withdraw or granted the party’s
motion for continuance; it did neither.” Id. at 627.
In contrast, in State v. Crank, 666 S.W.2d 91 (Tex. 1984), Dr. Crank had
previously received two continuances when, on the morning of his administrative
hearing before the board of dental examiners, he announced that he and his counsel
had reached “philosophical differences” in their approach to his case, and he
requested a continuance to substitute other attorneys. Id. at 93. Despite having notice
of the scheduled hearing for over a month, it was not until the morning of the hearing
that Dr. Crank informed the board that he would no longer be represented by his
attorney of record and wanted more time to find other attorneys. Id. at 93–94. Based
on those facts, the supreme court found no abuse of discretion in denying Dr. Crank’s
motion for continuance. Id. at 94.
We conclude the facts of this case are more akin to Crank than Villegas. As
noted by the arbitration panel, Choudhri was given all the documents his new
counsel requested, and he had been made aware that no further continuances would
be granted. Choudhri’s attorneys withdrew due to conflicts caused by Choudhri’s
failure to comply with counsel’s engagement agreement. The record supports a
reasonable basis for denying the postponement, i.e., Choudhri’s attorneys had
requested withdrawal at least one month before the hearing was set, Choudhri was
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aware of their request, and the record reflects he did not object to it.
In alleging harm from the arbitrators’ denial of Choudhri’s motion for
postponement, appellants assert they were harmed because “counsel for Mokaram
failed to comply with the panel’s March 29, 2020 scheduling order, including, but
not limited to, Mokaram’s failure to timely designate experts or quantify damages.”
Appellants make no argument as to how the arbitrators’ denial of their motion for
continuance was related to Mokaram’s failure to timely designate experts or quantify
damages almost a year earlier. Even if appellants could demonstrate that the
arbitrators engaged in misconduct, they failed to show harm by failing to establish
how the failure to grant a postponement might have altered the outcome of the
arbitration. See Laws, 452 F.3d at 400. We overrule appellants’ fourth issue.
VI. Appellants did not establish that Arbitrator Zimmerman was biased.
In appellants’ fifth issue they challenge the trial court’s failure to vacate the
arbitration award on the grounds that the arbitrators committed material errors of
law. Specifically, appellants challenge the arbitrators’ award on the merits of the
Mokaram’s claims of wrongful foreclosure, conspiracy, and breach of fiduciary
duty. Appellants further challenge the arbitrators’ award on the merits of Nemeti’s
claims of breach of fiduciary duty and breach of contract. Appellants also challenge
the portion of the arbitrators’ award that found Mokaram could bring a derivative
action on behalf of Texas REIT. Appellants also challenge the arbitrators’ decision
to permit Mokaram and Nemeti to assign their interests in Texas REIT after
appellants pay the damage award.
Appellants’ “material errors of law” do not constitute grounds for vacatur
under the FAA. As stated above, the parties’ agreement provided that the FAA
governed the arbitration proceedings in this matter. The grounds on which a trial
court may vacate an arbitration award under the FAA are limited to those expressly
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identified in section 10 of the FAA, to the exclusion of all other potential grounds,
including allegations of reversible error. Hall St. Assocs., 552 U.S. at 584. A mere
mistake of law by an arbitrator cannot serve as the basis for judicial review.
Prudential-Bache Sec., Inc. v. Tanner, 72 F.3d 234, 239 (1st Cir. 1995).
Under the heading of “[m]iscellaneous errors of law,” appellants assert that
arbitrator Alvin Zimmerman was biased due to an undisclosed relationship with an
attorney who represented one of the witnesses in another proceeding in 2008. The
only “material error of law” listed in appellants’ fifth issue that can be reviewed
under the FAA is the alleged bias of one of the arbitrators. See 9 U.S.C.A. § 10(a)(2)
(addressing evident partiality or corruption in the arbitrators); see also Cooper v.
WestEnd Cap. Mgmt., L.L.C., 832 F.3d 534, 544 (5th Cir. 2016) (“Section 10
provides the exclusive grounds for vacatur of an arbitration award.”).
On April 13, 2020, Choudhri filed an objection to arbitrator Alvin
Zimmerman. Choudhri alleged that Zimmerman had been either employed by, or
partnered with, an attorney named Rodney Drinnon from 2004 through 2008.
Drinnon represented Osama Abdullatif in ongoing litigation in another court in
Harris County. Abdullatif was a witness during the arbitration proceedings and,
according to Choudhri, was Mokaram’s business partner. Choudhri alleged that this
connection resulted in the appearance of impropriety and asserted that Zimmerman
may be biased in the arbitration. The parties have not cited any ruling on this
objection, nor has our review of the record reflected a ruling.
On appeal, without citation to authority, appellants contend the panel was
prejudiced by Zimmerman’s alleged bias, and such bias “irreparably harmed the
fairness of the proceedings.” Under the FAA, courts may vacate an arbitration award
where there was evident partiality or corruption in the arbitrators. Cooper, 832 F.3d
at 545. Evident partiality conveys “a stern standard.” Positive Software Sols., Inc. v.
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New Century Mortg. Corp., 476 F.3d 278, 281 (5th Cir. 2007) (en banc). The
statutory language requires a court to uphold an arbitral award unless bias was
clearly evident in the decisionmakers. Id. Thus, for the arbitration award to be
vacated, appellants “must produce specific facts from which a reasonable person
would have to conclude that the arbitrator was partial to” Mokaram. See
Householder Grp. v. Caughran, 354 Fed.Appx. 848, 852 (5th Cir. 2009). The
“alleged partiality [must be] direct, definite, and capable of demonstration rather
than remote, uncertain, or speculative.” Id. (quoting Weber v. Merrill Lynch Pierce
Fenner & Smith, Inc., 455 F.Supp.2d 545, 550 (N.D. Tex. 2006)).
Appellants fail to allege specific facts sufficient to demonstrate a direct,
definite partiality. The only facts alleged to support bias are that Zimmerman
partnered with an attorney who represented a witness to the arbitration more than a
decade before the arbitrators made their decision. We are left with nothing more than
appellants’ speculative assertion in their brief that this tenuous relationship resulted
in bias. Appellants failed to demonstrate a significant connection to the parties to
establish that vacatur is warranted under section 10(a)(2). See OOGC Am., L.L.C. v.
Chesapeake Expl., L.L.C., 975 F.3d 449, 453 (5th Cir. 2020) (arbitrator’s prior
relationship with a non-party was not a “significant compromising connection to the
parties” to justify vacatur of award). We overrule appellants’ fifth issue.
CONCLUSION
Having overruled appellant’s issues on appeal we affirm the trial court’s
judgment confirming the arbitration award.
/s/ Jerry Zimmerer
Justice
Panel consists of Justices Jewell, Bourliot, and Zimmerer.
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