Scott D. Morgan v. Bronze Queen Management Company, LLC

Affirmed and Opinion filed February 27, 2014.
In The
Fourteenth Court of Appeals
NO. 14-13-00535-CV
SCOTT D. MORGAN, Appellant
V.
BRONZE QUEEN MANAGEMENT COMPANY, LLC, Appellee
On Appeal from the 127th District Court
Harris County, Texas
Trial Court Cause No. 2013-08050
OPINION
This is an interlocutory appeal from the denial of a motion to compel
arbitration. In a single issue, appellant Scott D. Morgan (Morgan) asserts that the
trial court erred in refusing to compel arbitration of the underlying dispute for three
reasons: (1) the claim was previously submitted to arbitration, but withdrawn; (2)
appellee, Bronze Queen Management Company, LLC (Bronze Queen), has waived
the right to challenge arbitrability; and (3) the agreement between the parties
requires arbitration of the claim. We affirm.
FACTUAL AND PROCEDURAL BACKGROUND
Morgan financed numerous real estate development projects with Amegy
Bank over several years. In 2007, in connection with one of these real estate
developments, MRI Playa Vista, LP executed a promissory note payable to
Amegy, and Morgan guaranteed the note.1
Morgan and Amegy executed a modification of the guaranty in May 2010,
with an effective date of October 2009. The Modification specified that disputes
related to the note or the Modification would be determined by arbitration in
accordance with a second agreement, The Arbitration Agreement and Jury and
Class Action Waiver. The Modification states:
EXCEPT AS EXPRESSLY EXCLUDED THEREIN, ALL CLAIMS,
DISPUTES AND OTHER MATTERS IN QUESTION BETWEEN
THE PARTIES TO THIS NOTE ARISING OUT OF OR RELATING
TO THE NOTE AND/OR THIS MODIFICATION OR ANY OF
THE LOAN DOCUMENTS OR ANY OTHER INSTRUMENTS
EXECUTED IN CONNECTION WITH THE NOTE OR THIS
MODIFICATION SHALL BE DECIDED BY ARBITRATION IN
ACCORDANCE WITH THE PROCEDURES SET FORTH IN THE
ARBITRATION AGREEMENT, JURY AND CLASS ACTION
WAIVER BY BORROWER, GUARANTOR AND LENDER.
As relevant here, The Arbitration Agreement and Jury and Class Action
Waiver (the Agreement), contains two main sections. The first is a section entitled
“JURY TRIAL WAIVER; CLASS ACTION WAIVER,” in which the parties
waive their rights to a jury trial and to bring a class action. In the second section
entitled “ARBITRATION,” the Agreement grants the parties the right to compel
arbitration if a court holds the jury trial waiver to be invalid. It further specifies
1
In June of 2009, Morgan and Amegy executed a Change in Terms Agreement containing a
broad arbitration clause, which was superseded by the later agreements at issue here. The parties
do not contend that the Change in Terms Agreement mandates arbitration.
2
that certain issues are not subject to arbitration, such as the “validity,
enforceability, meaning or scope of this arbitration provision.” Specifically, the
limited arbitration agreement provides (with emphasis supplied):
JURY TRIAL WAIVER; CLASS ACTION WAIVER. As permitted
by applicable law each party waives their respective rights to a trial
before a jury in connection with any Dispute (hereinafter defined) and
Disputes shall be resolved by a judge sitting without a jury. If a
court determines that this provision is not enforceable for any reason
and at any time prior to trial of the Dispute, but not later than 30 days
after entry of the order determining this provision is unenforceable,
any party shall be entitled to move the court for an order compelling
arbitration and staying or dismissing such litigation pending
arbitration (“Arbitration Order”). If permitted by applicable law, each
party also waives the right to litigate in court or an arbitration
proceeding any Dispute as a class action, either as a member of a class
or as a representative, or to act as a private attorney general.
ARBITRATION. If a claim, dispute or controversy arises between the
parties hereto with respect to the Loan, this Agreement, related
agreements or any other agreement or business relationship between
any of the parties hereto whether or not related to the subject matter of
this Agreement (individually and collectively called a “Dispute”), and
only if a jury trial waiver is not permitted by applicable law or
ruling by a court, any of the parties hereto may require that the
Dispute be resolved by binding arbitration before a single arbitrator at
the request of any party. By agreeing to arbitrate a Dispute each party
gives up any right that party may have to a jury trial as well as other
rights that party would have in court that are not available or are more
limited in arbitration such as the rights to discovery and to appeal.
In August 2010, Amegy sued Morgan for breach of his guaranty of another
promissory note unrelated to this dispute. The parties agreed to arbitrate that
dispute. Morgan filed a Demand for Arbitration with JAMS and a Statement of
Claim, in which he alleged multiple claims against Amegy.
In March 2011, Amegy added affirmative claims to the arbitration, alleging
guaranty claims against Morgan relating to several loans, including the Playa
3
guaranty at issue here. On September 2, 2011, Amegy sold the Playa note and
guaranty to appellee Bronze Queen. On September 13, 2011, Amegy amended its
arbitration pleadings to nonsuit the Playa claims at issue in this proceeding.
At arbitration on October 24, 2011, the arbitrator resolved the remaining
claims and issued an award in January 2012. The district court confirmed the
award and signed a final judgment on January 17, 2013.
On February 11, 2013, Bronze Queen sued Morgan for breach of the Playa
guaranty. Morgan moved to compel arbitration, which the trial court denied, and
this appeal followed.
GOVERNING LAW AND STANDARD OF REVIEW
Arbitration cannot be ordered in the absence of an agreement to arbitrate.
See Freis v. Canales, 877 S.W.2d 283, 284 (Tex. 1994). Thus, despite strong
presumptions that favor arbitration, a valid agreement to arbitrate is a settled,
threshold requirement to compel arbitration. See In re Kellogg Brown & Root, Inc.,
166 S.W.3d 732, 737–38 (Tex. 2005) (orig. proceeding). Courts apply state
contract law in determining whether there is a valid agreement to arbitrate. See In
re Rubiola, 334 S.W.3d 220, 224 (Tex. 2011) (orig. proceeding).
Texas procedure controls the determination of arbitrability of this dispute.
See Jack B. Anglin Co., Inc., v. Tipps, 842 S.W.2d 266, 268–69 (Tex. 1992). Under
Texas law, the trial court conducts a summary proceeding to make the gateway
determination of that issue. See In re Weekley Homes, L.P., 180 S.W.3d 127, 130
(Tex. 2005) (orig. proceeding).
When reviewing a denial of a motion to compel arbitration, if the court’s
factual findings are in dispute, we review the court’s denial of the motion to
compel under a legal sufficiency or “no evidence” standard of review. J.M.
4
Davidson, Inc. v. Webster, 128 S.W.3d 223, 227 (Tex. 2003). We defer to the trial
court’s factual determinations that are supported by evidence, but we review the
trial court’s legal determinations de novo. In re Labatt Food Service, L.P., 279
S.W.3d 640, 643 (Tex. 2009) (orig. proceeding).
ANALYSIS
Morgan argues that the trial court erred in denying his motion to compel
arbitration because an agreement to arbitrate the Playa claims exists for three
reasons: (1) Amegy and Morgan formed a binding arbitration agreement by
submitting the Playa guaranty claim to arbitration; (2) Amegy waived the
arbitrability issue because it submitted the Playa guaranty claim to arbitration and
pursued it for months; and (3) Amegy and Morgan agreed to arbitrate the Playa
Guaranty in the Modification agreement. Morgan also asserts that Bronze Queen is
bound by Amegy’s agreements and conduct.
1. There was no agreement to arbitrate by submitting and then
withdrawing a pleading in arbitration.
Morgan contends that Amegy agreed to arbitrate this dispute because it
affirmatively asked the arbitrator to decide the Playa guaranty claim when it
amended its arbitration pleadings to include that claim. Bronze Queen responds
that inclusion of the Playa claim in a pleading does not constitute an agreement to
arbitrate.
Morgan asserts he accepted Amegy’s offer to arbitrate the Playa guaranty
claim when he continued to participate in the arbitration, he “engaged on the
merits,” and made no objection to Amegy’s amended pleading bringing the claim
into the arbitration. Morgan asserts he therefore accepted by conduct and
acquiescence.
Morgan cites cases where the courts have found an agreement to arbitrate
5
but none contain the same facts as present here—a pleading in arbitration that was
nonsuited before any trial before the arbitrators. See Massey v. Galvan, 822
S.W.2d. 309, 315 (Tex. App.—Houston [14th Dist.] 1992, writ denied) (holding
offer to arbitrate was accepted and contract to arbitrate was ratified by performance
where claim was submitted to the arbitrator and a ruling obtained); Kamakazi
Music Corp. v. Robbins Music Corp., 684 F.2d 228, 231 (2d Cir. 1982) (claim was
litigated through final resolution and party did not attempt to rescind arbitration
demand until after the arbitrator issued an award).
Morgan also cites cases where the parties both agreed in writing to submit a
claim to the arbitrators. See Piggly Wiggly Operators’ Warehouse, Inc. v. Piggly
Wiggly Operators’ Warehouse Indep. Truck Drivers Union, Local No. 1, 611 F.2d
580, 584 (5th Cir. 1980) (recognizing that in addition to entering into a written
submission agreement, parties may ask the arbiter to decide a specific written
grievance, which becomes the submission agreement); InterSecurities, Inc. v.
Bernard, No. 07-720-C, 2009 WL 4716028, at *3 (M.D. La. Dec. 9, 2009) (the
parties each executed a “Uniform Submission Agreement,” agreeing to submit the
controversy to arbitration).
While Bronze Queen recognizes that an offer to arbitrate may be accepted
by performance, it argues that the principle is inapplicable here because there is no
evidence of performance. Bronze Queen denies that Morgan accepted any offer to
arbitrate expressly or by performance. Bronze Queen argues that the offer to
arbitrate the Playa claim was revoked before Morgan accepted it. Bronze Queen
points out that Amegy nonsuited the Playa guaranty claim before any action had
been taken on the claim by the arbitrator. In addition, its nonsuit was in accordance
with JAMS Rule 13(b). The rule permits an objection to the nonsuit and allows a
6
party to seek a determination that the nonsuit is made with prejudice.2 Morgan did
not object to the nonsuit.
As a matter of basic contract formation principles, an agreement to arbitrate
is not created by a unilateral offer from one party. Contracts require mutual assent
to be enforceable. Baylor Univ. v. Sonnichsen, 221 S.W.3d 632, 635 (Tex. 2007)
(per curiam). It is well-settled that to have a binding contract, the offer must be
accepted in strict compliance with its terms. Coleman v. Reich, ___ S.W.3d ___,
2013 WL 3353992, at *2 (Tex. App.—Houston [14th Dist.] July 2, 2013, no pet.).
It is also established that an offer may be revoked before acceptance. See Bowles v.
Fickas, 140 Tex. 312, 167 S.W.2d 741, 743 (1943); see also Liberty Mut. Ins. Co.
v. Mandaree Pub. Sch. Dist. #36, 503 F.3d 709, 712–13 (8th Cir. 2007)
(recognizing arbitrator’s denial of a request to amend a counterclaim in arbitration
effectively revoked the offer before acceptance and later consent to join arbitration
did not form an agreement to arbitrate).
The parties dispute whether there was acceptance of an offer creating an
implied agreement to arbitrate the Playa guaranty claim. Whether the parties
reached an agreement is a question of fact. Parker Drilling Co. v. Romfor Supply
Co., 316 S.W.3d 68, 72 (Tex. App.—Houston [14th Dist.] 2010, pet. denied). We
review this factual dispute under a “no evidence” standard of review. See J.M.
Davidson, 128 S.W.3d at 227. The record contains no evidence that Morgan
accepted an offer to arbitrate the dispute by performance. Accordingly, the trial
2
JAMS Rule 13(b) provides:
(b) A Party that asserts a claim or counterclaim may unilaterally withdraw that
claim or counterclaim without prejudice by serving written notice on the other
Parties and on the Arbitrator. However, the opposing Parties may, within fourteen
(14) calendar days of service of notice of the withdrawal of the claim or
counterclaim, request that the Arbitrator order that the withdrawal be with
prejudice. If such a request is made, it shall be determined by the Arbitrator.
JAMS Comprehensive Arbitration Rules & Procedures.
7
court’s factual determination that there was no implied contract to arbitrate the
underlying dispute must be affirmed.
2. There was no waiver.
In a related argument, Morgan contends that Amegy, and thereby its
successor, may not contest arbitration after having invoked arbitration of the
dispute over the guaranty in a previous arbitration proceeding. Morgan asserts that
Amegy both submitted the Playa guaranty claim to arbitration without reservation
and litigated the claim before the arbitrator for over seven months. He argues that
Amegy’s submission of the Playa guaranty claim to arbitration constitutes waiver
of the arbitrability issue.3 Bronze Queen strongly disputes that the Playa guaranty
claim was litigated in arbitration.
“Waiver” requires the voluntary and intentional relinquishment of a known,
existing right, or intentional conduct inconsistent with claiming that right. Emscor
Mfg., Inc. v. Alliance Ins. Group, 879 S.W.2d 894, 917 (Tex. App.—Houston [14th
Dist.] 1994, writ denied). Therefore, waiver is largely a matter of intent; thus, for
implied waiver to be found through a party’s actions, intent must be clearly
demonstrated by the surrounding facts and circumstances. See EZ Pawn Corp. v.
Mancias, 934 S.W.2d 87, 89 (Tex. 1996) (addressing waiver of arbitration rights).
The authorities Morgan cites do not support his claim that Amegy has
waived the arbitrability issue. In Piggly Wiggly, neither party questioned the
arbitrability of the dispute until after an issue was decided adversely to the
employer. 611 F.2d at 584 (“On whatever basis it rests, waiver, estoppel or new
3
Morgan alternatively alleges Amegy is estopped from challenging arbitrability by invoking the
arbitration process. Although not fully developed in the briefing, we construe this argument to
allege that the offer to arbitrate may not be withdrawn because Morgan has “taken substantial
action based upon it.” See Perry Homes v. Cull, 258 S.W.3d 580, 595 (Tex. 2008) (recognizing
that estoppel includes a prejudice requirement, in holding that waiver of arbitration requires a
showing of prejudice). Accordingly, our waiver analysis also applies to this estoppel claim.
8
contract, the result is that the grievance submitted to the arbiter defines his
authority without regard to whether the parties had a prior legal obligation to
submit the dispute.”). In contrast to this case, the dispute in Piggly Wiggly was
actually submitted to, and decided by, the arbitrator.
Morgan also cites Jones Dairy Farm v. Local No. P-1236, United Food &
Commercial Workers Int’l Union, AFL-CIO, 760 F.2d 173 (7th Cir. 1985). “If a
party voluntarily and unreservedly submits an issue to arbitration, he cannot later
argue that the arbitrator had no authority to resolve it.” Id. at 175. In Jones Dairy
Farm, the court found waiver because an objection to the arbitrator’s jurisdiction
was not raised until after the entire arbitration was completed and the arbitrator had
issued its ruling. See id. As in Piggly Wiggly, the issue was actually submitted to
the arbitrator and the arbitrator rendered a decision. See id.
Most Texas cases that discuss waiver in connection with arbitration do so
from the opposite position—in those cases the parties argue that arbitration was
waived by participation in a lawsuit. Because of the strong presumption against
waiver of arbitration, the courts do not readily find waiver and require a showing
of prejudice. A party waives a right to arbitration by substantially invoking the
judicial process to the other party’s detriment or prejudice. See Perry Homes, 258
S.W.3d at 589–90. Waiver can be implied from a party’s conduct, although that
conduct must be unequivocal. See id. at 593. In the context of waiver of an
arbitration clause, “prejudice” relates 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 that same issue. Id.
at 597.
For example, filing suit, by itself, does not constitute a waiver of arbitration
rights. In re D. Wilson Constr. Co., 196 S.W.3d 774, 783 (Tex. 2006) (orig.
9
proceeding). Engaging in minimal discovery also does not establish waiver. Id.
(citing In re Vesta Ins. Group, Inc., 192 S.W.3d 759, 762 (Tex. 2006) (per
curiam)). This court has rejected a claim that filing a motion for mediation
substantially invoked the judicial process or was prejudicial to the parties agreeing
to the motion. See Courtland Bldg. Co., Inc. v. Jalal Family P’ship, Ltd, 403
S.W.3d 265, 275–76 (Tex. App.—Houston [14th Dist.] 2012, no pet.).
In McReynolds v. Elston, this court addressed a contention that appellant
waived his right to stay a pending arbitration by “participating in the arbitration for
a year before filing the motion [to stay arbitration].” 222 S.W.3d 731 (Tex. App.—
Houston [14th Dist.] 2007, no pet.). McReynolds contended that the claim should
have been arbitrated in a different arbitration proceeding and not in the pending
AAA arbitration. As with claims that a party has substantially invoked the judicial
process, we considered the actions that were alleged to have invoked arbitration in
determining whether the right to object to arbitration had been waived. See id. at
741–42. We held there was no waiver, finding the AAA arbitration process was not
substantially invoked, despite appellant’s filing a counterclaim, waiting over a year
to seek to stay the arbitration proceedings, and otherwise participating in pre-
hearing proceedings. Id. at 742.
We therefore consider whether the arbitration process was substantially
invoked in this case to determine whether the right to contest arbitrability has been
waived. Bronze Queen correctly asserts that Morgan cites no record evidence to
support his claim the Playa guaranty was actually litigated in arbitration
proceedings. When pressed for evidence the claim was actually litigated, at oral
argument Morgan referenced his motion to compel arbitration which generally
referred to discovery related to the Playa dispute.4 Because the motion was
4
The motion states: “Prior to assigning the guaranty to Bronze Queen, Amegy engaged in
10
verified, Morgan contends it constitutes evidence supporting his contention. We
reject Morgan’s contention that these general statements in his motion to compel
arbitration are sufficient to demonstrate the Playa guaranty claim was litigated in
arbitration, waiving the right to contest arbitrability. See D. Wilson Constr., 196
S.W.3d at 783 (engaging in minimal discovery does not establish waiver).
In contrast to Morgan’s cited authorities, there was no submission of the
claim to the arbitrator for resolution on the merits. There is no evidence Amegy
substantially invoked the arbitration process as to constitute a waiver We conclude
that filing a counterclaim in arbitration and withdrawing it before the claim is
submitted to the arbitrator for decision does not constitute waiver.
3. The contract does not require arbitration of this dispute.
Where, as here, the signatories to the contract have agreed that the Federal
Arbitration Act applies, courts nonetheless apply state contract law in determining
whether there is a valid agreement to arbitrate. See In re Rubiola, 334 S.W.3d 220,
223 (Tex. 2011) (orig. proceeding). “Whether a valid arbitration agreement exists
is a legal question subject to de novo review.” In re D. Wilson Constr. Co., 196
S.W.3d at 781 (citing J.M. Davidson, Inc., 128 S.W.3d at 227). If a valid
arbitration agreement exists, then a strong presumption arises favoring arbitration,
and the burden shifts to the party opposing arbitration to raise an affirmative
defense to its enforcement. J.M. Davidson, Inc., 128 S.W.3d at 227. “[T]he
presumption arises only after the party seeking to compel arbitration proves that a
valid arbitration agreement exists because the purpose of the FAA was to make
discovery related to Playa Vista. Amegy requested documents from Morgan, including
correspondence, partnership agreements, statements, contracts, meeting minutes, and other
documents related to the Playa Vista project. The Playa Vista project and note were discussed
during the deposition of Scott Morgan and other witnesses. As part of the Arbitration, [the
arbitrator] made rulings concerning the documents at issue in this case. [The arbitrator] ruled on
certain clauses of the Playa notes and agreements, including the validity of release and waiver
provisions.”
11
arbitration agreements as enforceable as other contracts, not more so.” See In re
Kellogg Brown & Root, Inc., 166 S.W.3d at 737–38 (internal citations and
quotation marks omitted).
Morgan asserts the arbitration clause in the Modification encompasses the
Playa guaranty claim. The Modification states:
Except as expressly excluded therein, all claims, disputes and other
matters in question between the parties to the [Playa] Note arising out
of or relating to the [Playa] Note and/or this Modification or any of
the loan documents or any other instruments executed in connection
with the [Playa] Note or this Modification shall be decided by
arbitration in accordance with the procedures set forth in the
Arbitration Agreement, Jury and Class Action Waiver by borrower,
guarantor and lender.
The Agreement was executed at the same time as the Modification. In interpreting
these two agreements, we should give words in the agreements their plain
meaning. See Am. Mfrs. Mut. Ins. Co. v. Schaefer, 124 S.W.3d 154, 157–59 (Tex.
2003).
Morgan contends that the Agreement contains a general, broad arbitration
clause. The agreement contains a jury trial waiver and grants parties the right to
demand arbitration “only if a jury trial waiver is not permitted by applicable law or
ruling by a court.” In all other cases, the disputes “will be resolved by a judge
sitting without a jury.” The Agreement prohibits arbitration of certain claims and
issues, including class actions and the “validity, enforceability, meaning or scope
of this arbitration provision.” Based on this language, Bronze Queen responds that
Morgan and Amegy did not agree to arbitrate claims related to the Playa note; they
instead agreed not to arbitrate such claims. Despite its title—Arbitration
Agreement and Jury Trial and Class Action Waiver—the Agreement is not an
arbitration agreement, but an agreement to resolve disputes by a bench trial,
12
waiving the right to a jury. It is the substance of the provision, not its label, that
controls. See Stedman v. Georgetown Sav. & Loan Ass’n, 595 S.W.2d 486, 488
(Tex. 1979) (courts look behind the form or labels in a transaction to determine
actual substance); Luckel v. White, 819 S.W.2d 459, 463 (Tex. 1991) (stating labels
are not controlling and courts are to give effect to the substance of unambiguous
provisions).
The arbitration provision in the Agreement is conditioned on (1) a statute or
controlling case law making a jury waiver unenforceable, or (2) a court order or
other judicial finding that the jury trial waiver in the agreement is not enforceable.
Neither is applicable in this case. Contractual jury waivers are permitted under
both state and federal law. See In re Prudential Ins. Co. of Am., 148 S.W.3d 124
(Tex. 2004) (orig. proceeding) (upholding enforceability of contractual jury trial
waiver). Moreover, our record contains no court order or finding that the jury
waiver is unenforceable.
Although Morgan acknowledges that the Agreement supersedes other
arbitration agreements, Morgan asserts the arbitration clause in the Modification
provides an exception to the Agreement and mandates arbitration for disputes
relating to the Playa note unless there is a specific exclusion in the Agreement,
such as the exclusion provided for class action claims or matters involving the
validity of the arbitration provision.
We disagree. The Modification states that arbitration will apply according to
the Agreement “[e]xcept as expressly excluded therein.” The Agreement expressly
excludes from arbitration every claim for which a jury trial waiver was allowed. It
provides: “Disputes shall be resolved by a judge sitting without a jury.” The
Agreement further provides “only if a jury trial waiver is not permitted by
applicable law or ruling by a court, any of the parties hereto may require that the
13
Dispute be resolved by binding arbitration.” A plain reading of these provisions
requires a determination that the Playa guaranty claim is excluded from arbitration
because the jury waiver provision is effective, mandating a bench trial of this
dispute. In addition, the Modification expressly provides:
Borrower agrees that any dispute involving the note, modification or
any of the loan documents or any other instruments executed in
connection with the note, shall be brought only in the district courts of
Harris County, Texas or the United States District Court for the
Southern District of Texas, Houston Division.
Bronze Queen argues this language further indicates the parties’ intent not to
arbitrate this dispute, but instead to have the dispute resolved in court. We agree.
We hold that the Modification Agreement does not require arbitration of this
dispute.
CONCLUSION
Having concluded that there is no agreement to arbitrate the underlying
dispute—whether express, implied, or by waiver—we need not address Morgan’s
assertion that Bronze Queen is bound by Amegy’s agreements and conduct.5 We
overrule Morgan’s sole issue. The trial court’s order denying Morgan’s motion to
compel arbitration is affirmed.
/s/ Tracy Christopher
Justice
Panel consists of Justices Boyce, Christopher, and Brown.
5
Specifically, we have not addressed Morgan’s argument that Bronze Queen is required to
arbitrate under a direct-benefits-estoppel theory. See In re Kellogg Brown & Root, 166 S.W.3d at
741.
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