Storm Water Solutions, LLC v. Live Oak Rail Partners, LLC

NUMBER 13-17-00492-CV
COURT OF APPEALS
THIRTEENTH DISTRICT OF TEXAS
CORPUS CHRISTI – EDINBURG
STORM WATER SOLUTIONS, LLC, Appellant,
v.
LIVE OAK RAIL PARTNERS, LLC, Appellee.
On appeal from the 343rd District Court
of Live Oak County, Texas.
MEMORANDUM OPINION
Before Chief Justice Contreras and Justices Longoria and Hinojosa
Memorandum Opinion by Justice Longoria
Mark Bomar sued appellee Live Oak Rail Partners, LLC (“Live Oak”), alleging that
discharge of excess storm water and silt from Live Oak’s development caused damage
to his land. Live Oak then brought third-party claims against three entities, including
appellant Storm Water Solutions, LLC (“Storm Water”). Storm Water argues on appeal
that the trial court erred by denying its motion to compel arbitration. We reverse and
remand.
I. BACKGROUND
In 2013, Live Oak, in partnership with Howard Energy Partners (“Howard Energy”),
constructed a railroad hub (“the Hub”). Bomar owns the land adjacent to the Hub. In his
suit, he complains that sediment and water runoff from the construction site of the HUB
has flowed onto his property on multiple occasions since 2014. Based on his complaints,
the Texas Commission on Environmental Quality (“TCEQ”) issued a water field citation
on March 10, 2015 to Live Oak for outstanding violations related to the Hub’s storm water
pollution prevention plan. On June 30, 2015, Storm Water was retained to respond to the
water field citation. An agreement was signed by Storm Water’s representative Justin
Cox and Howard Energy Partners’ representative Larry Walker. The agreement states
that Storm Water is to provide consultative and field services related to the discharge of
storm water from the Hub. The agreement also contained the following clauses:
Disputes: The parties will attempt to resolve any disputes arising out of or
relating to this Proposal or the resulting Agreement and/or the Work by a)
direct discussions between the parties, followed by b) mediation. If disputes
remain unresolved after mediation, they will be resolved by arbitration, with
the award of the arbitrator(s) binding pursuant to Texas Civil Practices and
remedies Code Ch. 171. Mediation and/or arbitration will be conducted by
the American Arbitration Association (“AAA”) under their Construction and
Industry Rules in effect at the time that the dispute is first submitted to the
AAA.
...
No Third Party Beneficiary: Notwithstanding any provision of the
Agreement, no other person or entity besides [Storm Water] and [Howard
Energy], whether or not mentioned in this Agreement or in the Work, is
intended to be or will be considered to be a third party beneficiary of or
entitled to assert any rights under this Agreement.
2
Storm Water provided consulting services from the date of the agreement until
November 24, 2015. The record indicates that most of Storm Water’s work during this
time was directed, supervised, and/or requested by Live Oak. Representatives from
Storm Water met with representatives from Live Oak during site inspections and made
compliance recommendations to Live Oak and its contractor, Q-Haul, Inc. Storm Water
also stayed in frequent touch with Seay and Simpson about the status of the project. On
several occasions, Live Oak representatives made service demands of Storm Water
pursuant to the agreement, such as asking Storm Water to perform additional site
inspections and seeking additional recommendations after heavy rains caused sediment
issues at the Hub. Storm Water also submitted paperwork to the TCEQ on behalf of Live
Oak documenting compliance with the prescribed actions. On September 16, 2015, the
TCEQ issued a letter indicating that it had received adequate compliance documentation
to resolve alleged violations at the Hub.
Bomar asserted claims against Live Oak for trespass, negligence, nuisance, and
violations of the Texas Water Code, alleging that Live Oak “failed to construct a
structurally sound detention pond and install suitable silt fencing, as well as, the creation
of other suitable barriers to prevent the flow of storm waters onto [Bomar’s] land.” Live
Oak in turn filed a claim against Storm Water for contribution. When Live Oak brought its
third-party claims against Storm Water, Storm Water moved to compel arbitration under
the agreement. Although the agreement was executed by Howard Energy, which is Live
Oak’s parent company, Storm Water contended that Live Oak is bound by the terms of
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the arbitration agreement under the doctrine of direct-benefits equitable estoppel. 1 The
trial court denied Storm Water’s motion to compel arbitration. This appeal followed.
II. MOTION TO COMPEL ARBITRATION
Storm Water argues on appeal that the trial court abused its discretion by denying
its motion to compel arbitration. More specifically, Storm Water argues that Live Oak was
bound to arbitrate because: (1) Live Oak is equitably estopped from refusing to arbitrate
because it has sought and received the direct benefits of the agreement; and (2) its claims
fall within the scope of a valid arbitration agreement.
A. Standard of Review
We review the denial of a motion to compel arbitration for an abuse of discretion.
Weekley Homes, L.P. v. Rao, 336 S.W.3d 413, 418 (Tex. App.—Dallas 2011, pet.
denied). A trial court abuses its discretion when it acts without reference to any guiding
rules or principles. Worford v. Stamper, 801 S.W.2d 108, 109 (Tex. 1990). Under this
standard, we defer “to the trial court’s factual determinations if they are supported by
evidence, but we review the trial court’s legal determinations de novo.” Weekley, 336
S.W.3d at 418 (citing In re Labatt Food Svc., L.P., 279 S.W.3d 640, 643 (Tex. 2009) (orig.
proceeding)). Specifically, “[w]hether an arbitration agreement is enforceable is subject
to de novo review.” Id. But “[a] trial court that refuses to compel arbitration under a valid
and enforceable arbitration agreement has clearly abused its discretion.” In re 24R, Inc.,
324 S.W.3d 564, 566 (Tex. 2010) (orig. proceeding) (citing In re Halliburton Co., 80
S.W.3d 566, 573 (Tex. 2002)).
1 Howard Energy is listed as the “Governing Organization” in Live Oak’s application for registration
as a foreign limited liability company. In addition, Howard Energy’s CEO, President, and CFO are all on
Live Oak’s Board of Directors.
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B. Applicable Law
Generally, federal and state policies strongly favor arbitration. See Dean Witter
Reynolds, Inc. v. Byrd, 470 U.S. 213, 217 (1985); Cantella & Co. v. Goodwin, 924 S.W.2d
943, 944 (Tex. 1996); see also TEX. CIV. PRAC. & REM. CODE ANN. § 171.001 et seq. (West,
Westlaw through 2017 1st C.S.). For a court to compel arbitration under the Texas
Arbitration Act (“TAA”), the moving party must establish: (1) a valid agreement to
arbitrate, and (2) that the claims fall within the scope of that agreement. Rachal v. Reitz,
403 S.W.3d 840, 843 (Tex. 2013). 2 Ordinary principles of state law determine whether
there is a valid agreement to arbitrate. In re Kellogg Brown & Root, Inc., 166 S.W.3d 732,
738 (Tex. 2005) (orig. proceeding). A written agreement to arbitrate is valid and
enforceable if the agreement is to arbitrate a controversy that (1) exists at the time of the
agreement, or (2) arises between the parties after the date of the agreement. TEX. CIV.
PRAC. & REM. CODE ANN. § 171.001.
Normally, only parties to an arbitration agreement can be compelled to arbitrate.
Id. at 739. However, the Texas Supreme Court has recognized “six theories, arising out
of common principles of contract and agency law, that may bind non-signatories to
arbitration agreements: (1) incorporation by reference; (2) assumption; (3) agency; (4)
alter ego; (5) equitable estoppel, and (6) third-party beneficiary.” Bridas S.A.P.I.C. v.
Gov’t of Turkmenistan, 345 F.3d 347, 362 (5th Cir. 2003) (applying Texas law); see In re
Kellogg, Brown & Root, Inc., 166 S.W.3d at 738.
2 It is undisputed that the TAA governs the arbitration clause in this case, as opposed to the Federal
Arbitration Act.
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Under the doctrine of direct-benefits equitable estoppel, a non-signatory has
assented to be bound by the arbitration agreement if the non-signatory seeks or obtains
direct benefits from the contract containing the arbitration clause. See In re SSP Partners,
241 S.W.3d 162, 170 (Tex. App.—Corpus Christi 2007, orig. proceeding). Texas courts
have recognized two ways in which a non-signatory can seek a direct benefit from the
contract containing the arbitration clause: “(1) bring claims in a lawsuit that seek direct
benefits from a contract containing an arbitration clause, or (2) deliberately seek and
obtain substantial benefits from the contract itself outside of litigation.” Id. (emphasis
added); see Meyer v. WMCO-GP, LLC, 211 S.W.3d 302 (Tex. 2006) (applying the
equitable estoppel standard to an arbitration agreement governed by the TAA); In re
Weekley Homes, 180 S.W.3d at 132. Even though the equitable estoppel and third-party
beneficiary theories are similar, there is a subtle difference: “Under third-party beneficiary
theory, a court must look to the intentions of the parties at the time the contract was
executed. Under the equitable estoppel theory, a court looks to the parties’ conduct after
the contract was executed.” Bridas, 345 F.3d at 362 (emphasis added). Thus, it is the
general rule that if a non-signatory’s claims can stand independently of the underlying
contract, then arbitration should not be compelled. See Kellogg Brown & Root, Inc., 166
S.W.3d at 739. But there are situations in which “a tort claim by a non-signatory to an
arbitration agreement arising from general duties and obligations under the law (rather
than a contract) is nonetheless subject to arbitration through the theory of direct-benefits
estoppel.” Rocha v. Marks Transp., Inc., 512 S.W.3d 529, 538 (Tex. App.—Houston [1st
Dist.] 2016, no pet.) (citing In re Weekley Homes, 180 S.W.3d at 133).
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Although courts sometimes hesitate to compel arbitration against a non-signatory
to an arbitration agreement, courts are less hesitant to do so when the non-signatory is
the one to initiate the suit. See Bridas, 345 F.3d at 363; see also In re Weekley Homes,
180 S.W.3d at 134 (observing that the “strong state policy favoring arbitration would be
effectively thwarted” if non-signatories could avoid arbitration by initiating the suit
themselves); In re Kellogg, Brown & Root, Inc., 166 S.W.3d at 739.
C. Discussion
Storm Water argues that Live Oak has sought and received substantial benefits
from the contract and therefore is equitably estopped from avoiding the arbitration clause.
Live Oak asserts that it is not bound by the agreement because it did not sign the
agreement. Additionally, Live Oak also argues that it is not bound to arbitrate because
its claims merely “relate to” the agreement; they do not seek to “enforce” the agreement.
See G.T. Leach Builders, LLC v. Sapphire V.P., LP, 458 S.W.3d 502, 527–28 (Tex. 2015).
We will first determine whether there is an enforceable, valid agreement to arbitrate that
is binding to Live Oak as a non-signatory; if we find there is a valid agreement, the next
step is to determine if the claims fall within the scope of said agreement. See Rachal,
403 S.W.3d at 843.
1. Valid Agreement to Arbitrate
As Live Oak points out, a defendant’s contribution claim is derivative of the
plaintiff’s right to recover against the joint defendant against whom contribution is sought.
See Shoemake v. Fogel, Ltd., 926 S.W.2d 933, 935 (Tex. 1992); Prairie View A & M Univ.
v. Brooks, 180 S.W.3d 694, 702 (Tex. App.—Houston [14th Dist.] 2005, no pet.). In other
words, Live Oak argues that its contribution claim concerns the duty that Storm Water
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owes Bomar for his underlying claims of negligence and trespass, not the agreement with
Storm Water. Thus, Live Oak asserts its contribution claim against Storm Water is
“independent” of the agreement. See In re Kellogg, Brown & Root, Inc., 166 S.W.3d at
738. Live Oak goes so far as to argue that equitable estoppel does not apply in
contribution cases; however, this Court has previously held that arbitration can be
compelled even in cases concerning contribution claims. See Hudson Ins. Co. v. Bruce
Gamble Farms, No. 13-15-00098-CV, 2015 WL 6758654, at *6 (Tex. App.—Corpus
Christi Nov. 5, 2015, no pet.) (mem. op.).
More importantly, Live Oak’s arguments largely focus on whether or not it is
seeking benefits from the contract directly through the lawsuit; this approach fails to
address Storm Water’s major contention that Live Oak received substantial benefits from
the contract “outside of litigation.” In re SSP Partners, 241 S.W.3d at 170 (emphasis
added). We find that Live Oak’s arguments and underlying fact pattern are analogous to
those presented in In re Weekley Homes, 180 S.W.3d at 134. The Weekley Homes case
involved a purchase agreement for the construction of a home. The purchase agreement
was executed between Weekley Homes, the homebuilder, and Vernon Forsting, who was
the father of the plaintiff, Von Bargen. The lawsuit brought by Bargen against Weekley
Homes alleged personal injury damages related to construction defects within the home.
Weekley Homes moved to compel arbitration against the plaintiff under the real estate
purchase agreement. Bargen argued that she was not bound by the purchase agreement
because she did not sign the agreement, her father did. Bargen also asserted that she
was not suing under the contract; rather, she insisted that her claim arose out of the
independent duties imposed on Weekley under Texas tort law. Nonetheless, the
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Supreme Court of Texas ruled that Bargen was equitably estopped from avoiding the
purchase agreement’s arbitration requirement. See id. at 133.
In making that determination, the court noted that Bargen was the actual occupant
of the home and sought direct benefits from the purchase agreement. For example, she
negotiated directly with Weekley on construction issues, selected the floor plan, signed a
letter of intent as a purchaser, made custom design choices for the home, and directly
demanded repairs from Weekley Homes when she first noticed the construction issues.
See id. She was the one to pay the deposit on the home. The court even acknowledged
that nothing in the record suggests “Bargen’s claim is different from what any bystander
might assert.” See id. at 132. However, the court ultimately concluded:
when a nonparty consistently and knowingly insists that others treat it as a
party, it cannot later turn[ ] its back on the portions of the contract, such as
an arbitration clause, that it finds distasteful. A nonparty cannot both have
his contract and defeat it too. . . . While Von Bargen never based her
personal injury claim on the contract, her prior exercise of other contractual
rights and her equitable entitlement to other contractual benefits prevents
her from avoiding the arbitration clause here.
See id. at 135 (internal citations and quotations omitted). Therefore, Bargen was bound
by the arbitration because she sought for and received substantial benefits under the
agreement, even though the agreement was signed by her parent. See id.
Likewise, in the present case, we conclude that Live Oak is bound by the
agreement even though it was signed by Live Oak’s parent (company). Howard Energy
may have signed the agreement, but Live Oak received substantial benefits under the
agreement. Live Oak requested services and inspections and recommendations from
Storm Water. Live Oak paid Storm Water for its services under the agreement. Live Oak
supervised and directed Storm Water’s performance of the agreement at the work site.
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Thus, like Bargen, even though Live Oak’s contribution claim may rest in tort law and
even if Live Oak never based its claim directly upon the agreement, we find that Live
Oak’s prior exercise of other contractual rights outside of litigation prevents it from
avoiding arbitration. See id.; In re SSP Partners, 241 S.W.3d at 170; see also Rocha,
512 S.W.3d at 538.
We also find Live Oak’s argument that compelling arbitration would run contrary to
the parties’ intention to be unpersuasive. It is true that the agreement clearly contains a
“No Third Party Beneficiary” clause. However, we disagree with Live Oak’s contention
that this clause prevents Storm Water from compelling arbitration based on equitable
estoppel. As noted previously, third-party beneficiary theories and equitable estoppel
theories, although similar, are distinct and independent grounds which may bind a non-
signatory to an arbitration agreement. See Arthur Andersen LLP v. Carlisle, 556 U.S.
624, 630 (2009); Sabine Syngas, Ltd. v. Port of Port Arthur Nav. Dist. of Jefferson Cty.,
Tex., No. 09-09-00331-CV, 2011 WL 192756, at *4 (Tex. App.—Beaumont Jan. 13, 2011,
no pet.) (mem. op.) (holding that a third-party beneficiary clause, which explicitly stated
the parties’ intention for there to be no third-party beneficiaries, “does not negate
appellee[’s] right to compel arbitration based on equitable estoppel”). The clause about
third party beneficiaries informs us of Storm Water’s and Howard Energy’s intention at
the time the contract was executed; however, “[u]nder the equitable estoppel theory, a
court looks to the parties’ conduct after the contract was executed.” Bridas, 345 F.3d at
362.
2. Scope of the Agreement
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Finding that there was a valid arbitration agreement applicable to Live Oak as a
non-signatory, we must determine whether the present claims fall within the scope of the
arbitration agreement. See Rachal, 403 S.W.3d at 843; In re Kellogg, Brown & Root, Inc.,
166 S.W.3d at 738. We first note that Live Oak does not really dispute that its claims fall
within the scope of the agreement; rather, Live Oak focuses its brief on contending that
there is no valid arbitration agreement in the first place. See Rachal, 403 S.W.3d at 843.
But we also note that the arbitration agreement in this case is extremely broad in
scope. The contract uses broad language providing that “any dispute out of or related to
this Proposal, or the resulting Agreement, and/or the Work” will be arbitrated. This
language suggests that the parties intended all claims between the parties, both
contractual and extra-contractual, to be subject to arbitration. See Prima Paint Corp., v.
Flood & Conklin Mfg. Co., 388 U.S. 395, 397–98, (1967) (observing that an arbitration
clause requiring “[an]y controversy or claim arising out of or relating to this Agreement” to
be arbitrated was “broad” and had an expansive reach); see also Nauru Phosphate
Royalties, Inc. v. Drago Daic Interests, Inc., 138 F.3d 160, 164–65 (5th Cir. 1998) (holding
that when parties agree to arbitrate any “dispute . . . arising out of or in connection with
or relating to this Agreement,” the parties intended the clause to “reach all aspects of the
relationship”). Other courts have compelled arbitration of tort claims if the arbitration
clause’s scope was broad enough to include tort claims. See Meyer, 211 S.W.3d at 307.
The language in the agreement suggests that Storm Water and Howard Energy
contemplated that all types of claims would be arbitrated because the contracts did not
place any limitations on what kinds of disputes would be arbitrated. See id. Therefore,
Live Oak’s claims fall within the scope of the arbitration agreement.
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3. Summary
We conclude that Live Oak is bound under the arbitration agreement, even as a
non-signatory, under the direct-benefits equitable estoppel theory and that Live Oak’s
claims fall within the broad scope of the valid, enforceable arbitration agreement. The
trial court erred by failing to compel arbitration. We sustain Storm Water’s sole issue. 3
III. CONCLUSION
We reverse the trial court’s order refusing to compel arbitration and remand for
entry of an order compelling the parties to arbitrate.
NORA L. LONGORIA
Justice
Delivered and filed the
14th day of February, 2019.
3 Storm Water has admitted that its other issue concerning discovery deadlines has become moot
in light of the trial court’s stay of the proceedings below.
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