Victor S. Elgohary v. Gilbert A. Herrera

Opinion issued March 5, 2013.
In The
Court of Appeals
For The
First District of Texas
————————————
NO. 01-11-00550-CV
———————————
VICTOR S. ELGOHARY, Appellant
V.
GILBERT A. HERRERA, Appellee
On Appeal from the 133rd District Court
Harris County, Texas
Trial Court Case No. 2010-40476
OPINION
This is an appeal from a trial court judgment confirming in part, denying in
part, and vacating in part an arbitration award. In several related issues on appeal,
appellant contends the trial court erred in denying confirmation of and vacating an
arbitration award against a non-signatory to the arbitration agreement. Thus, the
issue presented in this appeal is who properly decides the issue of arbitrability
against a non-signatory—the trial court or the arbitrator.
BACKGROUND
In November 2006, Elgohary entered into a written employment agreement
with his employer, Herrera Partners, L.P. [“Herrera Partners”]. Herrera Partners
was a Texas limited partnership with Gilbert Herrera [“Herrera”] as the limited
partner and G.A. Herrera & Co., LLC [“Herrera LLC”] as the general partner. The
agreement was signed by Elgohary and Herrera. Herrera’s signature indicating
that he was signing the document in his role as President of Hererra Partners.
Neither Herrera, nor Herrera LLC were signatories. The employment agreement
contained an arbitration agreement, which provides:
Upon the demand of either party, any dispute, controversy or claim
arising out of or relating to this Agreement, or the breach, termination
or invalidity thereof, or that arises out of the relationship of the parties
shall be resolved by mandatory binding arbitration in Houston, Texas.
In May 2007, Herrera Partners terminated Elgohary’s employment for cause. A
dispute arose between the parties over Elgohary’s claim that Hererra Parners owed
him his salary for work performed after May 1, 2007 until the day he was
terminated, as well as reimbursement of certain expenses.
In June 2007, Herrera Partners was formally dissolved. Elgohary contends
that this was an attempt “to evade [Herrera Partners’s] creditors,” while the
2
arbitrator, who considered the issue, concluded that the dissolution was “a result of
changes in Texas law that would have created a greater tax burden on limited
partnerships.”
In March 2009, after first unsuccessfully pursuing a claim for unemployment
benefits, 1 and filing then non-suiting two defamation suits, Elgohary demanded
arbitration. Elgohary sought arbitration against Herrera Partners, which was a
signatory to the arbitration agreement, and also Herrera, individually, who was not
a signatory to the arbitration agreement. There was no court order compelling
arbitration.
Hererra Partners answered and filed a counterclaim, while Herrera objected
that he was not a party to the employment agreement and could not be subjected to
arbitration:
Herrera is not a party to the arbitration agreement giving rise to this
proceeding. Herrera does not consent to joinder in this proceeding.
Herrera does not waive the right to have Movant’s alleged claims
against him decided in a Harris County, Texas court of law before a
duly empaneled jury. Herrera respectfully submits that the American
Arbitration Association has no authority to administer the prosecution
of Movant’s alleged claims against Herrera. Herrera is not a proper
party to this proceeding and requests that he be released from this
proceeding.
1
See Elgohary v. Tex. Workforce Comm’n, No. 14-09-00108-CV, 2010 WL
2326126 (Tex. App.—Houston [14th Dist.] June 10, 2010, no pet.).
3
Herrera continued to argue throughout the arbitration proceeding that whether he
as a non-signatory should be compelled to arbitrate was a “gateway matter” for the
court to decide, not the arbitrator.
Based on a “successors and assigns” clause in the employment agreement, 2
the arbitrator overruled Herrera’s objection finding that
[t]he employment contract “clearly and unmistakably” is applicable to
successors to Herrera Partners, LP. In the Arbitrator’s view, the
parties have “clearly and unmistakably incorporated any successor to
Herrera Partners, LP as a party covered by the arbitration process of
the employment contract. Based on the authority of the Arbitrator, I
find Gilbert Herrera as the successor to Herrera Partners, LP to be a
proper party to this arbitration proceeding.
The arbitrator ultimately awarded Elgohary $5,208.34 in unpaid wages and
$2,048.70 in unpaid business expenses, plus prejudgment interest and attorney’s
fees, and denied Herrera Partners’s counterclaim. The Award of Arbitrator also
provided that “[t]his award applies to [Herrera Partners] and any successor,
including Gilbert Herrera.” The award did not name Herrera LLP as a party.
Elgohary then filed a suit to confirm the award against Herrera Partners,
Herrera, and Herrera LLC, even though Herrera LLC was not named in the award.
Herrera Partners did not answer. Herrera answered, objected to confirmation, and
2
The “successors and assigns” clause provides as follows:
The rights and obligations of this Agreement shall be binding on the
Partnership’s successors and assigns and inure to the benefit of any
successor or assign or the Partnership.
4
moved to vacate the award, arguing that the arbitrator had exceeded his powers by
making him a party to the arbitration. Herrera LLC answered and objected to
confirmation, arguing that it was not named in the arbitration award.
The trial court (1) granted the application to confirm as to Herrera Partners,
(2) denied the application to confirm as to Herrera and Herrera LLP, and (3)
vacated the arbitration award against Herrera. This appeal followed. 3
DID THE ARBITRATOR EXCEED HIS POWERS?
In issues two and three, Elgohary contends the trial court erred in failing to
confirm, and in vacating, the award as to Herrera, individually. Specifically,
Elgohary contends that “[t]he trial court erred in vacating the arbitration award
against Gilbert Herrera since the Arbitrator had the authority to determine issues of
arbitrability and found that Gilbert Herrera was the successor to the arbitration
contract.”
Under the FAA, an arbitration award can be vacated for any of several
enumerated reasons, one of which is that “the arbitrators exceeded their powers.” 9
U.S.C. § 10(a)(4); Citigroup Global Markets, Inc. v. Bacon, 562 F.3d 349, 352 (5th
3
The parties agree that this case is governed by the Federal Arbitration Act [“FAA”].
In such cases, a party may appeal an order “under the same circumstances that an
appeal from a federal district court’s order or decision would be permitted by”
section 16 of the FAA. TEX. CIV. PRAC. & REM. CODE ANN. § 51.016 (Vernon
Supp. 2012). Section 16 of the FAA allows for the appeal of, among other things,
an order that confirms, denies confirmation, or vacates an arbitration award. 9
U.S.C. § 16(a)(1)(D), (E) (2006).
5
Cir. 2009). Arbitrators exceed their powers when they decide matters not properly
before them. Ancor Holdings, LLC v. Peterson, Goldman & Villani, Inc., 294
S.W.3d 818, 829 (Tex. App.—Dallas 2009, no pet.); Barsness v. Scott, 126 S.W.3d
232, 241 (Tex. App.—San Antonio 2003, pet. denied). When the arbitrator issues
an award against a party not subject to arbitration, he has exceeded his powers.
Rapid Settlements, Ltd., v. Green, 294 S.W.3d 701, 707 (Tex. App.—Houston [1st
Dist. 2009, no pet.) Thus, the issue this Court must decide is whether the arbitrator
exceeded his authority by determining that Herrera, a non-signatory to the
arbitration agreement, was nonetheless bound to arbitrate.
“Generally, only signatories to an arbitration agreement are bound by the
agreement.” In re James E. Bashaw & Co., 305 S.W.3d 44, 54 (Tex. App.—
Houston [1st Dist.] 2009, orig. proceeding) (citing Brown v. Pac. Life Ins. Co., 462
F.3d 384, 398 (5th Cir.2006)). “While non-signatories to an arbitration agreement
can be bound to arbitrate under principles of contract and agency law, such
issues—dealing as they do with non-signatories—are gateway ‘issues of
arbitrability’ that the courts are primarily responsible for deciding—not the
arbitrator.” Roe v. Ladymon, 318 S.W.3d 502, 515 (Tex. App.—Dallas 2010, no
pet.) (citing Howsam v. Dean Witter Reynolds, Inc., 537 U.S. 79, 84, 123 S. Ct.
588 (2002)). However, if the court determines that the parties “clearly and
unmistakably agreed” to submit arbitrability to the arbitrator, we defer to the
6
arbitrator’s decision on the issues. First Options of Chicago, Inc. v. Kaplan, 514
U.S. 938, 943, 115 S. Ct. 1920, 1924 (1995); Roe, 318 S.W.3d at 514. Absent such
“clear and unmistakable evidence” that the parties agreed to the contrary, the
primary power to decide arbitrability resides with the court, not the arbitrator. See
First Options, 514 U.S. at 944, 115 S. Ct. at 1924; Howsam, 537 U.S. at 84, 123 S.
Ct. at 588; Roe, 318 F.3d at 514. We focus on whether there is such an agreement
between the parties to the dispute before the court, not between the parties to the
arbitration agreement itself. See Roe, 318 S.W.3d at 514 (citing First Options, 514
U.S. at 946–47, 115 S. Ct. at 1925).
In First Options, the Supreme Court explained that “Courts should not
assume that the parties agreed to arbitrate arbitrability unless there is clear and
unmistakable evidence that they did so.” 514 U.S. at 944, 115 S. Ct. at 1924
(internal quotation marks and alterations omitted). The issue there was whether
Kaplan, the owner of a wholly owned investment company, was required to
arbitrate a dispute over an agreement between his investment company and another
firm. Id. at 941, 115 S. Ct. at 1922. While it was undisputed that his investment
company had agreed to arbitrate under the agreement, Kaplan asserted that because
he had not personally signed the agreement, he was not obligated to arbitrate in an
individual capacity. Id. Because this was a gateway question of “who should
decide arbitrability,” the Court cautioned that “silence or ambiguity” on the point
7
should not be interpreted to give the arbitrators the power to decide the issue. Id. at
945, 115 S. Ct. at 1925. Since Kaplan had not clearly and unmistakably agreed to
arbitrate the question of whether he himself was bound by the agreement, the Court
held that this was a question for judicial resolution. Id. at 946–47, 115 S. Ct. at
1925–26.
Thus, we turn to the issue of whether there is “clear and unmistakable
evidence” that Elgohary and the non-signatory, Herrera, had agreed to submit the
issue of arbitrability to the arbitrator. Elgohary argues that there is clear and
unmistakable evidence that Herrera agreed to arbitrate, in that (1) Herrera signed
the employment agreement as agent for the company, (2) the arbitration provision
invoked the rules of the American Arbitration Association, which gives the
arbitrator the authority to decide his own jurisdiction, and (3) the employment
agreement contained a “successors and assigns” clause. We address each
argument respectively to determine whether it presents “clear and unmistakable
evidence” of an agreement to allow the arbitrator to decide the gateway issue of
arbitrability.
Signing as Agent?
Elgohary argues that Herrera was “bound to arbitrate in his individual
capacity since he was Herrera Partner. L.P.’s sole agent . . .” However, signing a
contract in a representative capacity does not bind the agent personally to the
8
contract. See RESTATEMENT (SECOND) OF AGENCY §320 (“Unless otherwise
agreed, a person making or purporting to make a contract with another as agent for
a disclosed principal does not become a party to the contract.”).
In Roe, 318 S.W.3d at 507, the appellee signed an agreement in his capacity
as a partner of a limited partnership. The agreement contained an arbitration
agreement invoking the FAA. Id. The plaintiff sought arbitration against both the
signatory partnership and the non-signatory partner. Id. at 508. The appellee
objected to arbitration, arguing that he was not a party to the agreement. Id. The
arbitrator overruled the appellees objection and entered an award against both the
partnership and him, individually. Id. at 509. The trial court confirmed the award
as to the partnership, but vacated it as to the partner, individually. Id. On appeal,
the court held that appellee’s signature on the contract as agent was not evidence
“that he clearly and unmistakably agreed the arbitrator could decide whether he
[was] bound to arbitrate claims against him individually.” Id. at 516.
In DK Joint Venture 1 v. Weyand, 649 F.3d 310, 313 (5th Cir. 2011) an
arbitrator entered an award against two signatory corporations and two non-
signatory officers of those corporations. Id. at 313. The district court confirmed
the arbitration award, but the court of appeals reversed the order confirming the
award against the non-signatory officers. Id. at 314, 320. In so holding, the Fifth
Circuit stated that “the fact that the defendant corporations entered into the
9
Subscription Agreements did not cause their agents, Weyand and Thiessen, who
acted only as officers on behalf of the corporations to be personally bound by those
agreements.” Id. at 314–15. The court, citing Roe v. Ladymon with approval, held
that the agents who signed only in a representative capacity were not bound by the
terms of the agreement including the arbitration provision. Id. at 315.
Elgohary, nonetheless, cites In re Vesta Ins. Group, Inc., 192 S.W.3d 759,
762 (Tex. 2006) (orig. proceeding) and In re Merrill Lynch Trust Co., 235 S.W.3d
185, 189 (Tex. 2007) (orig. proceeding), for the proposition that agents and
representatives of parties to contracts containing arbitration clauses are also bound
to arbitrate. However, both Roe and DK Joint Venture distinguished these cases,
noting that in Roe and Merrill Lynch, the party resisting arbitration was, in fact, a
signatory to the contract and a non-signatory was seeking to compel arbitration.
See DK Joint Venture, 649 F.3d at 315 (citing Roe, 318 S.W.2d at 520). “In re
Vesta stands for the proposition that a signatory plaintiff cannot avoid its
agreement to arbitrate dispute simply by bringing . . . claims against the
[nonsignatory] officers, agents, or affiliates of the other signatory to the contract.”
Roe, 318 S.W.2d at 520. Both Roe and DK Joint Venture hold that “it matters
whether the party resisting arbitration is a signatory or not.” DK Venture, 649 F.3d
at 317. If the party resisting arbitration is not a signatory to the contract, his status
10
as an agent of the signatory entity will not bind him to the arbitration provision.
Id.
This case is like Roe and DK Venture and unlike Vesta and Merrill Lynch.
Herrera is a non-signatory to the arbitration provision, and his signing the
agreement as agent is not a clear and unmistakable agreement to submit claims
against him personally to arbitration.
Invoking the Rules of the American Arbitration Association?
Elgohary also contends that Rule 7(a) of the Commercial Arbitration Rules
of the AAA permits an arbitrator “the power to rule on his or her own jurisdiction,
including any objections with respect to the existence, scope, or validity of the
Arbitration Agreement,” and that by invoking the AAA in the arbitration
agreement in this case, the parties clearly and unmistakably agreed to submit
arbitrability issues to the arbitrator.
Roe v. Ladymon considered and rejected this same argument, noting that
“the entities who agreed to arbitrate under the AAA rules are Metro LLP and Roe,
not Ladymon.” 318 S.W.3d at 517. As was the case in First Options, the terms of
the contracting parties’ agreement to arbitrate is not evidence that a non-
contracting party—here Ladymon—agreed to arbitrate or to do so under AAA
rules, much less clear and unmistakable evidence of such an agreement.” Id.
(citing First Options, 514 U.S. at 946–47, 115 S. Ct. at 1920).
11
We agree that Herrera Partners’s agreement to arbitrate under AAA rules is
not clear and unmistakable evidence that Herrera agreed to arbitrate under AAA
rules for claims against himself, individually.
The “Successors and Assigns” clause?
Elgohary’s employment contract with Herrera Brothers contains a
“successors and assigns” clause, which provides as follows:
The rights and obligations of this Agreement shall be binding on the
Partnership’s successors and assigns and inure to the benefit of any
successor or assign of the Partnership.
The arbitrator found that this clause was clear and unmistakable evidence that
Herrera had agreed to arbitrate any claims against him personally. 4 Herrera
responds that, by reaching the issue of whether he was the successor or assign of
Herrera Brothers, the arbitrator exceeded his power.
The Fifth Circuit considered this issue DK Joint Venture, stating:
The plaintiffs additionally argue that [the non-signatories] are bound
by the arbitration provisions in the Subscription Agreements because
of language in the agreements referring to “affiliates.” The plaintiffs
contend that the agreements purport to bind “affiliates” of the
4
The arbitrator ruled as follows:
The employment contract “clearly and unmistakably” is applicable
to successors to Herrera Partners, LP. In the Arbitrator’s view, the
parties have “clearly and unmistakably” incorporated any successor
to Herrera Partners, LP as a party covered by the arbitration process
of the employment contract. Based on the authority of the
Arbitrator, I find Gilbert Herrera as the successor to Herrera
Partners, LP to be a proper party to this arbitration proceeding.
12
defendant corporations and they further claim that [the non-
signatories] count as “affiliates.” However, this argument fails
because, even if the Subscription Agreements could be interpreted in
that manner, the defendant corporations lacked the authority to bind
[the non-signatories] personally.
Id. at 318–19.
In First Options, the Supreme Court explained the difference between a
dispute about a non-signatory’s liability for a debt and whether that non-signatory
was bound to arbitrate.
First, [the non-signatories] and First Options disagree about whether
the [non-signatories] are personally liable for [their wholly-owned
company’s] debt to First Options. That disagreement makes up the
merits of the dispute. Second, they disagree about whether they
agreed to arbitrate the merits. That disagreement is about the
abitrability of the dispute. Third, they disagree about who should have
the primary power to decide the second matter. Does that power
belong primarily to the arbitrators (because the court reviews their
arbitrability decision deferentially) or the court (because the court
makes up its mind about arbitrability independently)? We consider
here only this third question.
514 U.S. at 942, 111 S. Ct. at 1923.
Becasuse the non-signatories in that case had not signed the agreement in their
individual capacity, the First Options Court held that the court, not the arbitrator,
was to decide the issue. Id. at 946, 115 S. Ct. at 1925–26.
By deciding that Herrera was bound by the “successors and assigns” clause
of the employment agreement, the arbitrator skipped to the “merits” of the dispute
without there first being a judicial determination as to whether Herrera,
13
individually, had agreed to arbitrate. We agree with the Fifth Circuit, that evidence
of a successor, assigns, or affiliates clause in the contract between the signatories is
not evidence that the non-signatory intended that an arbitrator decide whether the
non-signatory was bound under the contract’s provisions about successors. See
DK Joint Venture, 649 F.3d at 318–19; see also John Wiley & Sons, Inc. v.
Livingston, 376 U.S. 543, 546–47, 84 S. Ct. 909, 912 (1964) (holding that court
should decide whether arbitration clause binds successor corporation).
Other Theories Requiring Non-signatory to Arbitrate?
Texas and federal law recognize six theories under which a court could
compel a non-signatory to arbitrate. In re Merrill Lynch Trust Co., 235 S.W.3d at
191; Bridas S.A.P.I.C. v. Government of Turkmenistan, 345 F.3d 347, 356 (5th
Cir. 2003). Those theories include (1) incorporation by reference, (2) assumption,
(3) agency, (4) veil-piercing/alter ego, (5) estoppel, and (6) third-party beneficiary.
Bridas, 345 F.3d at 356. However, these issues are to be resolved by the court
before compelling a non-signatory to arbitration. See In re Weekley Homes, L.P.,
180 S.W.3d 127, 130 (Tex. 2005) (reviewing whether trial court properly denied
motion to compel non-signatory to arbitrate under direct benefits estoppel theory);
Roe, 318 S.W.3d at 519 (holding that trial court properly determined that non-
signatory was not bound either as agent for or as successor to signatory of
contract); Bridas S.A.P.I.C., 345 F.3d at 358–59 (reviewing trial court’s
14
independent review of whether non-signatory was bound to arbitrate under theories
of agency, alter ego, estoppel, and third-party beneficiary).
Because the trial court, not the arbitrator, should have decided the “gateway
issue” of whether Herrera had agreed to be bound by the arbitration, the arbitrator
exceeded his authority.
Remand for Independent Review of Arbitrability Issues by Trial Court
Elgohary nevertheless argues that, even if this Court finds that the arbitrator
exceeded his authority, we must nonetheless remand to the trial court because “the
court must make a finding on who is the successor to the contract.” On this narrow
issue, we agree.
In Roe v. Ladymon, the court of appeals, as we have done above, considered
and decided that the court, not the arbitrator, should decide the issue of whether a
non-signatory would be bound by the arbitration agreement. 318 S.W.3d at 518.
Because the court found that the non-signatory did not clearly agree to submit the
question to arbitration, “the district court was correct in finding that the
arbitrability of the dispute was subject to independent review by the courts.” Id.
(citing First Options, 514 U.S. at 947, 115 S. Ct. at 1920)). The court of appeals
then reviewed the trial court’s independent determination that successor liability
and agency did not bind the non-signatory to the contract. Id. at 518-520.
15
Similarly, in Bridas S.A.P.I.C., the trial court, finding no clear and
unmistakable evidence that the parties had agreed to arbitrate claims against a non-
signatory, undertook “an independent review” of whether the non-signatory was
bound to arbitrate. 345 F.3d at 354. The Fifth Circuit then reviewed and reversed
the trial court’s decision that the doctrines of agency and estoppel required the
non-signatory to arbitrate. Id. at 356-63.
Here, the trial court properly decided that it, and not the arbitrator, had the
authority to decide whether Herrera, as a non-signatory, had agreed to be bound by
the arbitration. However, the trial court did not then conduct an independent
review to determine whether arbitration could nonetheless be compelled because of
either successor liability under the contract or under any of the six theories for
compelling a non-signatory to arbitrate set forth in In re Merrill Lynch, 235
S.W.3d at 191. Absent such an independent review of arbitrability by the trial
court, its action in denying the application to confirm and vacating the arbitration
award against Herrera was premature.
CONCLUSION
Accordingly, we reverse the judgment of the trial court and remand for
further proceedings so that the trial court may consider the arbitrability issue.
16
We express no opinion as to it resolution of such issue. In light of this
disposition, we need not address any remaining issues raised by Elgohary and
decline to do so.
Sherry Radack
Chief Justice
Panel consists of Chief Justice Radack and Justices Bland and Huddle.
17