Dallas COA Refuses to Compel Non-Signatory to Arbitration

The Dallas Appeals Court has refused to compel a non-signatory to a contract to arbitrate under the Federal Arbitration Act (“FAA”).

In Carr v. Main Carr Development, LLC, No. 05-10-01346-CV, (Tex. App. – Dallas, 03/31/2011), Main Carr Development (“MCD”) was a limited liability corporation organized to engage in real estate development projects. An operating agreement which did not contain an arbitration clause authorized MCD to engage in a variety of endeavors including the lease and development of several Christian Brothers Automotive sites.

The Operating Agreement was signed by MCD’s four individual members (the “Reed members”), and by Carr in the capacity of manager and trustee of two entities he controls. The Operating Agreement defines “the Company” as MCD and the manager as Main Christian Brothers Development (“MCBD”) or a successor entity and the Reed members. The agreement reflects that Carr is a director of MCD, and provides for the establishment and designation of eleven series LLC’s to own and lease the projects contemplated by the agreement, subject to Carr’s approval.

Later, “Carr, Christian Brothers Automotive Corporation (“CBAC”), a Texas corporation, and MCBD, a Texas limited liability company, entered into a development agreement (the “Development Agreement”).” The development agreement contained an arbitration clause which provided, “[i]f the parties are unable to resolve any dispute . . . arising from or relating to this Agreement, then the parties hereto agree to submit the dispute to a single arbitrator administered by the American Arbitration Association.” MCD, however, was not a signatory to the development agreement.

MCD subsequently filed suit against Carr for breach of fiduciary duty. Carr and CBAC initiated arbitration proceedings based on the language in the development agreement and “named MCD and MCBD as respondents.” Carr filed a motion to compel MCD to arbitration and a motion for abatement pending the outcome of arbitration. A trial court denied Carr’s motions and he filed an interlocutory appeal with the Dallas Court of Appeals.

First, the Dallas Court stated that an interlocutory appeal was permissible because both parties agreed the FAA governed the arbitration agreement. Next, the court addressed each of Carr’s assertions that, “MCD must be compelled to arbitrate because it is an agent of MCBD, because it is a third-party beneficiary of the Development Agreement, and because it sought and obtained benefits from the Development Agreement and is therefore estopped from avoiding arbitration.”

According to the court, Carr’s agency argument was not preserved for review and the court’s “determination is limited to whether MCD is bound by the arbitration agreement as a third-party beneficiary or under a theory of estoppel.”

Carr asserted certain sections of the development agreement rendered MCD a third-party beneficiary and subject to arbitration. The court responded,

We disagree with the interpretation Carr seeks to advance. On its face, section 7(c) relates only to the right to assert claims against CBAC or MCBD. No rights are conferred upon MCD. The section expressly precludes third-party beneficiary claims, and the carve out provision does not name MCD. In fact, the language in section 7(c) does not relate to the assertion of any claims other than those which might be asserted pursuant to section 3.

Section 3 of the Development Agreement relates to an anticipated buy-sell or similar provision with respect to Carr’s interest in Joint Developments. “Joint Developments” are defined as projects developed jointly between MCBD and CBAC. MCD is neither expressly nor implicitly referenced in section 3. Thus, there is no reasonable basis to conclude either section 7(c) or section 3 pertain to MCD.

The Dallas Court of Appeals next dismissed Carr’s argument that the two agreements were interrelated and the arbitration agreement in the development agreement was incorporated by reference into the operating agreement. Carr also alleged the strong public policy favoring arbitration required the court to compel arbitration. The Court disagreed,

But as this Court previously noted, the presumption in favor of arbitration applies to the scope of an arbitration agreement; it does not apply to the existence of such an agreement or to the identity of the parties who may be bound to such an agreement. See Roe v. Ladymon, 318 S.W.3d 502,511 n.6 (Tex. App.-Dallas 2010, no pet.). Even the exceptionally strong policy favoring arbitration cannot justify requiring litigants to forego a judicial remedy when they have not agreed to do so. E.E.O.C. v. Waffle House, 534 U.S. 279, 293-94 (2002). Because MCD is not a third-party beneficiary to the Development Agreement, the trial court properly refused to compel MCD to arbitrate pursuant to the arbitration clause in this agreement.

Next, the Appeals Court addressed Carr’s argument that MCD was estopped from avoiding arbitration because it relied on the development agreement when it filed suit against Carr for breach of fiduciary duty.

The determination of whether a party seeks to benefit from a contract through its claim turns on the substance of the claim, not artful pleading. See Weekley, 180 S.W.3d at 131-32. The substance of the amended petition reflects that MCD does not seek to enforce the Development Agreement in conjunction with its breach of fiduciary duty claim. Its recovery is dependent upon whether it can prove Carr breached his fiduciary duties and caused damage to MCD, its Series, and its members. Carr’s assertion that there can be no breach of fiduciary duty claim if he can show he did not violate the Development Agreement is incorrect. The duties Carr owed as a director are distinct from his contractual obligations under the Development Agreement, and MCD need not prove a breach of the Development Agreement to recover on its independent tort claim. In reviewing MCD’s claims and the Development Agreement, we are not convinced that MCD “would have no claims had the agreement containing the arbitration provision not been signed.” See Anco Insurance Svcs. v. Romero, 27 S.W.3d 1, 6 (Tex. App.-San Antonio 2000, no pet.).

The court also rejected “Carr’s contention that MCD is estopped to avoid arbitration because it sought and obtained benefits from the Development Agreement by means other than through its lawsuit,” by stating the “alternative application of direct benefits estoppel does not sweep as broadly as Carr’s argument would imply.”

According to the Dallas Court,

We also reject Carr’s argument that the Operating Agreement reflects that the business of MCD was exclusively the development, leasing, and financing of Christian Brothers Automotive sites. The express language of the contract states otherwise. In addition to the development, leasing, and financing of Christian Brothers Automotive sites, MCD is also authorized to engage in business activities of a series, and other activities at the Board’s discretion. Moreover, the Operating Agreement does not specify or require that Christian Brothers Automotive sites will be developed according to the Development Agreement. And as previously noted, the Operating Agreement is not incorporated into the Development Agreement.

Finally, the court stated that lease payments forwarded to MCD by other entities did “not establish that MCD received a substantial direct benefit under the Development Agreement.”

The court continued,

Therefore, we conclude the tort claim urged by MCD is not encompassed by the arbitration clause in the contract it did not sign. We further conclude MCD did not receive a substantial direct benefit under the Development Agreement. Because Carr’s potential liability arises from general obligations imposed by law rather than the Development Agreement, and MCD did not obtain a substantial direct benefit under the Development Agreement, estoppel does not apply to bind MCD to arbitrate its claim.

Because MCD’s breach of fiduciary duty claim against Carr was not arbitrable, the Dallas Court of Appeals affirmed the decision of the trial court.

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