Houston COA Orders Legal Malpractice Case to Arbitration

Houston’s 14th District Court of Appeals has ordered a legal malpractice case to arbitration. In Cedillo v. Immobiliere Jeuness Establissement, No. 14–15–00101–CV (Tex. App. – Houston [14th], August 27, 2015), a Lichtenstein-based limited partner, Immobiliere Jeuness Establissement (“IJE”), of two Texas limited partnerships (the “Original Partnerships”) initiated litigation against them in 2009. In response, the Original Partnerships secured the services of a San Antonio-based law firm (“DCM”).

The parties’ Legal Representation Agreement included an arbitration clause which stated any disputes must be resolved through binding arbitration governed by the laws of the State of Texas, held in Bexar County, Texas, using the American Arbitration Association’s Commercial Arbitration Rules. The agreement also stated that the firm would represent a number of other related business entities and their executives.

Initially, IJE asked a Texas court to compel the Original Partnerships to produce records related to the subject of the litigation. After that, IJE filed an amended complaint alleging breach of contract and breach of fiduciary duty. Later, IJE again amended its complaint to assert derivative claims against one of the Original Partnerships’ related business entities and its executive. As a result, the law firm successfully sought to withdraw its representation based on a potential conflict between the firm’s clients in June 2011.

About one year later, IJE filed a legal malpractice lawsuit against the firm. In its complaint, the company argued the firm assisted in concealing certain fiduciary breaches when it represented the Original Partnerships at the same time as the related business entities and executives. Additionally, IJE argued the firm placed its own interests above those of its clients. In May 2013, IJE was granted the right to wind up the Original Partnerships’ affairs and pursue any existing derivative claims against third parties.

At the close of a 17-month abatement, the law firm began responding to IJE’s discovery requests in the legal malpractice case. In December 2014, however, the firm filed a motion to compel the dispute to arbitration. IJE opposed the firm’s motion by claiming the Original Partnerships did not agree to be bound by the unsigned Legal Representation Agreement, the company’s claims fell outside of the scope of the parties’ contract, IJE’s derivative claims were not subject to arbitration, the arbitral provision was unconscionable, and the law firm waived its right to arbitrate the dispute by substantially invoking the judicial process. The trial court then denied the firm’s motion to compel arbitral proceedings because IJE was not a party to the Legal Representation Agreement. Next, the law firm filed an interlocutory appeal with Houston’s 14th District Court of Appeals.

On appeal, the Houston court first stated the law favors arbitration. After that, the court found that a valid agreement to arbitrate existed despite that the Original Partnerships failed to sign the Legal Representation Agreement because “the uncontroverted evidence establishes that the partnerships did, in fact, accept the representation agreement by their conduct: they accepted DCM as their counsel in the Louetta litigation until DCM withdrew due, in part, to a potential conflict.”

The court continued:

And by accepting the representation agreement, they also accepted the arbitration clause contained therein. See Greenberg Traurig, LLP v. Nat’l Am. Ins. Co., 448 S.W.3d 115, 121–22 (Tex.App.—Houston [14th Dist.] 2014, no pet.). We, therefore, conclude that a valid arbitration agreement exists between the Original Partnerships and DCM.

Next, the appellate court ruled that IJE was bound by the arbitral agreement. The court stated:

IJE urges that the mere fact that it is suing derivatively and “steps into the shoes” of the Original Partnerships, standing alone, is irrelevant. Instead, IJE urges that the only question presented is whether liability “arises from or relates to the contract containing the arbitration provision.” We conclude that IJE is bound to the provision because (a) it is bringing derivative claims for the Original Partnerships and (b) we cannot say with “positive assurance” that those claims are beyond the scope of the arbitration clause.

The appeals court then held that the arbitration agreement was not unconscionable:

IJE further asserted that the arbitration provision is unconscionable. Unconscionable agreements, whether relating to arbitration or not, are unenforceable under Texas law. In re Poly–Am., L.P., 262 S.W.3d at 348. “Because the law favors arbitration, the party opposing arbitration bears the burden to prove unconscionability.” TMI, Inc. v. Brooks, 225 S.W.3d 783, 792 (Tex.App.—Houston [14th Dist.] 2007, pet. denied). Arbitration agreements are not per se unconscionable, including arbitration agreements between attorneys and clients. See In re Pham, 314 S.W.3d 520, 526 (Tex.App.—Houston [14th Dist.] 2010, orig. proceeding, pet. struck).

In its response to DCM’s motion to compel arbitration, IJE sought to place the burden on DCM to prove that the arbitration agreement at issue here is not unconscionable. IJE presented no evidence in support of its unconscionability argument, aside from the existence of the agreement between a law firm and its clients. In short, IJE failed to meet its burden to prove the arbitration agreement here is unconscionable. TMI, Inc., 225 S.W.3d at 792. Thus, IJE’s unconscionability defense provides no basis for denying DCM’s motion to compel arbitration.

Finally, the Houston court stated the law firm did not waive its right to pursue arbitration by participating in limited discovery or by seeking a change of venue despite the length of the litigation. According to the court:

Under the circumstances presented here, considered as a whole, IJE has not established that DCM substantially invoked the judicial process See, e.g., id. at 576; Baty, 423 S.W.3d at 436–38. Having reached this conclusion, we need not consider whether IJE was prejudiced by the delay. See Richmont Holdings, Inc., 455 S.W.3d at 576. Thus, IJE’s waiver arguments offer no support for the trial court’s denial of the motion to compel arbitration.

Since the firm demonstrated that a valid arbitration agreement existed, IJE was bound by its provisions, IJE’s claims fell within the scope of that agreement, and there was no basis for denying the law firm’s motion, Texas’ 14th Court of Appeals in Houston reversed the trial court’s order denying arbitration.

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