Houston’s First District Refuses to Compel Lease Dispute to Arbitration

Houston’s First Court of Appeals has affirmed a trial court’s order refusing to compel a lease dispute to arbitration.  In Speedemissions, Inc. v. Bear Gate, L.P., 01-12-00431-CV (Tex. App.–Hous. [1st Dist.] Apr. 4, 2013), Speedemissions, Inc. purchased six Mr. Sticker vehicle inspection stations in Houston, Texas from David, Barbara, and Grant Smith (the “Smiths”).  The company also sought to lease the real property on which two of the inspection stations operated from the Smiths.  Prior to Speedemissions’s purchase of the inspection stations, the Smiths formed Spencer Head, LLC with Grant Smith as the company’s only member and sole manager.  Next, the Smiths formed Bear Gate, LP which named Spencer Head as managing partner.  After that, the two properties that Speedemissions sought to lease were transferred to Bear Gate via a general warranty deed that was signed by Grant Smith in his capacity as vice-president of Mr. Sticker.

Two weeks later, the Smiths sold all of their stock in Mr. Sticker to Speedemissions, Inc.  The stock purchase agreement contained a non-compete, non-solicitation, confidentiality, and arbitration clause and specifically excluded the real property that was transferred to Bear Gate from the contract.  On the same day, Speedemissions and Bear Gate, LP entered into two five-year lease agreements for the two properties.  The stock purchase agreement made no mention of the leases and Mr. Sticker no longer owned the properties at the time of the sale.

Near the end of the lease terms, Speedemissions and Bear Gate were unable to agree on renewal terms and Speedemissions relocated the two businesses when the leases expired.  About six weeks before the leases expired, Speedemissions initiated an arbitration proceeding against the Smiths for breach of contract, fraud, and conversion as a result of alleged lease violations.  The Smiths responded by filing a motion to dismiss the arbitral proceeding and stated Bear Gate was an indispensable party to the dispute.  The arbitrator agreed with the Smiths and abated the proceeding.  Speedemissions then filed a motion to compel Bear Gate to arbitration.  According to the company, the lease agreements were part of the sale of Mr. Sticker and should be read in conjunction with the stock sale agreement which required that all disputes be submitted to arbitration.  Speedemissions also argued that the stock purchase contract was a sale and lease-back agreement that anticipated a ten-year lease term.

After the trial court denied Speedemissions’ motion to compel arbitration, the company filed an appeal with Houston’s First District.  First, the appellate court stated the Federal Arbitration Act applied to the parties’ dispute.  Next, the court said a party who seeks to compel arbitration must demonstrate a valid agreement to arbitrate exists and the disagreement falls within the scope of that agreement.  The court then stated both parties agreed that the dispute arose from the lease agreements and the agreements did not contain an arbitration clause.  According to the court, the intent of the parties at the time the agreement was signed normally determines whether a dispute is subject to arbitration.

After the appeals court stated that Speedemissions improperly categorized the parties’ transaction as a lease-back, the court found that the language of the stock purchase and lease agreements clearly demonstrated that the parties intended for the two agreements to remain separate.  Additionally, the Houston court said this was further established by the fact that the properties were conveyed before the stock purchase agreement was signed and the stock purchase agreement specifically excluded the properties from the transaction.

The court held,

We conclude that Speedemissions and Bear Gate did not have a meeting of the minds that disputes under the terms of the Lease Agreements should be subject to arbitration under the terms of the Stock Purchase Agreement and that Bear Gate did not consent to arbitrate disputes arising under the Lease Agreements. See Advantage Physical Therapy, Inc., 165 S.W.3d at 24. Therefore, the trial court did not err in refusing to compel Bear Gate to submit to arbitration.

Next, the First District dismissed Speedemissions’ argument that the two agreements were part of a single transaction by stating,

…the contracts Speedemissions asks us to read and construe together do not even reference each other. As we have already discussed, both the Stock Purchase Agreement between Speedemissions and the Smiths on behalf of Mr. Sticker and the Lease Agreements between Speedemissions and Bear Gate are intrinsically complete. Neither relies upon the other to provide any essential term.

The court continued by saying, “The agreements are between different parties, and they each have a distinct and separate purpose.”

Next, the court found,

Performance under the Stock Purchase Agreement was not conditioned upon execution of or performance under the Lease Agreements, and performance under the Lease Agreements was not conditioned upon execution of or performance under the Stock Purchase Agreement.  Nor did the Stock Purchase Agreement include the Lease Agreements among the deliveries to be made at the closing in its description of the “Contemplated Transactions.”

After stating the stock purchase agreement was not illusory without inclusion of the lease agreements, the appeals court held,

We conclude, as did the court in A.J. Robbins & Co., that “specific obligations assumed under one contract cannot be used to alter, amend or add to specific obligations assumed under the other contract.”

Finally, Houston’s First District dismissed Speedemissions’ argument that Bear Gate should be compelled to arbitrate under the direct benefits doctrine of estoppel by stating,

Speedemissions’ own argument asserts that the only direct benefit to Bear Gate flowed through the leases. Bear Gate was not a party to the Stock Purchase Agreement and received no direct benefit under its terms. In this suit, neither Speedemissions nor Bear Gate is seeking a direct benefit granted by the Stock Purchase Agreement or relying on a claim or defense arising under that agreement.  Thus, the direct benefits doctrine of estoppel does not apply here.

Because no agreement to arbitrate existed between the parties, Houston’s First District Court of Appeals affirmed the lower court’s order which denied Speedemissions’ motion to compel arbitration.