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 […]

A new paper entitled Regulating Mandatory Arbitration, is available from Thomas Burch, Assistant Visiting Professor in Law at the Florida State University College of Law. (Utah Law Review, 2011; FSU College of Law, Public Law Research Paper No. 493.) In his paper, Professor Burch examines mandatory arbitration jurisprudence and reform efforts over the past twenty-five years. Here is the abstract: Over the last twenty-five years, the Supreme Court has relied on party autonomy and the national policy favoring arbitration to expand the Federal Arbitration Act’s scope beyond Congress’s original intent. Choosing these loaded premises has allowed the Court to reach the outcomes it desires while denying that it is making any political or moral judgments in its decisions – a type of bureaucratic formalism. One controversial outcome of the Court’s formalism, overall, has been the increased prevalence of mandatory arbitration. Although it reduces judicial caseloads and lowers companies’ dispute-resolution costs, it also restricts or eliminates individual rights and reduces public regulation of the companies that require it. The Court has supported the spread of mandatory arbitration despite these negative effects. Because of the Court’s support, the parties being subjected to mandatory arbitration began asking lower courts for relief through the unconscionability doctrine in the early 1990s. And because the unconscionability doctrine could not provide the wide-scale relief they wanted, they also turned to Congress, convincing its members to introduce 139 anti-arbitration bills since 1995 – the majority of which proposed eliminating mandatory arbitration. A review of these efforts, including an original survey of these bills, reveals that these parties have been disregarding mandatory arbitration’s public benefits in favor of a rights-oriented, liberal approach that rejects regulation as a possible way to improve mandatory arbitration’s overall fairness. This Article shows that both the Supreme Court’s and the reform advocates’ approaches to mandatory arbitration are flawed. It makes more sense, at least for now, to continue mandatory arbitration’s use while improving its overall fairness through legislative or agency regulation. Regulating mandatory arbitration with the goal of improving its fairness is consistent with pragmatic principles and is superior to the Supreme Court’s formalism and the reform advocates’ liberalism in the current mandatory-arbitration context. Taking this approach will allow us to study mandatory arbitration over time before deciding whether to eliminate it – a fair way to proceed given the importance of the rights at stake and the positive effects that mandatory arbitration can (possibly) have on the public good. You may download a copy of the article here (without charge) from Social Science Research Network. Other papers by Professor Burch can be found here. Technorati Tags: arbitration, ADR, law, Mediation  

The San Antonio Court of Appeals has held that a signatory’s waiver of its right to arbitrate could not be imputed to its non-signatory agent. In Garcia v. Huerta, No. 04-10-00688-CV (Tex. App. – San Antonio, March 30, 2011) Albert Garcia appealed a trial court’s order which denied arbitration against Edward and Margarita Huerta. The Huertas obtained a home equity loan from Wells Fargo and entered into an arbitration agreement with Wells Fargo as part of the loan process. After the Huertas subsequently defaulted on the loan, Wells Fargo sought a non-judicial foreclosure and purchased the property at the resulting foreclosure auction. Wells Fargo then employed real estate agent Albert Garcia to evict the Huertas and to sell the property after making any necessary repairs to the house. The Huertas filed suit against Wells Fargo, Garcia, and other parties. The court held in In re Wells Fargo Bank, N.A., 300 S.W.3d 818 (Tex. App. – San Antonio 2009, orig., proceeding) that Wells Fargo had the right to enforce the arbitration agreement, Garcia was likewise entitled to enforce the arbitration agreement as a non-signatory because his actions were conducted as an agent of Wells Fargo and none of the defendants to the Huertas’ lawsuit waived their right to compel arbitration. Following this ruling, the Huertas negotiated a settlement with Wells Fargo and all other defendants except Garcia. The resulting Settlement Agreement provided that Wells Fargo and the other settling defendants would assign their claims against Garcia to the Huertas and further waive their rights to enforce the arbitration agreement with respect to any claim against him. After executing the Settlement Agreement, the Huertas filed a Motion to Amend with the trial court and requested that arbitration of the Huertas’ claims against Garcia be denied. The trial court granted the motion and Garcia appealed. After finding that Garcia’s interlocutory appeal was appropriate under the Federal Arbitration Act (FAA), and that Garcia was entitled as an agent to enforce the arbitration agreement, the San Antonio Court of Appeals considered “whether Wells Fargo’s express waiver of its own right to arbitrate contained in the Settlement Agreement operated to deny Garcia his right to enforce the arbitration agreement.” The Huertas argued Wells Fargo’s express waiver must be imputed against Garcia and prevented his right to enforce the initial arbitration agreement because, as a non-signatory, his right to enforce was derived solely from his status as an agent of Wells Fargo. The Huertas, however, failed to cite any legal authority which supported their argument. The Appellate Court refused to hold that one party’s waiver of the right to arbitrate could be imputed to another when it was not alleged that the second party acted in any way to repudiate his right. Further, the court pointed out that Garcia “relied upon this Court’s holding that he had the right to enforce the agreement.” Together with the FAA’s strong presumption against waiver, Garcia’s reliance required the court to resolve any doubts in favor of arbitration. Because Garcia did not waive his right to arbitration, the San Antonio Court of Appeals reversed and remanded the case with instructions to enter an order compelling arbitration and stay all other proceedings pending that arbitration. Technorati Tags: arbitration, ADR, law

The Center for Public Policy Dispute Resolution at the University of Texas School of Law will be hosting “Innovations in Collaboration and Conflict Resolution – Skills Enrichment Institute,” July 28-29 at the Four Seasons Hotel in Austin, TX. According to the Center for Public Policy Dispute Resolution, This dynamic skill-building program allows participants to choose from five intensive two-day tracks. In addition, the program fosters opportunities to form a variety of connections. The selected session tracks showcase prominent trainers and represent the latest advances in the field. Participants will learn to integrate innovative techniques into their work, while the setting provides a congenial atmosphere for deliberate thought and dialogue among colleagues and recognized leaders in the field. The Plenary Speaker will be Nina Meierding and session tracks include: Nina Meierding, Advanced Negotiation Skills: A Skills Based Institute of Strategy and Technique (must have completed a basic negotiation course prior) Lee Jay Berman, Impasse is a Fallacy: An Advanced Mediators’ Forum Bernie Mayer, New Roles and New Approaches to Conflict Jennifer Kresge, Brains Matter: The Art and Science of Using the Mind in Conflict Matthew P. Guasco, Conflict Management and Resolution for Businesses and Other Organizations in a Rapidly Changing World More information about the Skills Enrichment Institute is available here. You may register by mail, fax, or online here. Technorati Tags: ADR, Mediation