SCOTX Reverses Order Denying Arbitration in Dallas County Structured Settlement Transfer Case

On Friday, the Supreme Court of Texas reversed a lower court’s order denying a party’s motion to compel arbitration because a provision included in a structured settlement transfer agreement stated the question of arbitrability was one for an arbitrator to decide.  In RSL Funding, LLC v. Newsome, No. 16-0998 (Tex., December 21, 2018), a man named Newsome received a structured settlement from an insurance company following a personal injury.  Decades later, RSL funding agreed to pay Newsome a lump sum in exchange for the assignment of 120 monthly structured settlement payments.  The parties’ contract included a mandatory arbitration clause that stated the agreement was controlled by the Federal Arbitration Act.  The contract also specifically delegated any issues related to arbitrability to an arbitrator.

In compliance with Texas’ Structured Settlement Protection Act, RSL filed a petition for approval of the parties’ agreement with a district court in Dallas County. The district court approved the structured settlement transfer, but the presiding judge placed a handwritten note on the order requiring RSL to pay Newsome double if he did not receive the agreed-upon lump sum within 10 days.  More than six months later, Newsome remained unpaid under the terms of the agreement.  Following court-ordered mediation, the parties agreed to remove the 10-day payment penalty and the district court issued a corrected nunc pro tunc order approving the parties’ agreement.

Despite the mediated agreement between the parties, RSL still failed to pay Newsome a lump sum payment.  Several months after the corrected order was issued, Newsome again sought relief from the district court.  According Newsome’s court pleading, the corrected order was void and the original court order should be vacated for non-compliance.

RSL responded to Newsome by stating the lump sum remained unpaid due to Newsome’s refusal to cooperate with RSL as well as his unwillingness to accept the originally agreed-upon payment amount.  In addition, RSL filed a motion to compel the dispute to arbitration based on the parties’ signed contract.

Next, Newsome filed a motion for summary judgment.  The district court granted the man’s motion with regard to the corrected order.  Despite this, the district court reserved the question of whether the court’s original order should be vacated for future proceedings.  The court also denied RSL’s motion to compel arbitration.  In response, RSL filed an interlocutory appeal with the Fifth District Court of Appeals in Dallas.

A divided appellate court affirmed the district court’s order denying RSL’s motion to compel arbitration by stating:

We recognize that the arbitration provision in the Transfer Agreement is broad in scope. We further recognize that once a valid arbitration agreement is established, there is a strong presumption favoring arbitration and we resolve doubts as to the agreement’s scope in favor of arbitration. See Rachal v. Reitz, 403 S.W.3d 840, 850 (Tex. 2013). Under the unique facts of this case, however, we conclude there was nothing for an arbitrator to determine. The disputes asserted by RSL in its motions to compel had no bearing on Newsome’s claim that the nunc pro tunc order was void. Further, the alternative relief Newsome sought from the trial court was in the province of the trial court under the SSPA, not an arbitrator. Approving transfers of structured settlement payment rights is a purely judicial function. We conclude the trial court did not abuse its discretion in denying RSL’s motions to compel arbitration. We overrule RSL’s first issue.

RSL then filed a successful petition for review with the Supreme Court of Texas.  Last week, the Texas high court reversed the judgment of the lower courts because the parties’ contract specifically stated the question of arbitrability was for an arbitrator to decide.

In its written opinion, the Texas Supreme Court said:

The dispute thus presents two legal questions for us to decide. First, does an arbitral delegation clause in a court-approved structured settlement transfer agreement apply when the validity of the approving court order is at issue? The court of appeals held it does not. 559 S.W.3d at 175. Second, does a dispute about the validity of approving court orders under the Structured Settlement Protection Act affect the existence of an enforceable arbitration agreement? The court of appeals did not answer this question. Our review of these legal determinations is, of course, de novo. Forest Oil, 268 S.W.3d at 55 & n.9.

The Texas high court answered the first question by stating:

Here, the courts below have not questioned the validity of parties’ arbitration clause. We thus have no choice but to send this dispute to arbitration for the arbitrator to at least decide arbitrability. Accordingly, the court of appeals erred in affirming the trial court’s refusal to compel arbitration on the grounds that the dispute in this case was not arbitrable.

After that, the court declined to consider whether the “wholly groundless” exception that is applied by some federal courts was applicable to the case before it.  The Supreme Court of Texas said:

RSL urges us to go further and read the court of appeals’ decision as applying the “wholly groundless” exception and to explicitly reject such an exception in Texas. The wholly groundless exception is a doctrine applied by some federal appellate courts to deny arbitration even in the face of an arbitral delegation clause. Under the wholly groundless exception, the court may decline to enforce an arbitral delegation clause when no reasonable argument exists that the parties intended the arbitration clause to apply to the claim before it. Turi v. Main St. Adoption Servs., LLP, 633 F.3d 496, 507 (6th Cir. 2011). Here, the court of appeals concluded that the dispute over the validity of the court’s approval orders was “not relevant” and “had no bearing” on the parties’ arbitrable disputes. 559 S.W.3d. at 175. RSL contends that this was in effect an adoption of the wholly groundless exception.

But the court of appeals does not mention the exception or discuss the federal cases that apply it. Nor has Newsome asked us to adopt the exception or any similar “relevance test” to deny enforcement of an otherwise valid arbitration agreement. The court of appeals did not refuse to enforce arbitration because it thought there was no reasonable argument that the arbitration agreement covered the parties’ dispute. It refused to enforce arbitration because it decided this case offered “nothing for an arbitrator to determine.” Id. In other words, the court decided the nature of the dispute made it non-arbitrable. It erred by skipping the first step in which it should have considered whether it could decide arbitrability in the face of the arbitral delegation clause. This skipped step is where the wholly groundless exception would come into play if the court of appeals had intended to apply it. We conclude the validity of a wholly groundless exception or similar relevance test is not properly before us. We need not go any further than to hold the court of appeals erred by deciding arbitrability itself.

The highest court in the state then turned to the question of whether a valid agreement to arbitrate existed:

Because it decided the case on arbitrability grounds, the court of appeals did not address Newsome’s arguments that the agreement and thus the arbitration clause never came into effect or was unenforceable. As explained above, this was error; the court should have first decided whether a valid arbitration agreement exists. When presented with an issue the court of appeals could have but did not decide, we may either remand the case or consider the issue ourselves. TEX. R. APP. P. 53.4. We choose to decide this issue.

The Texas Supreme Court next examined the case law Newsome offered in support of his claims.  According to the court:

In the arbitration context, the Prima Paint separability doctrine provides that the arbitrator is to decide any challenge to the enforceability of an existing contract. 388 U.S. at 404. Any contract defense that attacks the contract as a whole but does not go to the issue of contract formation must be decided by the arbitrator. See, e.g., Rent-A-Ctr., 561 U.S. at 66 (unconscionability); Buckeye, 546 U.S. at 443 (illegality); Prima Paint, 338 U.S. at 402-04 (fraudulent inducement). Voidness on public policy grounds as in Washington Square may provide a basis for revoking an existing contract but does not mean the agreement never formed in the first place. See In re Poly-America, L.P., 262 S.W.3d 337, 348 (Tex. 2008) (orig. proceeding). Because voidness on public policy grounds, like illegality, is a defense to the contract’s enforcement, it falls into the category that the Prima Paint line of cases delegates to the arbitrator. See Buckeye, 456 U.S. at 446. Consequently, when a party resisting arbitration argues the whole contract is void for violation of public policy, the arbitrator, not a court, decides the issue. We thus cannot decide here whether a transfer agreement lacking court approval under section 141.004 is void on public policy grounds or unenforceable for any other reason that does not go to contract formation because the doctrine of separability reserves such decisions for the arbitrator.

The court continued:

Newsome, however, also argues that section 141.004 of the Structured Settlement Protection Act creates a condition precedent to contract formation. That indeed was the holding of a court of appeals in another case Newsome cites. See Rapid Settlements, 202 S.W.3d at 461. Assuming that holding to be correct, a court would have an opportunity to decide at the outset whether a valid court order approved a structured-settlement-transfer agreement because the existence of the court order goes to contract formation, which the court decides before compelling arbitration. See Morgan Stanley, 293 S.W.3d at 187. Whether we may decide in this appeal if court approval is an issue of the underlying contract’s formation depends on whether Newsome properly raised that issue below.

Finally, the Texas high court stated:

The primary thrust of Newsome’s bill of review was for the trial court to declare the nunc pro tunc order void so Newsome could enforce the original approval order. Because Newsome’s bill of review pleads that the approval order is valid and created an enforceable contract, the possible voidness of the nunc pro tunc order does not affect the existence of the agreement to arbitrate. The contract containing the agreement to arbitrate exists even if a question exists about whether the nunc pro tunc order corrected only a clerical error. Newsome seeks to enforce a contract approved by a court that contains an arbitration agreement and thereby concedes the existence of the agreement to arbitrate.

In fact, Newsome has no theory to support his conclusory attack on the original order. He did not even raise the issue in his trial court brief opposing RSL’s motion to compel arbitration. Indeed, Newsome’s petition for bill of review barely mentions the possibility, and his briefing in this Court is no better. A brief must provide citations or argument and analysis for the contentions and failure to do this can result in waiver. TEX. R. APP. P. 38.1(i), 38.2(a)(1); Ross v. St. Luke’s Episcopal Hosp., 462 S.W.3d 496, 500 (Tex. 2015). Newsome has failed to present any theory, analysis, or authority that puts the validity of the original approval order and thus formation of the contract to arbitrate in issue, and we conclude that the doctrine of separability reserves to the arbitrator all other questions raised in the district court. The court of appeals therefore erred in affirming the trial court’s order denying arbitration.

Because the lower court committed error when it denied RSL’s motion to compel arbitration, the Supreme Court of Texas reversed the district court’s order and remanded the case with instructions to send the dispute to arbitration.

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