Texas’ First COA Refuses to Compel Arbitration in Second Lawsuit Regarding Houston Aeronautical Heritage Society Governance

The First District of Texas Court of Appeals in Houston has refused to compel arbitration in a dispute over the governance of the Houston Aeronautical Heritage Society, Inc. (HAHS).  In Holmes v. Graves, No. 01-12-01032-CV (Tex. App. – Houston 2013), Steve Holmes and five other directors of the HAHS joined together with two members of the organization to file a lawsuit against HAHS directors John Graves and Harper Trammell (“defendants”) over the 2012 election of the HAHS Board.  This was the second case in as many years filed over HAHS governance.

Although later changed following the election in question, the original HAHS bylaws contained a valid arbitration provision.  During pretrial proceedings, the plaintiffs asked the 334th District Court in Harris County to grant them a temporary injunction and restraining order against the defendants.  The trial court refused the plaintiffs’ request and they filed a motion to compel arbitration pursuant to the original HAHS bylaws.  The defendants responded by stating the organization’s current bylaws do not provide for arbitration and even if they did, the plaintiffs waived their right to arbitrate the dispute by substantially engaging in the judicial process.  After the Harris County trial court denied the plaintiffs’ motion, they filed an interlocutory appeal with Texas’ First District.

On appeal, the plaintiffs asserted that their claims fall within the scope of the arbitration agreement included in the HAHS bylaws.  According to the appeals court, however, the plaintiffs’ argument was irrelevant as their actions waived any right they may have had to engage in arbitration.  The court stated despite that both Texas and federal law favor arbitration and there is a strong presumption against any waiver of the right to engage in arbitration, a party’s conduct may demonstrate implied waiver.

Next, the First District discussed those behaviors such as filing suit that would not ordinarily demonstrate a party’s unequivocal waiver of his or her right to arbitrate.  Additionally, the court described behaviors such as filing a motion to compel arbitration on the eve of trial that would establish waiver.  After that, the appeals court stated it was required to determine whether the plaintiffs waived their right to arbitration based upon the totality of the circumstances.  According to Court of Appeals,

We reject Plaintiffs’ contention that requesting injunctive relief from the trial court was not a specific or deliberate act that was inconsistent with the right to arbitrate because injunctive relief is not permitted under the applicable rules of arbitration. Plaintiffs did not establish what rules would govern any arbitration. Moreover, the clause in the original bylaws under which Plaintiffs sought arbitration does not include any limit on the arbitrator’s authority. This Court has determined that arbitrators do not exceed their authority in awarding injunctive relief in the absence of any language in the arbitration clause specifically prohibiting the arbiters from granting such relief. See J.J. Gregory Gourmet Servs., Inc. v. Antone’s Import Co., 927 S.W.2d 31, 36 (Tex. App.—Houston [1st Dist.] 1995, no writ).

…

Weighing all these factors under the case-specific facts here, we conclude that the totality of the circumstances demonstrates an attempt by Plaintiffs to “have it both ways.” See In re Citigroup Global Mkts., 258 S.W.3d 623, 625 (Tex. 2008)(orig. proceeding)(quoting Perry Homes, 258 S.W.3d at 597). Such circumstances demonstrate that Plaintiffs had substantially invoked the litigation process before seeking to compel arbitration.

The Houston court then examined whether the defendants were prejudiced because the plaintiffs substantially invoked the judicial process.  The court said,

The dispositive inquiry, therefore, is whether Defendants established that Plaintiffs’ switching from litigation to arbitration produced the necessary degree of prejudice or detriment to warrant waiver of arbitration. See Perry Homes, 258 S.W.3d at 595 (declining to vacate requirement that party claiming waiver premised on substantial invocation of judicial process demonstrates prejudice). Prejudice to a party may arise in any number of ways that demonstrate harm to a party’s legal rights or financial position. See, e.g., id. at 597 (defining prejudice for purposes of waiver of arbitration as “the inherent unfairness in terms of delay, expense, or damage to a party’s legal position”)(quoting Republic Ins. Co. v. PAICO Receivables, LLC, 383 F.3d 341, 346 (5th Cir. 2004)). Prejudice is more easily shown when a party delays his request for arbitration and in the meantime engages in pretrial activity inconsistent with the intent to arbitrate. Id. at 599.

The court held “[t]he substantial litigation between these parties related to the merits of Plaintiffs’ claims weighs heavily in favor of a finding of prejudice.”  Since the case was the second time litigation occurred over essentially the same issue and the same trial court made factual determinations when it presided over the previous litigation, Texas’ First District found that arbitrating the case would prejudice the defendants.  The appeals court stated,

Requiring Defendants to defend against Plaintiffs’ claims before a new fact finder after Defendants have already successfully defended substantially similar litigation results in prejudice to Defendants. Plaintiffs’ attempts to have an arbitrator reexamine matters already decided by the trial court in the 2011 lawsuit suggests  an effort to duplicate litigation rather than avoid it. The record supports a conclusion that Defendants would be prejudiced by Plaintiffs invocation of their arbitration rights, if any, at this stage of the proceedings. We therefore conclude that Plaintiffs have waived their right, if any, to seek arbitration of their claims in this lawsuit.

Because the plaintiffs waived any right they may have had to engage in arbitration and their waiver prejudiced the defendants, Texas’ First District Court of Appeals affirmed the trial court’s decision.