Saturday, September 1, 2018

Did the Word "May" Make the Arbitration Provision Mandatory? - Consumer crossed out mandatory arbitration clause before signing and Builder accepted the changes; but consumer gets forced into arbitration anyhow, with one Justice dissenting Southern Green Builders v. Cleveland (Tex. App. - Houston 2018)

DOES MAY REALLY MEAN MUST ?

and No. 14-17-00540-CV. (Tex.App.- Houston [14th Dist.] Aug. 9, 2018)
Dissent by Justice Tracy Christopher

Negotiable Boilerplate Contract (Builder's Email)
Negotiable Boilerplate Contract (Builder's Email) 


"shall" replaced with "may" but 2 of 3 justices now say it means "must"
arbitrate  

Final wording of ADR paragraph in the signed contract 

THE GIST OF THE DISSENT BY JUSTICE CHRISTOPHER 

Southern Green sent Cleveland a form boilerplate construction contract. Cleveland modified Southern Green's boilerplate contract by removing nearly the entirety of the mandatory arbitration clause and changing the words "shall be submitted to binding arbitration" to "may be submitted to binding arbitration." He also added the language that both parties "shall have the right to seek other legal remedies as they see fit and the law allows."
"May" does not take on a special meaning in an arbitration contract. As always, the entire contract must reviewed to see if it is mandatory or permissive. See G.T. Leach Builders, 458 S.W.3d at 525 (concluding that a joinder provision in an arbitration contract that used the word "may" was permissive rather than mandatory). 
The arbitration requirement in this contract is permissive, not mandatory. The trial court correctly denied the motion to compel arbitration. Because the majority holds otherwise, I respectfully dissent.

SOUTHERN GREEN BUILDERS, LP AND SAM SEIDEL, Appellants,
v.
JAIME CLEVELAND, Appellee.

Nos. 14-17-00483-CV, 14-17-00540-CV.
Court of Appeals of Texas, Fourteenth District, Houston.
Majority Opinion and Dissenting Opinion filed August 9, 2018.
Timothy C. Ross, Lauren Scroggs, for Southern Green Builders, LP, Appellant.

Crystal Parker, Jason Gregory Johns, Harris Huguenard, Lionel M. Schooler, for Jaime Cleveland, Appellee.
Jason Gregory Johns, Harris Huguenard, Lionel M. Schooler, Courtney Carlson, for Jennifer Cleveland, Appellee.
On Appeal from the 215th District Court, Harris County, Texas, Trial Court Cause No. 2017-13499.
Reversed and Remanded.
Panel consists of Justices Christopher, Donovan, and Jewell (Christopher, J., dissenting).

MAJORITY OPINION

JOHN DONOVAN, Justice.

Appellant Southern Green Builders, a residential home builder, sued appellee Jaime Cleveland, prospective homeowner, for breach of contract. Cleveland responded with a counterclaim against SGB, and a third-party claim against SGB's principal, appellant Sam Seidel. SGB and Seidel both moved to compel arbitration, which the trial court denied.[1] In a consolidated, accelerated, interlocutory appeal, SGB and Seidel argue the trial court erred in denying arbitration. We agree.

I. Background

This is a residential construction dispute. On September 30, 2015, Seidel, on behalf of SGB, entered in to a Residential Construction Contract (the "contract") to build for Cleveland the residence at 3424 Sunset Boulevard, Houston, Harris County, Texas, at an agreed price of $1,680,340.39. The contract contained the following language regarding arbitration of disputes:
17. RESOLUTION OF DISPUTES. The Parties desire prompt, inexpensive and efficient dispute resolution procedures and therefore agree that their disputes shall be governed by the following:
***
(c) Mediation-Binding Arbitration/Waiver of Jury Trial. The Owner and Builder agree that all controversies, claims (and any related settlements), or matters in question arising out of or relating to (i) this Contract, (ii) any breach or termination of this Contract, (iii) the construction of the Home and/or its repairs, (iv) any acts or omissions by the Builder (and its officers, directors or agents), and/or (v) any actual or purported representations or warranties, express or implied, relating to the Property and/or the Home (herein referred to collectively as a "Dispute") may be submitted to binding arbitration, but both parties shall also have the right to seek other legal remedies as they see fit and the law allows.
***
25. ENTIRE AGREEMENT. This Contract, together with all attachments, contains the entire understanding between Builder and Owner with respect to the construction of the Home, and replaces all prior agreements or understandings, if any. BUILDER IS NOT BOUND BY ANY STATEMENT, PROMISE, CONDITION OR STIPULATION NOT SPECIFICALLY SET FORTH IN THIS CONTRACT. No representative of Builder has authority to make any oral statements that modify or change the terms and conditions of this Contract. OWNER REPRESENTS THAT OWNER HAS READ AND UNDERSTANDS THIS ENTIRE CONTRACT, INCLUDING THE AGREEMENT FOR BINDING ARBITRATION OF DISPUTES RELATED TO THIS CONTRACT (AS AMENDED). OWNER ALSO REPRESENTS THAT NO VERBAL STATEMENT, PROMISE OR CONDITION NOT SPECIFICALLY SET FORTH IN THIS CONTRACT IS BEING RELIED UPON BY OWNER. IT IS ACKNOWLEDGED THAT BUILDER IS RELYING ON THESE REPRESENTATIONS AND WOULD NOT ENTER INTO THIS CONTRACT WITHOUT THIS UNDERSTANDING.
During the construction of the residence, a dispute arose between the parties regarding payment and performance under the contract. On February 27, 2017, SGB filed a demand for arbitration of its rights as well as an original petition in the trial court, which was made subject to SGB's right to arbitrate.

In response, the Cleveland's asserted a counterclaim against SGB for fraud, Deceptive Trade Practices Act violations, negligent misrepresentation, breach of contract, breach of implied warranty, and a request for declaratory relief wherein they request the trial court to declare the arbitration language in the contract is permissive and does not compel Cleveland to arbitrate. Cleveland also added a third-party petition against appellant Sam Seidel, SGB's principal, for fraud, DTPA violations, and negligent misrepresentation.

SGB voluntarily dismissed the arbitration proceeding without prejudice and moved the trial court to compel arbitration under the contract. On May 19, 2017, the trial court held a hearing on SGB's motion to compel and, after taking it under advisement, denied the motion on June 7, 2017. Seidel also filed a motion to compel, requesting the trial court to compel arbitration of all claims under the contract. The trial court denied Seidel's motion without a hearing on July 6, 2017. SGB and Seidel timely filed their respective notices of appeal, which were consolidated by this Court.

II. Analysis

The central focus of this appeal is whether the trial court erred in denying SGB and Seidel's motions to compel arbitration. Appellants raise three issues: (1) is arbitration required when requested under this contract; (2) Does Cleveland's extrinsic evidence alter the express terms of the contract; and (3) do the parties' claims fall within the scope of the arbitration agreement?

A. Standard of review and substantive law

Section 171.098 of the Texas Civil Practice and Remedies Code permits the interlocutory appeal of an order denying a motion to compel arbitration. Tex. Civ. Prac. & Rem. Code § 171.098(a)(1). Under an abuse of discretion standard, we defer to the trial court's factual determinations if they are supported by evidence, but we review the trial court's legal determinations de novo. In re Labatt Food Servs., L.P., 279S.W.3d 640, 643 (Tex. 2009) (citing Brainard v. State, 12 S.W.3d 6, 30 (Tex. 1999)see Walker v. Packer, 827 S.W.2d 833, 839-40 (Tex. 1992)). Whether an arbitration agreement is enforceable is subject to de novo review. See id. (citing J.M. Davidson, Inc. v. Webster, 128 S.W.3d 223, 227 (Tex. 2003)).

"Courts cannot compel a party to arbitrate claims in the absence of an agreement to arbitrate." Kehoe v. Pollack, 526 S.W.3d 781, 791 (Tex. App.-Houston [14th Dist.] 2017, no pet.) (citing In the Estate of Guerrero, 465 S.W.3d 693, 699 (Tex. App.-Houston [14th Dist.] 2015, pet. denied) (en banc)). A party moving to compel arbitration bears the initial burden of proving the existence of an arbitration agreement. Ellis v. Schlimmer, 337 S.W.3d 860, 862 (Tex. 2011) (citing J.M. Davidson, Inc. v. Webster, 128 S.W.3d 223, 227 (Tex. 2003); Tex. Civ. Prac. & Rem. Code § 171.021(a)); see also Rachal v. Reitz, 403 S.W.3d 840, 843 (Tex. 2013) (The party moving to compel arbitration must establish the existence of a valid arbitration agreement and the existence of a dispute within the scope of that agreement.). A party moving to compel a party who did not sign the arbitration agreement to arbitrate also bears the burden of establishing that the arbitration agreement binds the nonsignatory. See Kehoe, 526 S.W.3d at 791The Branch Law Firm, L.L.P. v. Osborn, 447 S.W.3d 390, 394 (Tex. App.-Houston [14th Dist.] 2014, no pet.)see also Labatt Food Servs., 279 S.W.3d at 643 (when "arbitration agreement is silent about who is to determine whether particular persons are bound by the agreement, courts, rather than the arbitrator, should determine the issue").

The existence of a valid arbitration agreement is a legal question. In re D. Wilson Constr., 196 S.W.3d 774, 781 (Tex. 2006). In interpreting an agreement to arbitrate, we apply ordinary contract principles. J.M. Davidson, Inc., 128 S.W.3d at 227. We examine and consider the entire writing in an effort to harmonize and give effect to all the provisions of the contract so that none will be rendered meaningless. Id. at 229. A trial court "has no `discretion' in determining what the law is or applying the law to the facts." In re D. Wilson Constr., 196 S.W.3d at 781(quoting Walker v. Packer, 827 S.W.2d 833, 840 (Tex.1992) (orig. proceeding)).

Once an agreement is established, a strong presumption favoring arbitration arises, and the burden shifts to the party opposing arbitration to raise an affirmative defense to the agreement's enforcement. Ellis, 337 S.W.3d at 862. Indeed, ". . . a court should not deny arbitration unless it can be said with positive assurance that an arbitration clause is not susceptible of an interpretation which would cover the dispute at issue." In re D. Wilson Constr., 196 S.W.3d at 783(emphasis original) (internal quotation marks omitted) (quoting Prudential Sec. Inc. v. Marshall, 909 S.W.2d 896, 899 (Tex. 1995) (per curiam) (orig. proceeding)). Further, courts should resolve any doubts as to the agreement's scope, waiver, and other issues unrelated to its validity in favor of arbitration. Id. (see In re Poly-America, L.P., 262 S.W.3d 337, 348 (Tex. 2008)). Here, appellants challenge the trial court's rulings on both motions to compel arbitration. We address each in turn.

B. The trial court erred by denying appellants' motions to compel

SGB and Seidel, as the parties seeking to compel arbitration,[2] argue that the trial court erred in denying their motions to compel because they met their burden by demonstrating (1) the existence of a valid and enforceable arbitration agreement and (2) that the claims asserted against them fall within the scope of that agreement. See Rachal, 403 S.W.3d at 843.

First, it is undisputed that the Residential Construction Contract contains an agreement to arbitrate. Section 17c lists categories of claims and provides those claims "may be submitted to binding arbitration." It also is undisputed that the claims at issue between the parties arise out of the contract.[3] SGB alleges breach of contract and prompt payment claims. Cleveland alleges issues against SGB and Seidel, in his official capacity, stemming from performance of the contract. Thus, the claims fall directly within the arbitration clause. The only matter in dispute is whether the arbitration clause is enforceable.

SGB and Seidel argue that arbitration is required if requested. They maintain that the arbitration provision in Section 17(c)—i.e., that any dispute "may be submitted to binding arbitration, but both parties shall also have the right to seek other legal remedies as they see fit and the law allows"—constitutes a binding promise to arbitrate if either party requested it. They maintain to give meaning to all the terms of 17(c) it must be read as providing the scope of claims subject to arbitration, stating that those claims are subject to arbitration upon request, and confirming that, if arbitration not requested, the parties are free to pursue other forms of dispute resolution. In their motions, SGB and Seidel cite to a Texas Supreme Court decision that they contend is controlling and demands arbitration under these circumstances. In re U.S. Home Corp., 236 S.W.3d 761 (Tex. 2007) (per curiam)("may" submit language requires arbitration when requested). Additionally, SGB and Seidel contend that requiring arbitration when requested is consistent with the rest of the contract. Under Section 25, which is entitled "Entire Agreement," the contract references an agreement for binding arbitration:
OWNER REPRESENTS THAT OWNER HAS READ AND UNDERSTAND THIS ENTIRE CONTRACT, INCLUDING THE AGREEMENT FOR BINDING ARBITRATION OF DISPUTES RELATED TO THIS CONTRACT (AS AMENDED).
Further, Section 25, provides the builder is "NOT BOUND BY ANY STATEMENT, PROMISE, CONDITION OR STIPULATION NOT SPECIFCIALLY SET FORTH IN THIS CONTRACT." Similarly, Cleveland represented that "NO VERBAL STATEMENT, PROMISE OR CONDITION NOT SPECIFICALLY SET FORTH IN THIS CONTRACT IS BEING RELIED UPON BY OWNER." Moreover, Section 20 of the contract references reimbursement of arbitration fees by the successful party. Finally, SGB and Seidel maintain that Cleveland accepted the contract, along with its terms and conditions, as evidenced by his signature on the final page of the contract.
Cleveland argues that the contract does not empower SGB and Seidel to unilaterally compel arbitration. Cleveland contends that he cannot be compelled to arbitrate because the arbitration clause in the contract uses permissive wording, stating that the parties "may" submit disputes to arbitration. Cleveland asserts that the parties were "permitted" but not "required" to agree mutually at some point in the future to pursue arbitration. According to Cleveland, this interpretation is evidenced by the circumstances surrounding the formation of the contract. In support of his argument, Cleveland submitted the parties' redlined draft of the contract, negotiating the replacement of "shall" with "may" in Section 17(c). Cleveland also maintains that U.S. Home Corp., is inapposite because it involved two agreements, one of which contained a mandatory arbitration clause. Cleveland distinguishes U.S. Home Corp. by asserting that the contract in this case requires the parties to subsequently agree to arbitrate. Finally, Cleveland contends that Section 25 of the contract does not dictate arbitration, but "only identifies a procedural structure (i.e., "binding" versus "non-binding") for a means of resolving existing disputes," and is considered after the question of arbitrability is resolved.

We agree with SGB and Seidel that arbitration was required. The plain language of Section 17(c) creates a valid and enforceable mandatory arbitration clause that unambiguously provides that either party may request arbitration. Nothing in the contract suggests arbitration was optional if either side requested it.[4] Hence, as interpreted by this court's precedent, this clause constitutes a binding promise to arbitrate if either party requested it. See Feldman/Matz Interests, LLP v. Settlement Capital Corp., 140 S.W.3d 879, 888 (Tex. App.-Houston [14th Dist.] 2004, no pet) ("may" submit language is mandatory for arbitration). In Feldman/Matz Interests, LLP, the court explained its interpretation of the "may" submit clause as follows:
That is merely another way of saying that either party may require the other to arbitrate—not a limitation on how a party may invoke arbitration. Secondly, although the agreement stated that either party "may" submit disagreements to arbitration, a number of the federal circuits—including the Fifth Circuit—have interpreted similar language to mean that either party has the power to require arbitration. See, e.g., Deaton Truck Line, Inc., v. Local Union 612, 314 F.2d 418 (5th Cir. 1962)Austin v. Owens-Brockway Glass Container, Inc., 78 F.3d 875, 879 (4th Cir.), cert. denied, 519 U.S. 980, 117 S. Ct. 432, 136 L.Ed.2d 330 (1996)Ceres Marine Terminals, Inc. v. Int'l Longshoremen's Ass'n, Local 1969, 683 F.2d 242, 246-47 (7th Cir. 1982)Local 771, I.A.T.S.E., AFL-CIO v. RKO Gen., Inc., 546 F.2d 1107, 1116 (2d Cir. 1977)Bonnot v. Cong. of Indep. Unions Local No. 4, 331 F.2d 355, 359 (8th Cir. 1964). Thus, generally, an agreement to arbitrate is mandatory even though it contains permissive terms such as "may." This interpretation supports the federal scheme to encourage arbitration. We see no reason to depart from the reasoning of these cases.
Id.; see In re U.S. Home Corp., 236 S.W.3d at 765 (holding clause that permitted either party to request arbitration and did not require permission from other to be mandatory); see also Hanover Ins. Co. v. Kiva Lodge Condo. Owners' Ass'n, Inc.,221 So. 3d 446, 453-54 (Ala. 2016) ("Most cases throughout the country. . .[find] that use of the term "may" in an arbitration provision generally does not denote permissive arbitration because the arbitration clause would be meaningless.") (citations omitted). Moreover, this construction harmonizes and gives effect to Section 25 of the contract, wherein Cleveland acknowledges "binding arbitration of disputes."
To the extent Cleveland introduced a redlined draft the contract demonstrating changes Cleveland made to the contract before it was executed, such evidence should not have been considered by the trial court as it is precluded by the parol evidence rule. The parol evidence rule is a rule of substantive law. Lewis v. Adams,979 S.W.2d 831, 836 (Tex. App.-Houston [14th Dist.] 1998, no pet.) (citations omitted). The parol evidence rule provides that the terms of a written contract cannot be contradicted by evidence of an earlier, inconsistent agreement.[5] Id.

Additionally, a written instrument presumes that all prior agreements relating to the transaction have been merged into it and will be enforced as written and cannot be added to, varied, or contradicted by parol testimony. Smith v. Smith, 794 S.W.2d 823, 827 (Tex. App.-Dallas 1990, no pet.). The rule is particularly applicable when the written contract contains a recital that it contains the entire agreement between the parties or a similarly-worded merger provision. Weinacht v. Phillips Coal Co.,673 S.W.2d 677, 679 (Tex. App.-Dallas 1984, no writ). Here, the merger clause in Section 25 of the contract prohibits Cleveland from relying on his redlined draft to alter the terms of the contract.

Cleveland attempts to avoid preclusion of his extrinsic evidence (i.e., prior redlined draft) by arguing the Texas Supreme Court's recent decision in First Bank v. Brumitt permits the trial court to consider the circumstances surrounding the formation to discern the meaning of an unambiguous contract. See 519 S.W.3d 95, 110 (Tex. 2017) ("[T]he parol-evidence rule does not prohibit consideration of surrounding circumstances that inform, rather than vary from or contradict, the contract text." (internal citations omitted)). This case does not fall within the ambit of Brummit. Cleveland's suggested construction adds a requirement that is not set forth in the contract, i.e., it requires Cleveland to consent or agree to arbitrate any claims, disputes, or questions that SGB and Seidel have requested to arbitrate. Brumitt clearly prohibits extrinsic evidence for such a purpose. "Extrinsic evidence cannot be used to show that the parties probably meant, or could have meant, something other than what their agreement stated." Id. at 110 (citation omitted). "[C]ourts may not rely on evidence of surrounding circumstances to make the language say what it unambiguously does not say." Id. The trial court in this case could not rely on extrinsic evidence to create an intent that the contract itself does not express. Id.
Because a valid and enforceable arbitration agreement exists and the claims at issue fall within the scope of the agreement, the trial court abused its discretion in denying SGB and Seidel's motions to compel arbitration. See Feldman/Matz Interests, LLP, 140 S.W.3d at 888. Accordingly, we sustain SGB's and Seidel's issues.

III. Conclusion

We reverse the trial court's orders denying SGB's and Seidel's motions to compel arbitration and remand for further proceedings consistent with this opinion and compelling arbitration.

[1] In separate appeals, SGB (14-17-00483-CV) and Seidel (14-17-00540-CV) both seek enforcement of the same arbitration clause against the same party, Cleveland. We granted an agreed motion to consolidate the appeals.
[2] Although Seidel was not a signatory to the contract, he may still compel arbitration in this case because Cleveland brought third-party claims against Seidel that are tied to his official capacity as owner of SGB. Thus, the claims are "in substance" claims against SGB and, as such, fall within the scope of the arbitration provision as set forth in 17(c). See In re Merrill Lynch Trust Co. FSB, 235 S.W.3d 185, 189-90 (Tex. 2007) ("Because the plaintiffs' claims against Medina are in substance claims against Merrill Lynch, they must abide by their agreement to arbitrate those claims."); In re Hous. Progressive Radiology Assocs., PLLC, 474 S.W.3d 435, 447 (Tex. App.-Houston [1st Dist.] 2015, no pet.). Cleveland cannot circumvent his agreement to arbitrate with SGB by bringing claims against Seidel. In his brief, Cleveland offers no authority to the contrary. Because the claims against Seidel are in substance claims against SGB, our analysis of the trial court's denial of SGB's and Seidel's motions to compel is the same.
[3] Cleveland does not squarely address whether claims between himself and SGB fall within the scope of the arbitration provision of the contract; instead, he asserts that scope need not be addressed because no agreement to arbitrate exists. With respect to Seidel, Cleveland asserts a potential lack of standing to compel arbitration and again asserts that scope is irrelevant because no agreement to arbitrate exists. As set forth, infra, we disagree with Cleveland's interpretation of the arbitration clause and its enforceability. And, as stated, infra at n.2, Seidel has standing to compel arbitration. By virtue of Cleveland's failure to address scope, it is undisputed that the claims in dispute fall within the scope of the arbitration clause of the contract.
[4] The cases relied upon by Cleveland expressly require the parties to commit to arbitration and allow one party to reject such a request. See Tex. Health Res. v. Kruse, No. 05-13-01754-CV, 2014 WL 3408636, at *3 (Tex. App.-Dallas July 11, 2014, pet. denied) (arbitration provision required both parties to subsequently "commit" to arbitration); Travelers Indem. Co. v. Tex. Mun. League Joint Self-Ins. Fund,No. 01-08-00062-CV, 2008 WL 2756874, at *2 (Tex. App.-Houston [1st Dist.] July 17, 2008, no pet.) (after one party requested arbitration, arbitration provision required the other party to accept or reject the request). Here, the contract does not contain this language. Rather, the operative language provides that claims "may be submitted to binding arbitration."
[5] In his brief, Cleveland argues that "[t]he Contract unambiguously provides solely for permissive arbitration." Thus, any exception permitting admissibility of parol evidence when a writing is ambiguous is not applicable in this case. See Gonzalez v. United Broth. Of Carpenters and Joiners of Am., Local 551, 93 S.W.3d 208, 211 (Tex. App.-Houston [14th Dist.] 2002, no pet.) (setting forth exceptions to parol evidence rule when extrinsic evidence may be shown to be admissible).

DISSENTING OPINION 

TRACY CHRISTOPHER, Justice.

Because I believe that the arbitration clause is not mandatory, I respectfully dissent.

1. The Negotiations

Southern Green sent Cleveland a form boilerplate construction contract. Cleveland modified Southern Green's boilerplate contract by removing nearly the entirety of the mandatory arbitration clause and changing the words "shall be submitted to binding arbitration" to "may be submitted to binding arbitration." He also added the language that both parties "shall have the right to seek other legal remedies as they see fit and the law allows."
This is what Cleveland did to the arbitration clause—he struck through most of the provision and added the underlined words:
(c) Mediation-Binding Arbitration/Waiver of Jury Trial. The Owner and Builder agree that all controversies, claims (and any related settlements), or matters in question arising out of or relating to (i) this Contract, (ii) any breach or termination of this Contract, (iii) the construction of the Home and/or its repairs, (iv) any acts or omissions by the Builder (and its officers, directors or agents), and/or (v) any actual or purported representations or warranties, express or implied, relating to the Property and/or the Home (herein referred to collectively as a "Dispute") shall may be submitted to binding arbitration, but both parties shall also have the right to seek other legal remedies as they see fit and the law allows. The Parties will attempt to resolve any Dispute through informal discussions and the dispute may be submitted to non-binding mediation under the Contraction Industry Mediation Rules of the American Arbitration Association ("AAA"). In the event that one or both parties do not desire to mediate, or the Dispute it not resolved by direct discussions and/or mediation, the Dispute shall be submitted to the AAA for binding arbitration in accordance with the Construction Industry Arbitration Rules of the AAA. The Parties will share equally all filing fees and administrative costs of the arbitration, however, any Award rendered may equitably reallocate those costs. The arbitration shall be governed by Texas law and the U.S. Arbitration Act, 9 U.S.C. 1-16, to the exclusion of any provisions of state law that are inconsistent with the application of the Federal Act.
In rendering the Award, the arbitrator shall state the reasons therefor, including any computations of actual damages or offsets, if applicable. The Parties agree to abide by and fully perform in accordance with any Award rendered by the arbitration. If the non-prevailing Party fails to comply with all aspects of the Award within thirty (30) days following issuance of the Award, then the prevailing Party shall be entitled to seek enforcement of the Award in any court of competent jurisdiction. If such enforcement becomes necessary, the prevailing Party in such proceeding shall recover its necessary and reasonable attorney's fees, in addition to any other relief to which that Party is entitled.
Southern Green agreed to the changes.

2. Under Texas Supreme Court case law, we can consider deletions.

In Houston Exploration Co. v Wellington Underwriting Agencies, LTD, 352 S.W.3d 462 (Tex. 2011), the Supreme Court considered the deletion of certain paragraphs from a form contract to determine the intent of the parties. The court noted that it had twice before considered deletions from a form contract in determining the meaning of a contract. Id. at 470-71 (citing Gibson v. Turner, 294 S.W.2d 781 (Tex. 1956) and Houston Pipe Line Co. v. Dwyer, 374 S.W.2d 662 (Tex. 1964)).
And the Supreme Court has also considered deletions from a form contract in determining the scope of an arbitration contract. See G.T. Leach Builders, LLC v. Sapphire V.P., LP, 458 S.W.3d 502, 526 (Tex. 2015). This rule of construction is not limited to where a party contends a contract is ambiguous. Id.

3. Generally, "may" is permissive, and "shall" is mandatory.

Under both the ordinary meaning of words and case law, may is permissive while shall is mandatory. See New Oxford American Dictionary 1082, 1604 (Angus Stevenson & Christine Lindberg eds., 3d ed. 2010) (defining "may" as "expressing permission" and "shall" as "expressing an instruction or command"); Dallas Cnty. Cmty. Coll. Dist. v. Bolton, 185 S.W.3d 868, 873-74 (Tex. 2005) ("may" grants permission to); Helena Chem. Co. v. Wilkins, 47 S.W.3d 486, 493 (Tex. 2001)("shall" is mandatory, creating a duty or obligation). This is also true under the Code Construction Act—"may" creates discretionary authority or grants permission or a power while "shall" imposes a duty. See Tex. Gov't Code 311.016.

4. Contracts should not be interpreted to render a part of the contract meaningless.

Courts are to examine and consider the entire writing to harmonize and give effect to all of the provisions of a contract so that "none will be rendered meaningless." See Coker v. Coker, 650 S.W.2d 391, 393 (Tex. 1983)see also FPL Energy, LLC v. TXU Portfolio Mgmt. Co., 426 S.W.3d 59, 69 (Tex. 2014) (interpreting a contract, as a matter of law, to avoid rendering a provision of the contract meaningless).

5. Using these rules, the agreement does not mandate arbitration.

The deletion of the mandatory arbitration provision from a form contract indicates the intent of the parties to not make arbitration mandatory. The agreement provides that the parties may arbitrate and also provides that the parties shall have the right to seek other legal remedies as they see fit. Construing the contract to require mandatory arbitration would make the remainder of the sentence meaningless—what other legal remedies could the sentence refer to if arbitration was mandatory? The arbitration provision is not mandatory.

6. Neither U.S. Home Corp. nor Feldman/Matzcompels a different result.

In In re U.S. Home Corp., 236 S.W.3d 761 (Tex. 2007) (orig. proceeding) (per curiam), the Supreme Court construed two contracts in connection with the sale of a home. The sales contract stated that any claim "shall be determined by mediation or by binding arbitration." The warranty book said that either party "may request" arbitration. The court concluded this did not render the contracts ambiguous. "While the warranty's clause allowed either party to request arbitration, nothing in it suggests that arbitration was optional if either did . . . ." Id. at 765. By contrast, the clause in this case does suggest that arbitration was optional for two reasons as noted above—the deletion of the mandatory language and the addition of a provision that the parties shall have the right to seek other legal remedies.
Similarly, the contract language in Feldman/Matz is quite different from the contract language in this case. See Feldman/Matz Interests, L.L.P. v. Settlement Capital Corp., 140 S.W.3d 879, 888 (Tex. App.-Houston [14th Dist.] 2004, no pet.). The contract provided in pertinent part:
With respect to any and all other disputes or claims between us whatsoever related to or arising out of our services, we agree that either of us may submit the same to a nationally recognized, neutral, arbitration association (eg., AAA, JAMS, etc.) for final, binding and nonappealable resolution pursuant to its single arbitrator, expedited arbitration rules. . . If the first arbitration organization which receives a written demand for arbitration of the dispute from either of us does not complete the arbitration to finality within four months of the written demand, either party then may file a written demand for arbitration of the dispute with another nationally recognized, neutral, arbitration association, with the prior arbitration association then being immediately divested of jurisdiction, subject to a decision being rendered by the replacement arbitration association within four months of the written demand being filed with the replacement arbitration association. The decision of the arbitrators shall be final in all respects and shall be non-appealable. Any person may have a court of competent jurisdiction enter into its record the findings of such arbitrators for all purposes including for the enforcement of such award.
This contract language evidences an intent that "may submit" is mandatory, because it did not provide for any opt out of the arbitration, nor did it provide that the parties shall retain other legal remedies. In fact, it specifically references a request for arbitration by only one party (demand from either of us). Under this agreement, arbitration was the only remedy.
"May" does not take on a special meaning in an arbitration contract. As always, the entire contract must reviewed to see if it is mandatory or permissive. See G.T. Leach Builders, 458 S.W.3d at 525 (concluding that a joinder provision in an arbitration contract that used the word "may" was permissive rather than mandatory).

7. Conclusion

The arbitration requirement in this contract is permissive, not mandatory. The trial court correctly denied the motion to compel arbitration. Because the majority holds otherwise, I respectfully dissent.

CASE CITE AND LINKS:

Southern Green Builders, LP v. Cleveland, No. 14-17-00483-CV (Tex. App.—Houston[14th Dist.] August 9, 2018, no pet. h.)(motion for rehearing not filed, PFR due 9/24/2018).

Texas Appeals Court Upholds Builder's Arbitration Clause. By Matthew Guarnaccia. Law360 (August 9, 2018).
ARBITRATION: Beware the Term “May”. Comment By Jack E. Urquhart August 12, 2018
([Houston Court of Appeals' opinion] "hammers home a crystal-clear contract drafting caution. 'May' is a perilous term for those truly desiring mandatory arbitration of contractual disputes.")
Also see: Amicus Curiae letter in Southern Green Builders LP v. Cleveland (arguing that phrasing of arbitration clause is ambiguous and that therefore verbiage expressly eliminated from the boilerplate contract should be considered in construing the intent of the parties at the time they signed the final version of the contract because the parol evidence rule does not apply).







Sunday, July 1, 2018

The arbitration clause was on the back side of the contract for construction of swimming pool, but the homeowners claimed to be unaware of it

GARY ZARS HOLDIG, LLC V. WILDER, No. 13-18-00142-CV.(Tex.App. - Corpus Christi, Jun. 21, 2018) (denial of motion to compel arbitration reversed on appeal) 

Thirteenth Court of Appeals holds, in interlocutory appeal, that trial court should have compelled arbitration where arbitration clause was on the back side of the contract, and was only one of several general provisions. Home owners seeking to avoid arbitration of claim against swimming-pool contractor averred that they were shown only the front page and claimed fraudulent inducement. Trial court denied motion to compel, but the court of appeals disagreed, basing its ruling in favor of arbitration on the conclusion that the fraud allegation challenged the contract as a whole (or at least half of it--the backside), rather than the arbitration clause only, and that the issue should therefore be decided by the arbitrator, not the court. Appeals court also held that the contract did not need to be formally admitted into evidence at the hearing on the motion to compel, noting that both parties had proffered a copy that included the back side. 
Here, there was no evidence that the parties had any "specific negotiations or representations concerning arbitration." See Shearson Lehman, 871 S.W.2d at 929. Just the opposite, Daren testified that arbitration was never discussed in any form during negotiations. Rather, the Wilders' complaint is that Gary's salesman failed to disclose the back side of the contract, which contained twenty separate "General Conditions," only one of which related to arbitration. Thus, the Wilders are not protesting any fraud that relates specifically to the arbitration clause; instead, the alleged fraud relates to the contract as a whole—or at least half of it. See id. at 928. Because the Wilders' complaint "attacks the broader contract," the merits of the Wilders' fraud defense must be resolved by the arbitrator rather than the court. See Forest Oil, 268 S.W.3d at 56 n.13.

GARY ZARS HOLDING, LLC AND GARY ZARS POOLS &; PATIO, LLC

VS. 

DAREN WILDER AND DIANNE WILDER.

No. 13-18-00142-CV.
Court of Appeals of Texas, Thirteenth District, Corpus Christi, Edinburg.
Delivered and filed June 21, 2018.
George P. Morrill, III, for Dianne Wilder and Daren Wilder, Appellees.
David L. Cunningham, for Gary Zars Pool & Patio, LLC and Gary Zars Holding, LLC, Appellants.

On appeal from the 343rd District Court, of Live Oak County, Texas.

Before Chief Justice Valdez and Justices Rodriguez and Benavides.

MEMORANDUM OPINION

Memorandum Opinion by Justice NELDA V. RODRIGUEZ.

Appellants Gary Zars Holding, LLC and Gary Zars Pools & Patio, LLC (collectively, "Gary") appeal the denial of their motion to compel arbitration. By one issue, Gary asserts that appellees Daren and Dianne Wilder's fraud defense is not a valid basis to avoid arbitration. We reverse and remand.

I. BACKGROUND

In 2015, the parties entered a written contract whereby Gary agreed to build an in-ground pool for the Wilders in exchange for the total price of $37,000. In 2016, the Wilders filed suit against Gary for breach of contract, fraudulent inducement, violation of the DTPA, and attorney's fees.

Gary filed a general denial and a motion to compel arbitration. Attached to Gary's motion was a copy of the parties' agreement ("the contract"). On the front, the contract recited the specifications for the Wilders' swimming pool, as well as various services necessary to complete construction. The front page of the contract also stated, "The general conditions to this agreement are on the back." On the back, the contract provided a list of twenty "General Conditions," one of which stated the following:

"Any controversy or claim arising out of or relating to this contract or breach thereof or any claim whatsoever with Gary's including claims under the DTPA shall be settled by an onsite, binding Arbitration in accordance with the BBB Arbitration Rules."

The Wilders filed a response resisting arbitration. They asserted that Gary had fraudulently induced them to agree to the arbitration clause, along with other grounds for resisting arbitration which are not at issue on appeal.

At the hearing, both parties proffered the contract to the trial court as a two-sided document. However, the trial court heard testimony from Daren that, throughout the process of negotiating the contract, Gary's sales representative consistently referred him to a one-sided document that was "blank on the back," which Daren reviewed with his wife Dianne.

Daren testified that as the salesman walked him through the contract, he only discussed the terms listed on the front, and he "kept emphasizing that whatever was on the front of this document was the contract." Daren explained that when the negotiation was complete, the salesman then transcribed various specifications from the one-sided document onto another document, but he never disclosed that this second document had two sides. Instead, the salesman simply "put his finger on the document above where the signature line is and told me to sign."

After Daren signed, Gary's salesman gave him a duplicate copy of the contract, but Daren testified that he did not notice the terms on the back, including the arbitration clause. Instead, Daren testified that he first became aware of the arbitration clause when Gary filed its motion to compel arbitration. On cross-examination, however, Daren conceded that just inches above his signature on the first page of the contract was a notice that the "general conditions to this agreement are on the back."

At the conclusion of the hearing, the trial court denied Gary's motion to compel. Gary appeals.

II. DISCUSSION

By its sole issue, Gary argues that it met its initial burden to establish the existence of a valid arbitration agreement and that the Wilders' fraud defense does not offer valid grounds for avoiding arbitration.

A. Standard of Review and General Applicable Law

We review an order denying a motion to compel arbitration under an abuse of discretion standard. In re Labatt Food Serv., LP, 279 S.W.3d 640, 642-43 (Tex. 2009)(orig. proceeding). Under that standard, we defer to the trial court's factual determinations if they are supported by the record, but we review the trial court's legal determinations de novo. Id. at 643. The question of whether an arbitration agreement is enforceable is subject to de novo review. Id.

A party seeking to compel arbitration must establish that the dispute falls within the scope of an existing agreement to arbitrate. Venture Cotton Co-op. v. Freeman, 435 S.W.3d 222, 227 (Tex. 2014). Upon such proof, the burden shifts to the party opposing arbitration to raise an affirmative defense to the agreement's enforcement. Id.

B. Existence of a Valid Arbitration Agreement

We first consider whether Gary met its initial burden to establish the existence of a valid arbitration agreement. The Wilders assert that Gary failed to satisfy this burden because while the contract was attached to Gary's motion to compel and was offered at the hearing, the contract was never formally admitted into evidence at the hearing. The Wilders contend that the record is therefore devoid of evidentiary support for the existence of an arbitration agreement.

However, the Wilders never disputed the existence of the contract or its arbitration clause before the trial court. Instead, the Wilders themselves offered the contract as an exhibit at the hearing, and Daren consulted the contract extensively during his testimony. Cf. McInnes v. Yamaha Motor Corp., USA, 673 S.W.2d 185, 188 (Tex. 1984) (holding that a party on appeal will not be heard to complain of improper evidence offered by the other side "when he, himself, introduced the same evidence"). 

Moreover, arbitrability proceedings are informal by default and by design, and evidentiary formality is usually required only when a material fact is in dispute:
Because the main benefits of arbitration lie in expedited and less expensive disposition of a dispute, and the legislature has mandated that a motion to compel arbitration be decided summarily, we think it unlikely that the legislature intended the issue to be resolved following a full evidentiary hearing in all cases. We also envision that the hearing at which a motion to compel arbitration is decided would ordinarily involve application of the terms of the arbitration agreement to undisputed facts, amenable to proof by affidavit. With these considerations in mind, we hold that the trial court may summarily decide whether to compel arbitration on the basis of affidavits, pleadings, discovery, and stipulations. However, if the material facts necessary to determine the issue are controverted, by an opposing affidavit or otherwise admissible evidence, the trial court must conduct an evidentiary hearing to determine the disputed material facts.

Because the Wilders never disputed the existence of the contract or its arbitration clause, the fact that both parties proffered the contract was, for such an informal and summary proceeding, enough to satisfy Gary's burden. See Venture Cotton, 435 S.W.3d at 227. We conclude that Gary carried its initial burden to show the existence of an arbitration agreement between the parties. See id.

C. Defense Against Enforcement of Arbitration

Once the party seeking arbitration has satisfied its initial burden, it becomes the burden of the party resisting arbitration to prove its defenses against enforcing an otherwise valid arbitration provision. In re Odyssey Healthcare, Inc., 310 S.W.3d 419, 422 (Tex. 2010) (per curiam) (orig. proceeding). Generally applicable contract defenses, such as fraud, duress, or unconscionability, may be applied to invalidate arbitration agreements. Doctor's Assocs., Inc. v. Casarotto, 517 U.S. 681, 687 (1996).

However, in order to avoid arbitration, a fraudulent inducement defense must focus specifically on the negotiation and acceptance of the arbitration provision in a contract, not on the contract as a wholeShearson Lehman Bros., Inc. v. Kilgore,871 S.W.2d 925, 928 (Tex. App.-Corpus Christi 1994, orig. proceeding)see Serv. Corp. Int'l v. Lopez, 162 S.W.3d 801, 809 (Tex. App.-Corpus Christi 2005, no pet.). If a fraudulent-inducement defense attacks the broader contract, then the arbitrator, not a court, considers the matter. Forest Oil Corp. v. McAllen, 268 S.W.3d 51, 56 n.13 (Tex. 2008).

We have held that in order for a fraud defense to specifically relate to the arbitration provision and allow a party to avoid arbitration, there must be specific negotiations or representations concerning arbitration:
Fraud is not sufficiently focused upon the arbitration agreement when a party merely fails to read the contract which contains an arbitration clause of which he is unaware. Even though that party may have been induced to sign the contract without reading it by someone with whom he has had prior agreements or oral understandings that did not include an arbitration agreement, if there have been no specific negotiations or representations concerning arbitration, any fraudulent inducement is considered to be directed at the signing of the contract generally and not at the arbitration clause within that contract.

Here, there was no evidence that the parties had any "specific negotiations or representations concerning arbitration.See Shearson Lehman, 871 S.W.2d at 929. Just the opposite, Daren testified that arbitration was never discussed in any form during negotiations. Rather, the Wilders' complaint is that Gary's salesman failed to disclose the back side of the contract, which contained twenty separate "General Conditions," only one of which related to arbitration. Thus, the Wilders are not protesting any fraud that relates specifically to the arbitration clause; instead, the alleged fraud relates to the contract as a whole—or at least half of it. See id. at 928. Because the Wilders' complaint "attacks the broader contract," the merits of the Wilders' fraud defense must be resolved by the arbitrator rather than the courtSee Forest Oil, 268 S.W.3d at 56 n.13.

We conclude that the trial court therefore abused its discretion by denying Gary's motion to compel.

We sustain Gary's sole issue.

III. CONCLUSION

We reverse the trial court's order denying Gary's motion to compel arbitration and remand the matter to the trial court for further proceedings consistent with this opinion.


Wednesday, June 27, 2018

JAMS rules, incorporated by reference, given effect by Fifth Circuit regarding delegation of arbitrability determination to arbitrator

Green Tree Servicing, LLC v. House, No. 17-60164 (5th Cir. May 14, 2018) 

Fifth Circuit holds that the district court (S.D. of Mississippi) did not err in ruling that the parties' express incorporation of the JAMS rules provides clear evidence that they agreed that the arbitrator would decide arbitrability. The same court had previously held similarly in a case involving the AAA rules. See Petrofac, Inc. v. DynMcDermott Petroleum Operations Co., 687 F.3d 671, 675 (5th Cir. 2012) 


The court held that, by incorporating the JAMS rules, the parties agreed to delegate questions as to arbitrability to the arbitrator. The district court referenced the version of the JAMS Comprehensive Arbitration Rules and Procedures, effective as of 2014, which provide:
Jurisdictional and arbitrability disputes, including disputes over the formation, existence, validity, interpretation or scope of the agreement under which Arbitration is sought, and who are proper Parties to the Arbitration, shall be submitted to and ruled on by the Arbitrator. The Arbitrator has the authority to determine jurisdiction and arbitrability issues as a preliminary matter.[2]
The House Parties also challenges the district court's determination that the parties agreed to delegate the "gateway" question of arbitrability to the arbitrator.

Green Tree Servicing, LLC v. House, No. 17-60164 (5th Cir. May 14, 2018)
Green Tree Servicing, LLC v. House, No. 17-60164 (5th Cir. May 14, 2018) 

Like the broader question of whether a dispute is subject to arbitration, "the question `who has the primary power to decide arbitrability' turns upon what the parties agreed about that matter."[44] A determination that the parties agreed to arbitrate arbitrability must be supported by evidence showing that the parties "clearly and unmistakably" intended to do so.[45] In such cases, so long as "the assertion of arbitrability" is not "wholly groundless,"[46] meaning that there is a "plausible argument[] that the dispute was covered by the [arbitration] agreement," the question of arbitration is to be resolved in arbitration.[47] In Petrofac, this court held that by incorporating the American Arbitration Association Rules—which state that arbitrators have power to rule on questions of arbitrability—into their arbitration agreement, the parties had clearly and unmistakably agreed to arbitrate arbitrability.[48] A number of our sister circuits share this view.[49]
[44] Petrofac, Inc. v. DynMcDermott Petroleum Operations Co., 687 F.3d 671, 675 (5th Cir. 2012) (quoting First Options of Chi., Inc. v. Kaplan, 514 U.S. 938, 943 (1995) (internal citations omitted)); see also Crawford Prof'l Drugs, Inc. v. CVS Caremark Corp., 748 F.3d 249, 262 (5th Cir. 2014).[45] Petrofac, 687 F.3d at 675 (quoting AT&T Techs., Inc. v. Commc'ns Workers of Am., 475 U.S. 643, 649 (1986)).[46] Douglas v. Regions Bank, 757 F.3d 460, 463 (5th Cir. 2014) (quoting Agere Sys., Inc. v. Samsung Elecs. Co., 560 F.3d 337 (5th Cir. 2009)); see also Qualcomm Inc. v. Nokia Corp., 466 F.3d 1366, 1371 (Fed. Cir. 2006).[47] Douglas, 757 F.3d at 463.[48] Petrofac, 68 F.3d at 675.[49] See, e.g., Fallo v. High-Tech Inst., 559 F.3d 874, 878 (8th Cir. 2009)Qualcomm, 466 F.3d at 1372-73Terminix Int'l Co., LP v. Palmer Ranch Ltd. P'ship, 432 F.3d 1327, 1332-33 (11th Cir. 2005)Contec Corp. v. Remote Sol. Co., 398 F.3d 205, 208 (2d Cir. 2005)Apollo Comput., Inc. v. Berg, 886 F.2d 469, 473 (1st Cir. 1989).
The House Parties contend that, as unsophisticated parties, they could not have assented to delegate arbitrability simply by agreeing to be bound by the JAMS arbitration rules. The House Parties did not raise this argument before the district court despite extensive argument from the Green Tree Parties that the JAMS rules gave the arbitrator power to determine arbitrability. Instead, the House Parties argued that because the arbitration agreement was unconscionable and invalid since it had not been properly executed, the delegation provision was invalid by extension. The House Parties do not renew these arguments on appeal, relying only on their new arguments that they could not have assented to delegation by the incorporation of a set of arbitration rules. This court generally does not consider arguments raised for the first time on appeal unless the party shows "extraordinary circumstances"—that "the issue . . . is a pure question of law and a miscarriage of justice would result from our failure to consider it."[50] 
[50] AG Acceptance Corp. v. Veigel, 564 F.3d 695, 700 (5th Cir. 2009) (quoting N. Alamo Water Supply Corp. v. City of San Juan, 90 F.3d 910, 916 (5th Cir. 1996)).[51] 9 U.S.C § 2.
That standard is not met here. By failing to bring their "assent" theory before the district  court, the House Parties forfeited it for purposes of appeal.

The House Parties also argue that the district court erred by considering the JAMS rules effective in 2014, rather than the year the arbitration agreement was signed. The House Parties forfeited this argument as well by failing to raise it before the district court. Even though the Green Tree Parties specifically referenced the 2014 version of the JAMS rules in their memorandum brief in support of their motion to compel arbitration, the House Parties did not object to that version of the rules in the proceedings below. The district court did not err in ruling that the parties' express incorporation of the JAMS rules provides clear evidence that they agreed that the arbitrator would decide arbitrability.

Finally, the House Parties argue that the district court failed to consider their allegations that the Green Tree Parties obtained the arbitration agreement by fraud. Pursuant to 9 U.S.C § 2, arbitration agreements are valid and enforceable "save upon such grounds as exist at law or in equity for the revocation of any contract."[51] Because arbitration agreements are severable as a matter of federal arbitration law, parties seeking to avoid arbitration under § 2 must challenge the validity of the arbitration agreement specifically, rather the contract as a whole.[52] If the party challenges the "precise agreement to arbitrate at issue, the federal court must consider the challenge" before ordering compliance with a delegation provision.[53] Even in cases "where the alleged fraud that induced the whole contract equally induced the agreement to arbitrate which was part of that contract," the Supreme Court "nonetheless require[s] the . . . challenge to be directed specifically to the agreement to arbitrate" as a prerequisite to judicial intervention.[54]
[51] 9 U.S.C § 2.[52] Rent-A-Ctr., W., Inc. v. Jackson, 561 U.S. 63, 70 (2010) (citing Buckeye Check Cashing, Inc. v. Cardegna,546 U.S. 440, 444-46 (2006)).[53] Id. at 71.[54] Id.
The House Parties' fraud allegations are not specific to the arbitration agreement. In their pleadings, the House Parties argued generally that the Green Tree Parties "wrongfully obtain[ed] the [House Parties'] signatures on contracts, promissory notes, deeds of trusts, insurance payment plans, and completion certificates" and that "[a]ll the signatures of [House] on the aforementioned documents were generally procured under duress, with deceit, and/or through coercion, trickery, and/or other wrongful conduct." These blanket allegations of fraud fall well short of the specificity that Rent-A-Centerrequires. The district court correctly referred the question of fraud to the arbitrator.


FULL TEXT OF OPINION IN GREEN TREE V. HOUSE BELOW

GREEN TREE SERVICING, L.L.C.; WALTER INVESTMENT MANAGEMENT CORPORATION; BEST INSURORS, INCORPORATED; MID STATE CAPITAL, L.L.C.; MID STATE TRUST II; MID STATE TRUST III; MID STATE TRUST IV; MID STATE TRUST V; MID STATE TRUST VI; MID STATE TRUST VII; MID STATE TRUST VIII; MID STATE TRUST IX; MID STATE TRUST X; MID STATE TRUST XI; WILMINGTON TRUST COMPANY; MID-STATE CAPITAL CORPORATION 2004-1 TRUST; MID-STATE CAPITAL CORPORATION 2005-1 TRUST; MID-STATE CAPITAL CORPORATION 2006-1 TRUST; MID-STATE CAPITAL TRUST 2010-1, Plaintiffs-Appellees,
v.
HENRY HOUSE; LINDA MURRELL, Defendants-Appellants.

No. 17-60164.
United States Court of Appeals, Fifth Circuit.
Filed: May 14, 2018.
Peter Emmanuel Ferraro, for Defendant-Appellant.
Jeffery P. Reynolds, for Defendant-Appellant.
Adam Stone, for Plaintiff-Appellee.
Kaytie Michelle Pickett, for Plaintiff-Appellee.
Andrew Scott Harris, for Plaintiff-Appellee.
Mitchell Dee Thomas, for Defendant-Appellant.

Appeal from the United States District Court for the Southern District of Mississippi.

Before: OWEN, SOUTHWICK, and WILLETT, Circuit Judges.
PRISCILLA R. OWEN, Circuit Judge.

Henry House, Linda Murrell (the House Parties), and other plaintiffs sued Green Tree Servicing and various other entities (the Green Tree Parties) in a related action.[1] The Green Tree Parties initiated the present suit in federal district court seeking to compel arbitration of claims asserted by the House Parties. The district court granted the motion to compel, holding that (1) all of the Green Tree Parties had standing to compel arbitration even though some were not signatories to the arbitration agreement; and (2) the parties had agreed to delegate questions regarding arbitrability to the arbitrator. We affirm.

I

Henry House purchased a house and surrounding real property from Jim Walter Homes, Inc. and Mid-State Trust IV in 1998. To obtain financing from the sellers, House pledged the real property as collateral. The parties memorialized the transaction by executing a sales contract, promissory note, and deed of trust. The sales contract expressly incorporated four exhibits, including an Arbitration Agreement. The Arbitration Agreement provided:
The parties agree that, at the election of either party, any controversy or claim arising out of or relating to this contract, or the breach thereof, whether asserted as in tort or contract, or as a federal or state statutory claim, arising before, during or after performance of this contract, shall be settled by binding arbitration in accordance with the Comprehensive Arbitration Rules and Procedures administered by J·A·M·S/Endispute, and judgment upon the award rendered by the arbitrator may be entered in any Court having jurisdiction thereof. The parties agree and understand that they choose arbitration instead of litigation to resolve disputes.
In 2016, the House Parties and other plaintiffs commenced a lawsuit— Green Tree Servicing, L.L.C. v. Billy Brown—in Mississippi state court (Brown). The suit alleged that Jim Walter Homes and some of the Green Tree Parties induced House to sign the sales contract by promising to construct a house in accordance with manufacturer specifications, house plans, and building codes, but that those defendants actually delivered a dwelling that was "substandard, incomplete, defective, and dangerous." Based on these allegations, House and the other plaintiffs brought claims that included civil conspiracy, breach of contract, negligence, false statements/fraud, and deceit.
The complaint in Brown alleged that Jim Walter Homes "sold, assigned, or conveyed" the sales contract and related documents "to Walter Mortgage Company, LLC, then to Walter Investment Management Corp. or one of the Mid State Trust Entities, and ultimately to Wilmington Trust Co., Green Tree [Servicing], and their predecessors, who in turn attempted to sell, assign, or convey said instruments" to the other defendants. This "lending engine," the Brown complaint alleged, facilitated the "home built on your lot" scheme in which the Green Tree Parties and Jim Walter Homes acted as conspirators and joint venturers to originate, pool, and securitize mortgages like House's. According to the complaint, "[w]ithout a willingness of [these parties] to purchase such ill-gotten paper, there would be no market or incentive to perpetuate this wrongful scheme." The complaint in Brown asserted that each of the Green Tree Parties "aided and abetted each other in each and every act . . . that is the subject of this action" and that each was "liable jointly and severally for the unlawful, deceptive, deceitful and misleading acts and/or omissions of each and every one" of its co-parties. The Green Tree Parties removed Brown to federal district court.
While the Brown case was pending, the Green Tree Parties filed the present suit and sought to compel arbitration of the House Parties' claims against the Green Tree Parties. The district court granted the motion to compel arbitration, ruling that even though Green Tree Servicing (Green Tree) and the Walter Investment Management Corporation (WIMC) were not signatories to the arbitration agreement, they had standing to enforce it under Mississippi law's intertwined claims test. The court held that, by incorporating the JAMS rules, the parties agreed to delegate questions as to arbitrability to the arbitrator. The district court referenced the version of the JAMS Comprehensive Arbitration Rules and Procedures, effective as of 2014, which provide:
Jurisdictional and arbitrability disputes, including disputes over the formation, existence, validity, interpretation or scope of the agreement under which Arbitration is sought, and who are proper Parties to the Arbitration, shall be submitted to and ruled on by the Arbitrator. The Arbitrator has the authority to determine jurisdiction and arbitrability issues as a preliminary matter.[2]
Based on this clause, the district court also held that the House Parties' claims that the sales contract was procedurally and substantively unconscionable must be decided by the arbitrator. The district court remanded the Brown case to state court due to lack of diversity jurisdiction.
On appeal, the House Parties contend that (1) under Mississippi law, the intertwined claims test does not apply to Green Tree and WIMC, which did not exist at the time the arbitration agreement was signed; (2) they did not assent to delegate arbitrability and that, in any event, the district court relied on the wrong version of the JAMS rules; and (3) the district court failed to address claims in their pleadings regarding fraud in the inducement.

II

We first address our jurisdiction. There are three issues: (1) did the district court's "Final Judgment" administratively close the case, (2) in light of this court's precedent,[3] how does the fact that the district court had another case pending before it that involved many of the parties in the present case and similar issues affect the finality of the "Final Judgment" compelling arbitration, and (3) was the notice of appeal premature, and if so, was it nevertheless effective.
This court has jurisdiction over "a final decision with respect to an arbitration that is subject to this title."[4] A decision is final if it "ends the litigation on the merits and leaves nothing more for the court to do but execute the judgment."[5] An order compelling arbitration is typically appealable because "once the court compel[s] arbitration, there [is] nothing more for it to do but execute the judgment."[6] However, when a district court stays or administratively closes a case pending arbitration, the order is not appealable because the "substantive claims have not been dismissed by any district court."[7]
The district court entered upon the record a document captioned "Final Judgment," which provides in its entirety:
In accordance with the Opinion and Order of the Court by which Plaintiffs' Motion to Compel Arbitration was granted, this case is hereby dismissed with prejudice. Any party may move to re-open this case if further judicial intervention is necessary to enforce the rulings of this Court, or to enforce the rulings of the arbitrators.
SO ORDERED this the 6th day of February, 2017.
The Green Tree Parties argue that because the district court permitted any party to move to re-open the case, the judgment was not final for purposes of appeal.
The district court labeled its decision "Final Judgment" and dismissed the case with prejudice. Although the order recited that either party may move to re-open the case after or during arbitration, this is simply a recognition of rights that the parties may have upon the conclusion of arbitration. As the Supreme Court has recognized, "[t]he FAA does permit parties to arbitration agreements to bring a separate proceeding in a district court to enter judgment on an arbitration award once it is made (or to vacate or modify it), but the existence of that remedy does not vitiate the finality of the District Court's resolution of the claims in the instant proceeding."[8] The federal district court's order in the present case does nothing more than state the law, and its recognition that post-arbitration proceedings may be initiated is not tantamount to a statement that the court retains jurisdiction of the suit or that it has only administratively closed the case. Our court concluded in Green Tree Servicing, L.L.C. v. Charles that an order virtually identical to the "Final Judgment" in the present case would be a final, appealable order if the court were only examining that order.[9] Accordingly, the statement in the "Final Judgment" that the parties may return to federal court during or after the arbitration does not affect the finality of the order compelling arbitration.
An unpublished order in Green Tree Servicing, L.L.C. v. Keyes does not purport to reach a contrary conclusion.[10] It considered a district court's order granting arbitration that also stated that the parties could return to district court during or after arbitration.[11] This court's order in Keyes concluded that appellate jurisdiction was lacking.[12] However, our order reflects that the quorum was under the impression that the district court, after ordering arbitration, had "stayed the remainder of the case, and directed the clerk to administratively close the case."[13] The order held that the judgment was not final because "[b]y entering a stay and allowing for reactivation of the case, the district court demonstrated that it was postponing, not terminating, the proceedings."[14] Regardless of how the district court's order in Keyes is properly interpreted, the district court in this case did not stay or administratively close the Green Tree Parties' case.
Other issues regarding our jurisdiction remain, however. We must consider other aspects of this court's decision in Charles.[15] In Charles, as in the present case, another case "involving the same parties and essentially the same dispute" remained pending before the same federal district court when the order compelling arbitration was entered.[16] But unlike the present case, the district court in Charles had stayed further proceedings in the related case, and the related case remained pending in the federal district court when we considered the appeal of the order compelling arbitration.[17] We held in Charles that the order compelling arbitration was not a final, appealable order and that we therefore lacked jurisdiction.[18] We cited and followed CitiFinancial Corp. v. Harrison,in which our court held that when two proceedings with common parties and issues were pending in the same United States District Court, although before two different federal district court judges, and the two judges had respected one another's orders regarding arbitration and a stay, we were obliged to look at the orders from both courts to resolve whether a final, appealable order had been entered.[19] We concluded in Harrison that there was no final order.[20] This court reasoned, "[f]unctionally, this case sits in a posture no different than had both orders been issued by a single district court judge."[21]Because, in one of the courts, the matter had been "administratively dismissed," which we deemed to be the same as "administratively close[d]" pending arbitration, and the substantive claims of the plaintiffs had not been dismissed, there was no final judgment.[22]
The Brown suit, involving some of the same parties and arbitration issue as the present case, remained pending before Judge Barbour when the "Final Judgment" at issue here was entered. Judge Barbour had stayed further proceedings in the Brown suit. Although the Brown suit was a separate action that had not been consolidated with the present suit, our decisions in Charles and Harrison compel the conclusion that the "Final Judgment" was not a final, appealable order when it was entered. However, Judge Barbour subsequently remanded the Brown case to state court.
The remand of the Brown suit places this case in a materially different procedural posture than Charles and Harrison. The remand of the Brown suit left nothing pending before Judge Barbour in either Brown or the present case, so the "Final Judgment" became final and appealable.[23] The remand to state court disposed of all remaining issues and parties in the two related actions. The federal district court had ordered arbitration, "the federal action did not contain any substantive claims," and "there was nothing more for it to do."[24]
The fact that Judge Barbour also stayed the state-court litigation pending arbitration when he remanded the Brown case to state court does not render the "Final Judgment" non-appealable. The stay of the state-court action was to protect the effectiveness of the federal district court's judgment compelling arbitration.[25] A stay by a federal district court of parallel state-court proceedings pending arbitration does not render the federal court's order compelling arbitration non-final or non-appealable.[26] In the present case, when the remand occurred, nothing remained pending in the federal district court, and the "Final Judgment" became final.
The third jurisdictional issue is whether the notice of appeal in this case is effective. The House Parties filed a notice of appeal on March 8, 2017, after entry of the "Final Judgment," which occurred on February 6, 2017. The "Final Judgment" did not become a final, appealable order until the federal district court remanded the Brown suit on March 15, 2017. Accordingly, the notice of appeal was prematurely filed. We must determine whether that notice is effective, and we conclude that it was.
Our court confronted a similar situation in Boudreaux v. Swift Transportation Co., Inc.[27]The district court granted one party's motion for summary judgment, but another party's summary judgment motion remained pending when the notice of appeal was filed.[28]The district court granted the pending motion one day after the notice of appeal was filed.[29] We discussed the Supreme Court's decision in FirsTier Mortgage Co. v. Investors Mortgage Ins. Co.,[30] and held that the prematurely filed notice of appeal was effective because the order from which the appeal was taken "would have been appealable if immediately followed by the entry of judgment pursuant to Federal Rule of Civil Procedure 54(b)."[31] The district court's February 6 "Final Judgment" would have been appealable had it been followed immediately by certification under FRCP 54(b).
An opinion of the District of Columbia Circuit Court of Appeals, authored by then-Judge John Roberts, also analyzes when a prematurely filed notice of appeal is effective,[32]and we commend that opinion to those who wish to plumb the issue more deeply. It similarly concluded that because the district court's order would have been appealable had the court issued a certification under F.R.C.P 54(b), the order was appealable.[33]
In the present case, we conclude that the premature notice of appeal was effective.[34]

III

The House Parties contend that Green Tree and WIMC cannot enforce the arbitration agreement because the latter corporate entities are not signatories, and do not come within Mississippi's intertwined claims test because they did not exist at the time the sales agreement was signed. Mississippi law establishes that, as a general rule, a party may not enforce an arbitration provision to which it is not a signatory.[35] One exception to this rule is the intertwined claims test.[36] It permits a non-signatory to compel arbitration when a litigant makes "allegations of substantially interdependent and concerted misconduct" between a non-signatory and a signatory that have a close legal relationship.[37] For example, in Sawyers, the Supreme Court of Mississippi applied the intertwined claims test to a car-buyer's claims against a car dealership and the underwriter of a GAP insurance policy sold by the dealership.[38] Even though the underwriter was not a party to the arbitration agreement between the dealer and the buyer, the court allowed it to compel arbitration.[39] The dealer and underwriter had a close legal relationship, the court held, because the underwriter acted on the dealer's behalf by administering the insurance policy and supervising payment of the claim.[40]Because the buyer based its claims against the underwriter on its contract with the dealership, she "[could not] deny [the underwriter] the benefit of the arbitration agreement which was an integral part of the transaction at issue."[41]
The House Parties' allegations support application of the intertwined claims test to permit Green Tree and WIMC to compel arbitration as non-signatories. First, based on the allegations in the complaint, both entities had a close legal relationship with a signatory to the arbitration agreement. The House Parties allege that Green Tree, the current servicing agent of the mortgage, or its predecessor, financed the home at a high interest rate and worked with Jim Walter Homes as the "`business end' of a lending engine" scheme that also involved WIMC and the other Green Tree Parties. These allegations support the conclusion that Green Tree has a close relationship with a signatory because it serviced the mortgage created in the initial transaction between House and Jim Walter Homes.
With respect to WIMC, Green Tree's parent company, the House Parties allege that "without the assistance and cooperation of [WIMC] . . . th[e] fraudulent scheme could not have been possible." The complaint also alleges that "Jim Walter Homes . . . transformed itself into publicly traded, billion dollar entities such as Walter Energy, Inc. and [WIMC]." The complaint alleges that both Green Tree and WIMC were joint venturers and co-conspirators with Jim Walter Homes, the entity that signed the sales contract and other documents. It further alleges that Jim Walter Homes "sold, assigned, or conveyed the contracts, promissory notes, and deeds of trust made the subject of this civil action generally to Walter Mortgage Company, LLC, [now Green Tree] then to WIMC" or other entities. As an alleged assignee/conveyee, co-conspirator, and joint venturer that was integral to perpetuating the harms described in the complaint, WIMC has a close legal relationship with Jim Walter Homes, a signatory.
The complaint alleges that Green Tree and WIMC engaged in "substantially interdependent and concerted misconduct" with Jim Walter Homes. Not only does the complaint assert that Green Tree and WIMC acted as co-conspirators and joint venturers in a scheme to originate and securitize sub-prime loans, it also claims that these entities aided and abetted and are "liable jointly and severally for the unlawful, deceptive, deceitful and misleading acts and/or omissions of each and everyone one" of the other named defendants. Accordingly, Green Tree and WIMC have standing to enforce the arbitration agreement.
The House Parties contend that because Green Tree and WIMC did not exist at the time the sales contract was executed, they are ineligible for the intertwined claims test. The intertwined claims test is not a doctrine of imputed assent, such that any non-signatory must have existed when the agreement was signed so that House could have anticipated that the entity could later compel arbitration. Rather, the test governs the application of the doctrine of equitable estoppel.[42] Mississippi courts apply the intertwined claims test to estop parties from making claims against non-signatories based on a contract, then seeking to avoid an arbitration provision that "was an integral part of the transaction at issue."[43] In this case, the House Parties allege that Green Tree and WIMC have a close legal relationship with Jim Walter Homes, a signatory to the sales contract, and the House Parties invoked that contract to allege that Green Tree and WIMC engaged in substantially interdependent misconduct with Jim Walter Homes. That Green Tree and WIMC were formed after the sales contract was signed is irrelevant.

IV

The House Parties also challenge the district court's determination that the parties agreed to delegate the "gateway" question of arbitrability to the arbitrator. Like the broader question of whether a dispute is subject to arbitration, "the question `who has the primary power to decide arbitrability' turns upon what the parties agreed about thatmatter."[44] A determination that the parties agreed to arbitrate arbitrability must be supported by evidence showing that the parties "clearly and unmistakably" intended to do so.[45] In such cases, so long as "the assertion of arbitrability" is not "wholly groundless,"[46] meaning that there is a "plausible argument[] that the dispute was covered by the [arbitration] agreement," the question of arbitration is to be resolved in arbitration.[47] In Petrofac, this court held that by incorporating the American Arbitration Association Rules—which state that arbitrators have power to rule on questions of arbitrability—into their arbitration agreement, the parties had clearly and unmistakably agreed to arbitrate arbitrability.[48] A number of our sister circuits share this view.[49]
The House Parties contend that, as unsophisticated parties, they could not have assented to delegate arbitrability simply by agreeing to be bound by the JAMS arbitration rules. The House Parties did not raise this argument before the district court despite extensive argument from the Green Tree Parties that the JAMS rules gave the arbitrator power to determine arbitrability. Instead, the House Parties argued that because the arbitration agreement was unconscionable and invalid since it had not been properly executed, the delegation provision was invalid by extension. The House Parties do not renew these arguments on appeal, relying only on their new arguments that they could not have assented to delegation by the incorporation of a set of arbitration rules. This court generally does not consider arguments raised for the first time on appeal unless the party shows "extraordinary circumstances"—that "the issue . . . is a pure question of law and a miscarriage of justice would result from our failure to consider it."[50] That standard is not met here. By failing to bring their "assent" theory before the district court, the House Parties forfeited it for purposes of appeal.
The House Parties also argue that the district court erred by considering the JAMS rules effective in 2014, rather than the year the arbitration agreement was signed. The House Parties forfeited this argument as well by failing to raise it before the district court. Even though the Green Tree Parties specifically referenced the 2014 version of the JAMS rules in their memorandum brief in support of their motion to compel arbitration, the House Parties did not object to that version of the rules in the proceedings below. The district court did not err in ruling that the parties' express incorporation of the JAMS rules provides clear evidence that they agreed that the arbitrator would decide arbitrability.

V

Finally, the House Parties argue that the district court failed to consider their allegations that the Green Tree Parties obtained the arbitration agreement by fraud. Pursuant to 9 U.S.C § 2, arbitration agreements are valid and enforceable "save upon such grounds as exist at law or in equity for the revocation of any contract."[51] Because arbitration agreements are severable as a matter of federal arbitration law, parties seeking to avoid arbitration under § 2 must challenge the validity of the arbitration agreement specifically, rather the contract as a whole.[52] If the party challenges the "precise agreement to arbitrate at issue, the federal court must consider the challenge" before ordering compliance with a delegation provision.[53] Even in cases "where the alleged fraud that induced the whole contract equally induced the agreement to arbitrate which was part of that contract," the Supreme Court "nonetheless require[s] the . . . challenge to be directed specifically to the agreement to arbitrate" as a prerequisite to judicial intervention.[54]
The House Parties' fraud allegations are not specific to the arbitration agreement. In their pleadings, the House Parties argued generally that the Green Tree Parties "wrongfully obtain[ed] the [House Parties'] signatures on contracts, promissory notes, deeds of trusts, insurance payment plans, and completion certificates" and that "[a]ll the signatures of [House] on the aforementioned documents were generally procured under duress, with deceit, and/or through coercion, trickery, and/or other wrongful conduct." These blanket allegations of fraud fall well short of the specificity that Rent-A-Centerrequires. The district court correctly referred the question of fraud to the arbitrator.
We AFFIRM the judgment of the district court.

[1] Green Tree Servicing, L.L.C. v. Billy Brown, No. 17-60105.
[2] Rule 11(b), JAMS Comprehensive Arbitration Rules & Procedures (2014).
[4] 9 U.S.C. § 16(a)(3).
[6] Harrison, 453 F.3d at 249 (citations omitted).
[7] Id. at 251.
[9] 872 F.3d 637, 639 (5th Cir. 2017)id. at 638 (reflecting that the district court granted the motion to compel arbitration and that the order also "stated that `each party may move to re-open this case if further judicial intervention is necessary to enforce the rulings of this Court, or to enforce the rulings of the arbitrators'").
[10] No. 17-60107 (5th Cir. May 31, 2017) (quorum opinion).
[11] Id.
[12] Id.
[13] Id.see also id. ("[I]n addition to compelling arbitration, the district court stayed the rest of the case and ordered it administratively closed.").
[14] Id.
[16] Id. at 638-39.
[17] Id.
[18] Id. at 639-40.
[20] Id. at 251.
[21] Id.
[22] Id. at 251-52.
[23] See American Heritage Life Ins. Co. v. Orr, 294 F.3d 702, 705 (5th Cir. 2002) ("[A]s a matter of law, the district court order compelling arbitration, which also stays the underlying state court proceedings and closes the case in federal court, is an immediately appealable, final decision under the ambit of 9 U.S.C. § 16(a)(3) of the FAA.").
[24] Harrison, 453 F.3d at 249 (citations omitted).
[25] See generally Aptim Corp. v. McCall, 888 F.3d 129 (5th Cir. 2018).
[26] See American Heritage Life Ins. Co., 294 F.3d at 708 ("We hold that where a district court with nothing before it but whether to compel arbitration and stay state court proceedings issues an order compelling arbitration, staying the underlying state court proceedings, and closing the case, thereby effectively ending the entire matter on its merits and leaving nothing more for the district court to do but execute the judgment, appellate jurisdiction lies, as the decision is `final' within the contemplation of § 16(a)(3) of the FAA.").
[27] 402 F.3d 536 (5th Cir. 2005).
[28] Id. at 539 and n.1.
[29] Id.
[30] 498 U.S. 269 (1991).
[36] Id.
[38] Id. at 1028-30.
[39] Id. at 1038-39.
[40] Id. at 1038.
[41] Id. at 1039.
[42] Id. at 1038-39.
[48] Petrofac, 68 F.3d at 675.
[51] 9 U.S.C § 2.
[53] Id. at 71.
[54] Id.