Trial court's denial of motion to compel arbitration upheld in interlocutory appeal on waiver grounds.
Adams v. Staxxring, Inc.
Adams, William Bryan "Bill" v. Staxxring, Inc. and Molly Langford, ex rel Staxxring, Inc.,
No. 05-10-01142-CV (Tex. App.- Dallas July 7, 2011) (Opinion by Justice Mary L. Murphy)
Pretrial activity included not only substantial discovery and discovery-related motions, but also amended pleadings with affirmative defenses, counterclaims, third-party claims, Rule 12 motion, a mandamus proceeding in the court of appeals, and a trip to bankruptcy court with associated stay (and delay) in state court.
Trial court found that aggressive litigation activity was prejudicial to the opposing party and denied motion to compel arbitration filed near the end of the discovery period after multiple trial resets. Fifth Court of Appeals affirms waiver ruling. Given the absence of a bright-line rule governing waiver of contractual arbitration rights under the Supreme Court's totality-of-the-circumstances precedent in Perry Homes v. Cull, the reviewing Court spends much time elaborating on the procedural history of the case in the trial court.
In The Court of Appeals
Fifth District of Texas at Dallas
...........................
No. 05-10-01142-CV
............................
WILLIAM B. ADAMS, Appellant
V.
STAXXRING, INC. AND MOLLY LANGFORD, Appellees
.............................................................
On Appeal from the 95th Judicial District Court
Dallas County, Texas
Trial Court Cause No. DC-09-07879-D
.............................................................
THE GIST: Because Adams substantially invoked the judicial process to the detriment and prejudice of Langford and StaxxRing, we conclude Adams waived any arbitration rights under the StaxxRing bylaws. We affirm the trial court's order denying Adams's motion to compel arbitration.
OPINION
Before Justices Murphy, Fillmore, and Myers
Opinion By Justice Murphy
William B. Adams appeals the trial court's denial of his motion
to compel arbitration of the lawsuit filed by Molly Langford and
StaxxRing, Inc. We conclude Adams waived any right to arbitration and
affirm the trial court's order.
BACKGROUND
Langford and Adams are each fifty-percent owners of StaxxRing, a
closely held corporation in the jewelry business. The trial court
described their underlying dispute as a power struggle over the control
of StaxxRing, which “more nearly resembles a corporate food fight.”
Because of the nature of the dispute and our consideration of the level
to which Adams invoked the judicial process, our review of background
information is detailed.
The Pleadings and Injunctive Relief
The litigation began on June 22, 2009, when StaxxRing and
Langford See Footnote 1 filed suit against Adams alleging he usurped
Langford's authority and undermined her efforts as president of
StaxxRing. The petition included a jury demand and claims for breach of
fiduciary duty, tortious interference, negligence, conversion, theft of
property and violations of the theft liability act, and a violation of
the Uniform Fraudulent Transfer Act. Langford and StaxxRing sought
declaratory and injunctive relief as well as a constructive trust,
damages, attorney's fees, and exemplary damages.
The next day, with allegations Langford was “freezing” him out
of StaxxRing, Adams answered the lawsuit; asserted affirmative defenses
of fraud, unclean hands, and estoppel and quasi- estoppel; and
counterclaimed against Langford for fraud, conversion, and shareholder
oppression, requesting damages, exemplary damages, and attorney's fees.
Adams also joined as a defendant Robert Swift, StaxxRing's sales
manager, and alleged claims of breach of fiduciary duty against Swift
and Langford individually. Quoting from StaxxRing's bylaws, Adams
demanded inspection of StaxxRing's books and records and sought
injunctive relief, the appointment of a receiver for StaxxRing,
expedited discovery, and rule 194 disclosures.
Counsel for Adams sent a letter to the trial court the next day,
June 24, requesting a hearing to “entertain Adams' motion for expedited
discovery on an expedited basis.” On June 25, Adams's counsel requested
and participated in a telephone conference with the trial court and
plaintiffs' counsel. The trial court granted Adams's request and ordered
Langford to provide StaxxRing's books and records no later than July 2,
2009.
Adams also amended his answer and counterclaim on July 1, adding
third-party claims for conversion and negligence against Bank of
America, N.A., the depository for StaxxRing's operating funds. Adams
added the Bank to his request for injunctive relief and included a
demand for accounting by StaxxRing. Adams again cited to and quoted
StaxxRing's bylaws, and attached the entirety of the bylaws to an
affidavit included in his amended answer. Article II, section 13 of the
bylaws provides: Arbitration. All claims, disputes, demands or
disagreements, relating to or arising out of, directly or indirectly,
this Article II among the shareholders of the Corporation shall be
settled by arbitration in Dallas, Texas. Such arbitration shall be
subject to the Texas General Arbitration Act and the rules of the
American Arbitration Association, in accordance with this Section 13. .
. . Any determination by such arbitrator(s) shall be a conclusive
determination of the matter, shall be binding upon the shareholders and
shall not be contested by them.
At Adams's request, the trial court held a hearing on his
application for temporary restraining order on July 2. The trial court
granted Adams's request as to Langford in part, finding Adams “is likely
to prevail on the merits of at least one of his claims.” The same day,
the trial court ordered Adams and Langford to mediation. As of the date
this appeal was filed, the parties had mediated twice unsuccessfully.
Eight days after the TRO hearing, Adams served Langford with a
subpoena duces tecum to produce documents by July 16, the day before the
hearing on the parties' cross-applications for temporary injunctions.
The subpoena requested nine groups of documents related to Langford's
net worth as well as the financial position of StaxxRing. Objecting to
the requests, Langford filed a motion to quash and for a protective
order. Pursuant to the parties' agreement, the court signed an order
requiring Langford to produce documents but otherwise granting
Langford's motion.
Also on July 16, Langford and StaxxRing filed a first amended
petition, embellishing the factual background and including an
allegation of sexual harassment against Adams. The amended petition
included Langford's affidavit attaching several documents, including
StaxxRing's financial records. The same day, Adams supplemented his
first amended counterclaim by adding an indemnification claim for legal
fees pursuant to the StaxxRing bylaws.
The temporary-injunction hearing began on July 17, 2009. The
appellate record does not include a reporter's record of the hearing,
but the trial court characterized it as involving “substantial
testimonial and documentary evidence.” Langford testified at the hearing
and was subject to cross- examination by Adams's counsel. The hearing
lasted for several days and concluded July 22, 2009.
The same day , Adams filed his second supplement to his first
amended counterclaim in which he added a breach-of-contract claim
against Langford and StaxxRing, jointly. He maintained his requests for
injunctive relief, attorney's fees, expedited discovery, appointment of
a receiver, and indemnification pursuant to StaxxRing's bylaws.
On July 23, 2009, the day after the injunction hearing
concluded, Adams filed a letter brief in support of his requested
injunctive relief. On July 25, the trial court granted injunctions in
part for both sides, finding they were “likely to prevail on the merits”
of at least one of their respective claims. The court set trial for
January 11, 2010 as part of the same order.
Just over a week later, Adams filed a motion to clarify or
modify the temporary injunction, relying on StaxxRing's bylaws. Adams
also described a line of credit to StaxxRing he personally had
guaranteed through Fidelity Bank and expressed concern that Fidelity
would call the note due and payable on its maturity date of August 7,
2009.
The trial court heard Adams's motion on August 20 and, on August
24, 2009, signed its order denying Adams's request for clarification. As
part of its order, the trial court stated it “has also had the
opportunity to keenly observe the in-court demeanor of the parties (as
witnesses and participants) and their actions since the filing of this
lawsuit.” Commenting that Adams's “mission has begun to take on the
appearance of a vendetta,” the trial court added that “the unchallenged
evidence before the Court indicates that Adams only recently
deliberately used his personal relationships to interfere with and
influence the termination of a [StaxxRing] line of credit at Fidelity
Bank.” Questioning the validity of Adams's third-party claims against
the Bank, the trial court noted “Adams continues to vigorously press
claims against Bank of America, the admitted purpose of which is to
force a termination of (or 'freeze,' as Adams puts it) [StaxxRing's]
bank account . . . .” The trial court concluded the order with the
“further opinion that at any future hearings at which he is present,
Defendant Adams must seek advance approval of the Court before leaving
the courtroom.” Adams subsequently non-suited his claims against the
Bank.
On October 30, 2009, Adams filed a second amended answer and
counterclaim, adding claims against Langford for equitable buy-out and
malicious suppression of dividends. He maintained his request for
injunctive relief, appointment of a receiver, inspection of books and
records, accounting, attorney's fees, and damages.
On November 23, 2009, Adams paid the jury fee.
In December 2009, both sides filed motions for contempt,
claiming violations of the temporary injunction.
Discovery
Meanwhile, Adams pursued additional discovery from Langford and
StaxxRing. After the initial expedited discovery, which included the
subpoena duces tecum served on Langford and the related order, Adams
served Langford and StaxxRing with merits discovery consisting of
twenty-six requests for production of documents and additional requests
for disclosure. On September 25, 2009, Adams served a second request for
production of documents, which included twenty-three requests for
documentation supporting StaxxRing's balance sheet and profit-and-loss
statement produced earlier. Upon receipt of Langford and StaxxRing's
responses to his requests for documents, Adams filed a motion and
supplemental motion to compel, attaching the discovery responses as well
as Langford's testimony from the temporary-injunction hearing where she
was cross-examined by Adams's counsel.
During the same time period, Adams resisted discovery. On
September 2, 2009, he filed a motion seeking to quash a subpoena and
document request Langford and StaxxRing directed to Fidelity. In late
October, Langford and StaxxRing served a deposition notice for Adams and
two others, which Adams promptly moved to quash. StaxxRing and Langford
responded with a motion to compel and a motion for attorney's fees,
costs, and sanctions, attaching correspondence evidencing a history of
their attempts to depose Adams. In November, Langford and StaxxRing
served another deposition notice for Adams and the same two individuals;
again, Adams filed a motion to quash. In July of 2010, StaxxRing and
Langford served Adams with their last deposition notice, which Adams
again moved to quash and for a protective order. StaxxRing and Langford
filed a second motion to compel Adams's deposition and a motion for
sanctions.
The Rule 12 Motion
In early October 2009, after serving Langford and StaxxRing with
multiple discovery requests, Adams filed a motion under rule 12 of the
Texas Rules of Civil Procedure for counsel to show authority to
represent StaxxRing. See Tex. R. Civ. P. 12. Adams again attached
StaxxRing's bylaws to this motion. A few weeks later, Adams filed an
amended motion to show authority, which included an additional copy of
StaxxRing's bylaws.
The trial court heard Adams's rule-12 motion on November 6,
2009. The hearing also included Adams's motion to compel responses to
certain discovery requests. On November 14, 2009, the trial court signed
an order denying Adams's rule-12 motion, granting his motion to compel
production of certain documents, and otherwise denying Adams's motion to
compel. Within a week, Adams filed a petition for writ of mandamus and
emergency motion, again attaching a copy of StaxxRing's bylaws, based on
the trial court's denial of Adams's rule-12 motion. This Court denied
Adams's petition for writ of mandamus on December 8, 2009. See In re
William Adams, No. 05-09- 01406-CV, 2009 WL 4601163, at *1 (Tex.
App.-Dallas Dec. 8, 2009, orig. proceeding) (mem. op.).
Adams's Motion for Continuance of Trial Setting
The year 2009 closed with Adams filing a verified motion to
continue the January 11, 2010 trial setting due to an injury his counsel
sustained. Langford and StaxxRing did not oppose the motion, although
their counsel announced that they were ready for trial. The trial court
granted Adams's requested continuance on January 5, 2010 and re-set the
trial for April 5, 2010.
Adams's Petition for Involuntary Bankruptcy of StaxxRing
After the trial court granted Adams's a continuance of the
January trial setting, he, his wife, his accounting firm, and other
creditors filed a petition for involuntary bankruptcy of StaxxRing. The
bankruptcy petition was filed January 29, and Adams filed a suggestion
of bankruptcy with the trial court on February 15. Five days later, the
trial court signed an order staying proceedings as to Langford and
StaxxRing but not as to Adams's third-party claims against Swift. Adams
non-suited his claims against Swift shortly thereafter.
In response to the bankruptcy petition, StaxxRing filed a motion
to dismiss that was heard by the bankruptcy court on April 28, 2010. A
month later, the bankruptcy court dismissed the bankruptcy petition with
prejudice. In the meantime, the April 5 trial setting passed. See
Footnote 2
The BA Acquisitions Lawsuit against StaxxRing and Langford
On June 17, 2010, an entity named BA Acquisitions filed suit
against StaxxRing and Langford in the 116th district court in Dallas
County. Testimony revealed that Adams was the sole officer, director,
and shareholder of BA Acquisitions and he had created the company for
the sole purpose of purchasing the StaxxRing note held by Fidelity. BA
Acquisitions, represented by the same attorneys who represented
Fidelity, sought payment of the note previously held by Fidelity.
Langford and StaxxRing filed an answer and third-party petition against
Adams and moved to transfer the lawsuit from the 116th to the 95th
judicial district court where their original litigation was pending. On
August 6, Adams filed a motion to compel arbitration of that dispute,
and on August 12, BA Acquisitions filed a notice of non-suit. The
third-party petition filed against Adams remained pending.
Lifting the Bankruptcy Stay and Adams's Motion to Compel Arbitration
In mid-June, Langford and StaxxRing filed a motion to reopen
this case and to lift the stay imposed as a result of the bankruptcy.
Adams subsequently agreed to the request and the trial court signed an
agreed order on July 8, 2010. A few days later, Adams began the process
of changing counsel. On July 19, 2010, after discovery closed, Adams
moved to compel arbitration, relying on article II, section thirteen of
StaxxRing's bylaws. Adams supplemented his motion to compel arbitration
on August 3, 2010; the next day, he filed a demand for arbitration with
the American Arbitration Association. On August 9, 2010, the trial court
reset the matter for trial for the third time: November 29, 2010.
The trial court heard Adams's motion to compel arbitration on
August 10 and 11, 2010, during which documents and testimony were
admitted. On August 27, 2010, the trial court heard Langford and
StaxxRing's motion to compel Adams's deposition and motion for
sanctions. In a single, hand-crafted order signed August 28, 2010, the
trial court denied Adams's motion to compel arbitration, ordered Adams's
deposition for September 28, 2010, and carried Langford and StaxxRing's
motion for sanctions.
Pursuant to its August 28 order, the trial court denied Adams's
motion to compel arbitration on the bases that (1) there was no
agreement to arbitrate the dispute before the court, (2) Adams waived
any right he may have had to arbitrate the claims in this case by
substantially invoking the judicial process “to the clear detriment and
prejudice of the plaintiffs,” and (3) the arbitration demanded by Adams
would not provide StaxxRing and Langford with “an accessible and
equivalent forum for them to redress their grievances.” This
interlocutory appeal followed.
DISCUSSION
In a single issue, Adams asserts that the trial court erred in
denying his motion to compel arbitration, arguing: (1) the claims are
within the scope of the arbitration agreement found within article II,
section 13 of StaxxRing's bylaws, (2) the agreement to arbitrate is not
substantively unconscionable, and (3) he has not waived his right to
arbitration because he has not substantially invoked the judicial
process and Langford and StaxxRing have not proven they have suffered
prejudice.
We address the question of whether Adams waived his right to
arbitration, because resolution of that issue is dispositive of this
appeal. In doing so, we assume without deciding that the claims are
subject to arbitration and the parties' agreement is not substantively
unconscionable.
Standard of Review and Applicable Law
Waiver of arbitration is a question of law that this Court
reviews de novo. Perry Homes v. Cull, 258 S.W.3d 580, 598 (Tex. 2008);
In re Bruce Terminix Co., 988 S.W.2d 702, 703-04 (Tex. 1998) (orig.
proceeding) (per curiam). Arbitration rights are contractual, and the
law includes a strong presumption against the waiver of those rights.
See Bruce Terminix, 988 S.W.2d at 704. When presented with questions of
waiver, we are required to resolve any doubts in favor of arbitration.
In re Oakwood Mobile Homes, 987 S.W.2d 571, 574 (Tex. 1999) (orig.
proceeding) (per curiam), abrogated in part on other grounds by In re
Halliburton Co., 80 S.W.3d 566, 572 (Tex. 2002) (orig. proceeding). The
standard for determining waiver is the same under federal and state law.
See Holmes, Woods & Diggs v. Gentry, 333 S.W.3d 650, 654 (Tex.
App.-Dallas 2009, no pet.). Waiver may be implied from a party's
conduct, so long as that conduct is unequivocal. Perry Homes, 258 S.W.3d
at 593. In “close cases, the 'strong presumption against waiver' should
govern.” Id. (quoting In re D. Wilson Constr. Co., 196 S.W.3d 774, 783
(Tex. 2006) (orig. proceeding)).
As the parties claiming waiver, Langford and StaxxRing had the
heavy burden of establishing Adams substantially invoked the judicial
process. See Bruce Terminix, 988 S.W.2d at 704; Valero Energy Corp. v.
Teco Pipeline Co., 2 S.W.3d 576, 594 (Tex. App.-Houston [14th Dist.]
1999, no pet.). Additionally, “waiver of arbitration requires a showing
of prejudice.” Perry Homes, 258 S.W.3d at 595. In determining whether
Langford and StaxxRing met their burden, we must examine the
case-specific facts and look to the totality of the circumstances. Id.
at 591.
Analysis
The supreme court in Perry Homes emphasized what would
constitute waiver: “allowing a party to conduct full discovery, file
motions going to the merits, and seek arbitration only on the eve of
trial.” Id. at 590 (quoting In re Vesta Ins. Group, Inc., 192 S.W.3d
759, 764 (Tex. 2006) (orig. proceeding) (per curiam)). The court also
recognized, as in that case where only two of these three requirements
were met, waiver “involves substantial invocation of the judicial
process, not just judgment on the merits.” Id. at 592. Here, the record
does not fit squarely within the circumstances that clearly would
constitute waiver, and we therefore must review relevant factors in the
context of the totality of the circumstances. Those factors include:
when Adams knew of the arbitration clause; the extent of discovery, who
initiated it, whether it related to the merits rather than arbitrability
or standing, and how much of it would be useful in arbitration; and,
whether Adams sought judgment on the merits. See id. at 591-92. See
Footnote 3
The record here is extensive. Although we have a reporter's
record for only one of the several hearings, the clerk's record consists
of over thirteen hundred pages, and the trial court took judicial notice
of its file. The trial court also issued two orders discussing
extensively the procedural history of the parties' dispute. See
Footnote 4
Adams's Knowledge of Arbitration Clause and Delay
Adams does not contest his knowledge of the arbitration clause
in StaxxRing's 2005 bylaws, which were adopted by the same unanimous
consent that elected Adams as an officer and director and issued him
100,000 shares of stock. The day after he was sued, Adams responded with
a pleading citing to and quoting the same bylaws. He also attached and
relied on the bylaws repeatedly as part of the relief sought by him in
the litigation and as part of his mandamus proceeding when the trial
court denied his rule-12 motion. Langford also testified to the
uncontroverted fact that the StaxxRing bylaws have been reviewed
repeatedly at the various hearings in the case. Yet Adams did not seek
to invoke arbitration until after thirteen months of extensive and
fast-paced litigation of a matter that had been reset for trial twice,
both times at Adams's request or as a result of his conduct. See Perry
Homes, 258 S.W.3d at 596 (waiver found when party delayed fourteen
months after filing suit); see also In re Christus Spohn Health Sys.
Corp., 231 S.W.3d 475, 481-82 (Tex. App.-Corpus Christi 2007, orig.
proceeding) (finding waiver after fourteen months of litigation and
resetting matter for trial three times).
Discovery
Relevant discovery factors in determining whether a movant has
substantially invoked the judicial process include how much discovery
has been conducted and who initiated it, whether the discovery related
to the merits rather than arbitrability or standing, and how much of the
discovery would be useful in arbitration. Holmes, 333 S.W.3d at 654
(citing Perry Homes, 258 S.W.3d at 591-92). “How much litigation conduct
will be 'substantial' depends very much on the context; three or four
depositions may be all the discovery needed in one case, but purely
preliminary in another.” Perry Homes, 258 S.W.3d at 593.
Adams not only initiated, but expedited discovery while avoiding
discovery directed to him. He served almost two hundred merits-related
requests-none going to issues of standing or arbitrability-and nothing
in the record suggests he responded to any discovery. See Holmes, 333
S.W.3d at 655 (“Although the discovery may not have involved the merits
per se, it did not involve arbitrability or standing.”). He also sought
and obtained orders from the court compelling discovery he was
requesting, cross-examined Langford during at least three evidentiary
hearings, and used that evidence as part of his requests for additional
relief.
While initiating and conducting his own discovery, Adams filed
repeated motions for protection and moved to compel arbitration only
after the discovery deadline had passed. It would appear discovery was
substantially completed. See Perry Homes, 258 S.W.3d at 596 (“[T]he
record is nevertheless clear that most of the discovery in the case had
already been completed before the Culls requested arbitration. The rule
that one cannot wait until 'the eve of trial' to request arbitration is
not limited to the evening before trial; it is a rule of proportion that
is implicated here.”). Adams argues that all of the discovery would be
useful in the arbitration. This is but a factor to be considered. See
Citizens Nat'l Bank v. Bryce, 271 S.W.3d 347, 358 (Tex. App.-Tyler 2008,
orig. proceeding) (citing Perry Homes, 258 S.W.3d at 591-92). What, if
any, remedies would be available in arbitration as to the discovery
resisted by Adams in the trial court is unknown. See Perry Homes, 258
S.W.3d at 599.
Merits Activity
As to merits activity conducted by Adams, he sought a temporary
restraining order and temporary injunctive relief on the merits
immediately after suit was filed and well before any answer would have
been due. He participated fully in the related hearings, and the trial
court specifically found as part of its order granting Adams injunctive
relief that he was “likely to prevail on the merits” of at least one of
his claims. Not only did Adams later seek to modify or clarify the
injunction, but he also asked the trial court to find Langford in
contempt for allegedly violating the injunction in Adams's favor. Even
if Adams's merits activity alone is insufficient to waive any right he
had to arbitrate his claims, this is an additional factor we consider.
See Perry Homes, 258 S.W.3d at 591-92.
Other Factors
Other factors implicated by Adams's actions are relevant to our
inquiry. Not only did Adams embrace the judicial process the day after
suit was filed by filing an answer, affirmative defenses, and
counterclaims, but he also brought in third parties. The trial date was
reset repeatedly either at the request of Adams or as a direct result of
his conduct. Months after the case was filed and Adams had engaged in
discovery, filed motions to compel and to show authority, pursued and
obtained injunctive relief, and had filed his second amended answer and
counterclaim, he paid a jury fee. By the time Adams filed his motion to
compel arbitration, the clerk's record included over eight hundred pages
of pleadings, motions, and other documentation. The trial court took
judicial notice of its “ample file” and noted that “the majority of the
file was generated by Adams'[s] own vigorous litigation of this case.”
In addition, Adams filed a rule-12 motion and sought mandamus
appellate review when the trial court denied him relief. Although the
rule-12 motion and Adams's immediate detour to the appellate court did
not implicate the merits of the underlying dispute, the journey delayed
and frustrated the trial court's ability to resolve the case and
increased the litigation costs for the parties. Importantly, Adams's use
of mandamus appellate review is activity otherwise not available in
arbitration.
Adams also invoked the judicial process through independent
proceedings: the involuntary bankruptcy petition and BA Acquisition's
suit against Langford and StaxxRing in the 116th district court.
Although we normally would not consider litigation activity in other
forums as evidencing waiver, Adams's other lawsuits support the
conclusion he was willing to engage in all methods of litigation
activity inconsistent with the right to arbitrate as part of his
strategy against Langford and StaxxRing. See Christus Spohn, 231 S.W.3d
at 481 (“While we ordinarily would not consider actions in a separate
cause as indicative of waiver, . . . we construe [movant's] actions in
this separate lawsuit as part of its strategic plan of defense in the
underlying matter that would be inconsistent with a right to
arbitrate.”); cf. Haddock v. Quinn, 287 S.W.3d 158, 180 (Tex. App.-Fort
Worth 2009, pet. denied) (“Moreover, participation in litigation to gain
an advantage in future litigation can result in waiver.”). We
conclude, considering the totality of the circumstances, Adams
substantially invoked the judicial process. By arguing Langford and
StaxxRing failed to meet their difficult burden of showing his
individual actions were sufficient to constitute waiver, Adams ignores
the requirement that we examine all circumstances in determining whether
he exhibited an intent to avail himself of the judicial process. See
Perry Homes, 258 S.W.3d at 591; see also Nw. Constr. Co. v. Oak
Partners, L.P., 248 S.W.3d 837, 849 (Tex. App.-Fort Worth 2008, pet.
denied) (“Northwest focuses on its various activities in the suit in
isolation; however, when viewed together, all of Northwest's actions in
the suit indicate an intention to avail itself of the judicial
process.”). At the time Adams invoked the arbitration clause contained
in the StaxxRing bylaws he had cited, quoted, and relied on early and
often, discovery was closed. All that appeared to remain in the case
were court-ordered depositions, including his, and trial of the case.
The trial court did not err in finding Adams had substantially invoked
the judicial process. See Christus Spohn, 231 S.W.3d at 479 (noting
actions inconsistent with right to arbitrate include some combination of
filing answer and counterclaim, conducting extensive discovery, moving
for continuance, and failing to timely request arbitration); Okorafor v.
Uncle Sam & Assocs., Inc., 295 S.W.3d 27, 40 (Tex. App.-Houston [1st
Dist.] 2009, pet. denied) (finding circumstances reflected concerted
effort seven months into simple defense strategy of denying sworn
account, to escalate process by multiple sworn and affirmative defenses,
claims of failures of conditions precedent, and affirmative claims for
relief, including declaratory relief, attorney's fees, and sanctions).
Prejudice
In determining whether Adams's substantial invocation of the
judicial process constitutes a waiver of his arbitration rights, we also
must determine whether StaxxRing and Langford showed prejudice. Perry
Homes, 258 S.W.3d at 595. In this context, “prejudice refers to the
inherent unfairness in terms of delay, expense, or damage to a party's
legal position that occurs when the party's opponent forces it to
litigate an issue and later seeks to arbitrate the same issue.” Id. at
597 (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 an intent to arbitrate. Id. at 600 (quoting
PAICO, 383 F.3d at 346)).
Here, Langford and StaxxRing presented sufficient evidence of
prejudice resulting from Adams's failure to invoke his arbitration
rights for thirteen months. They showed that over 5,000 pages of
documents were produced in response to Adams's discovery requests while
they continued unsuccessfully to obtain discovery from Adams. The trial
court had ordered Adams's deposition at the same time it denied Adams's
motion to compel arbitration; Adams then filed this interlocutory appeal
and obtained a stay of the trial court proceedings. Langford and
StaxxRing also incurred approximately $21,000 in legal fees solely for
the purpose of responding to Adams's discovery requests and motions and
$35,000 in legal fees in addressing Adams's rule-12 motion and appeal.
As of the date of the hearing on Adams's motion to compel arbitration,
Langford and StaxxRing had incurred $110,000 in legal fees in this
matter alone. Langford also testified that, in responding to discovery
requests, she lost “hundreds of hours” of income-producing activity and
needed to hire an accounting person to assist StaxxRing with production.
See Christus Spohn, 231 S.W.3d at 482 (considering personal prejudice
suffered by party as result of delay). StaxxRing also spent over $20,000
to handle the involuntary bankruptcy proceeding. See Footnote 5
In addition, when Adams filed his motion to compel arbitration,
discovery was closed with the exception of court-ordered depositions.
Thus, after Adams had obtained thousands of pages of documents from
Langford and StaxxRing under the rules of civil procedure, he sought to
apply the arbitration rules to any further proceedings. See Okorafor,
295 S.W.3d at 40 (“Armed with discovery provided by Uncle Sam and facing
a looming deadline to produce discovery requested by Uncle Sam, the
Okorafors tried to have it both ways and moved to compel arbitration.
Having substantially invoked the litigation process, the Okorafors
abruptly attempted to arrest it to gain the advantage of avoiding
reciprocal discovery.”) (internal citations omitted).
Adams argues that in order to show prejudice from pretrial
discovery, Langford and StaxxRing must show that discovery would not be
useful in arbitration and any costs would not have been incurred in
arbitration. The authority cited by Adams precedes Perry Homes, in which
the court stated such considerations were factors to consider but were
not dispositive on the issue of waiver. Perry Homes, 258 S.W.3d at
591-92. The majority in Perry Homes emphasized in response to a
dissenting argument that there would be no prejudice “from extensive
discovery without proof that an arbitration would have prohibited it”:
That again is impossible; arbitrators have almost unbridled discretion
regarding discovery, so no one can predict what they might do in
advance. Presuming (as the dissents do) that broad discovery is
generally available in arbitration simply ignores one of its most
distinctive features.
Id. at 599. That Langford and StaxxRing did not prove the discovery
incurred during litigation (and the attendant costs) would not have
occurred in arbitration, does not negate a conclusion they were
prejudiced by Adams's failure to timely invoke the arbitration clause
while simultaneously actively obtaining discovery under the rules of
civil procedure. See Bryce, 271 S.W.3d at 357-58; see also Perry Homes,
258 S.W.3d at 599 (“This confuses proof of the fact of prejudice with
proof its extent; the Defendants had to show substantial invocation that
prejudiced them, not precisely how much it all was.”).
In addition to this record evidencing costs involved, the status
of discovery, and the status of the litigation, Langford and StaxxRing
also presented their attorney's affidavit, in which he described the
effect Adams's litigation activities had on his clients' legal
positions: Perhaps more significant to the issue of prejudice than
attorneys' fees themselves is the fact that Adams forced Plaintiffs to
marshal their evidence, thought process, and legal analysis of its
attorneys in responding to Adams'[s] Mandamus, Emergency Appeal, Motion
to Show Authority, Temporary Injunction, Motion to Clarify/Modify and
reconsider, and the other pleadings and discovery Adams conducted in
this case that he would not have been able to in arbitration.
Evidence of compromise to Langford's and StaxxRing's legal positions is
another factor relevant to our consideration in determining prejudice.
See Perry Homes, 258 S.W.3d at 597. Much of their briefing and the
evidence they presented required Langford and StaxxRing to address the
merits of the dispute with Adams and to marshal their legal strategy in
defense of Adams's aggressive litigation activities.
Reviewing the record before us, we agree Langford and StaxxRing
presented sufficient evidence of prejudice to support the trial court's
findings. This record is not unlike that described by the supreme court
in its Perry Homes decision: [Movants] got extensive discovery under one
set of rules and then sought to arbitrate the case under another. They
delayed disposition by switching to arbitration when trial was imminent
and arbitration was not. They got the court to order discovery for them
and then limited their opponents' rights to appellate review. Such
manipulation of litigation for one party's advantage and another's
detriment is precisely the kind of inherent unfairness that constitutes
prejudice under federal and state law.
Perry Homes, 258 S.W.3d at 597. Similarly, Langford and StaxxRing were
prejudiced by Adams's strategic attempt to switch to arbitration and a
different set of rules after thirteen months of aggressive litigation in
which he got extensive discovery, took full advantage of the rules of
procedure and appellate remedies, and repeatedly avoided both a trial
date and his own deposition.
Conclusion
Because Adams substantially invoked the judicial process to the
detriment and prejudice of Langford and StaxxRing, we conclude Adams
waived any arbitration rights under the StaxxRing bylaws. We affirm the
trial court's order denying Adams's motion to compel arbitration.
MARY MURPHY
JUSTICE
-------------------
Footnote 1
The suit is styled “StaxxRing, Inc.; and Molly Langford ex rel
StaxxRing, Inc. v. William Bryan 'Bill' Adams,” but both the original
petition and first amended petition state that the suit “is brought on
behalf of the Company and Ms. Langford individually” against Adams.
Footnote 2
While the bankruptcy proceeded, Adams filed a state-bar grievance
against Langford and StaxxRing's counsel on the same grounds alleged in
his rule-12 motion to show authority.
Footnote 3
The court in Perry Homes also noted federal courts examine other
factors in determining waiver, including: whether the movant was the
plaintiff who elected to file in court or the defendant who merely
responded, how long the movant delayed before requesting arbitration,
whether the movant knew of the arbitration clause “all along,” how much
pretrial activity related to the merits rather than arbitrability or
jurisdiction, how much time and expense was incurred in litigation,
whether the movant sought or opposed arbitration previously in the case,
whether the movant filed affirmative claims or dispositive motions, what
discovery would be unavailable in arbitration, whether litigation
activity would be duplicated in arbitration, and when the case was to be
tried. Perry Homes, 258 S.W.3d at 590-91.
Footnote 4
The extensive record here contrasts the record in our earlier case of
Small v. Specialty Contractors, Inc., 310 S.W.3d 639 (Tex. App.-Dallas
2010, no pet.), in which we concluded the movants had not waived their
right to arbitration by invoking the judicial process to the prejudice
of nonmovant. Id. at 649. The record in Small contained no reporter's
record of argument before the trial court and no evidentiary hearing
regarding that motion to compel arbitration. Id. at 645-46. The trial
court in Small did not make findings, and the appellate record merely
contained the docket sheet, pleadings, briefing on a motion for summary
judgment, briefing on the motion to compel arbitration, and a notice of
partial non-suit. Id. at 646.
Footnote 5
Adams argues that any costs Langford and StaxxRing incurred as a result
of the bankruptcy filing should not be considered, citing an agreed
order in that suit for payment by Adams of $16,500 to resolve relief
sought by StaxxRing. The referenced order, however, is not part of the
appellate record, but is instead attached as an appendix to Adams's
opening brief on appeal. Even if we were to take judicial notice of the
order, it does not negate StaxxRing and Langford's showing of prejudice.
The settlement amount is less than the amount Langford's testimony shows
was expended as legal fees and the settlement does not address the
months of delay due to the bankruptcy stay.
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