No CV IN THE COURT OF APPEALS FIFTH DISTRICT OF TEXAS AT DALLAS MARK A. CARR. MAIN CARR DEVELOPMENT, LLC Appellee

Transcription

1 No CV IN THE COURT OF APPEALS FIFTH DISTRICT OF TEXAS AT DALLAS MARK A. CARR V. Appellant MAIN CARR DEVELOPMENT, LLC Appellee On Appeal from the 192 nd District Court Dallas County, Texas Trial Cause No BRIEF OF APPELLANT MICHAEL C. O CONNOR O CONNOR, CRAIG, GOULD, EVANS & ROHR State Bar No Tanglewilde, Suite 222 Houston, TX (fax) ATTORNEYS FOR APPELLANT, MARK CARR APPELLANT REQUESTS ORAL ARGUMENT

2 IDENTITY OF PARTIES AND COUNSEL Parties to the Trial Court s Final Judgment: 1. Mark Carr Defendant, Appellant c/o Christian Brothers Automotive Corporation N. Barkers Landing, Suite 145 Houston TX Main Carr Development, LLC Plaintiff, Appellee 1212 Corporate Drive, Suite 500 Irving, Texas Defendant-Appellant s Trial and Appellate Counsel: Michael C. O Connor O Connor, Craig, Gould, Evans & Rohr State Bar No Tanglewilde, Suite 222 Houston, TX Phone: (713) Fax: (713) Plaintiff-Appellee s Trial and Appellate Counsel: Leighton Aiken Owens, Clary & Aiken, LLP State Bar No N. Pearl Street, Suite 1600 Dallas, Texas Phone: (214) Fax: (214) ii

3 TABLE OF CONTENTS IDENTITY OF PARTIES AND COUNSEL... ii TABLE OF CONTENTS... iii INDEX OF AUTHORITIES... iv STATEMENT OF THE CASE... vii ISSUES PRESENTED... viii STATEMENT OF FACTS... 1 SUMMARY OF ARGUMENT... 4 ARGUMENT... 5 I. STANDARD OF REVIEW AND APPLICATION TO MCD S CLAIMS... 5 A. Texas And Federal Law Favor Arbitration B. The Arbitration Agreement Is Valid And MCD s Claims Fall Within Its Scope II. MCD IS A THIRD PARTY BENEFICIARY OF THE DEVELOPMENT AGREEMENT... 7 III. MCD IS EQUITABLY ESTOPPED FROM AVOIDING ARBITRATION A. MCD Is Suing Based On The Development Agreement B. MCD Sought And Obtained Benefits From The Development Agreement IV. MCD IS REQUIRED TO ARBITRATE AS AN AGENT OF MAIN CHRISTIAN BROTHERS V. COURT CLAIMS SHOULD BE STAYED PENDING ARBITRATION PRAYER APPENDIX iii

4 INDEX OF AUTHORITIES CASES AgGrow Oils, LLC v. Nat l Union Fire Ins. Co., 242 F.3d 777 (8 th Cir. 2001) American Bureau of Shipping v. Tencare Shipyard S.P.A, 170 F.3d 349 (2 nd Cir. 1999) Arnold v. Arnold Corp., 920 F.2d 1269 (6 th Cir. 1990) Arthur Anderson LLP v. Carlisle, 556 U.S., 129 S. Ct (2009)... 7 Astra Oil Co., Inc. v. Rover Navigation, Ltd., 344 F.3d 276 (2 nd Cir. 2003) Bridas Sapic v. Government of Turkmenistan, 345 F.3d 347 (5 th Cir. 2003)... 7 Cantella & Co. v. Goodwin, 924 S.W.2d 943 (Tex. 1996)... 5, 6 Energy Service Co. v. Superior Snubbing Services, Inc., 236 S.W.3d 190 (Tex. 2007)... 8 Esty v. Beal, 298 S.W.3d 280 (Tex. App.-Dallas 2009, no pet.) EZ Pawn Corp. v. Mancias, 934 S.W.2d 87 (Tex. 1996)... 6 Gilmer v. Interstate/Johnson Controls, 500 U.S. 20 (1991)... 5 In re FirstMerit Bank, N.A., 52 S.W.3d 749 (Tex. 2001)... 8, 12 In re Golden Peanut Co., LLC, 269 S.W.3d 302 (Tex. App.- Eastland 2008, no pet.)... 8 In re Kellogg Brown & Root, Inc., 166 S.W.3d 732 (Tex. 2005)... 5, 7, 12, 13, 17, 22 In re Labatt Food Serv., L.P., 279 S.W.3d 640 (Tex. 2009)... 5 In re Merrill Lynch & Co., Inc., 315 S.W.3d 888 (Tex. 2010) In re Merrill Lynch Trust Co., FSB, 235 S.W.3d 185 (Tex. 2007)... 21, 23 In re Next Fin. Group, Inc., 271 S.W.3d 263 (Tex. 2008)... 7 In re Rangel, 45 S.W.3d 783 (Tex. App.-Waco, 2001, no pet.)... 8 In re U.S. Home Corp, 236 S.W.3d 761 (Tex. 2007)... 7 iv

5 In re Vesta Insurance Group, Inc., 192 S.W.3d 759 (Tex. 2006)... 13, 16 In re Weekley Homes, L.P., 180 S.W.3d 127 (Tex. 2005)... 13, 15, 16, 17, 18 In the Matter of VMS Ltd. Partnership Sec. Lit., 26 F.3d 50 (7 th Cir. 1994) J.M. Davidson, Inc. v. Webster, 128 S.W.3d 223 (Tex. 2003)... 5 Jack B. Anglin Co., v. Tipps, 842 S.W.2d 266 (Tex. 1992)... 6 Javitch v. First Union Sec., Inc., 315 F.3d 619 (6 th Cir. 2003) McMillan v. Computer Translation Systems & Support, Inc., 66 S.W.3d 477 (Tex. App.-Dallas 2001, no writ)... 15, 16, 19 Meyer v. WMCO-GP, LLC, 211 S.W.3d 302 (Tex. 2006)... 5, 7, 13, 16 Nationwide v. Dyer, 969 S.W.2d 518 (Tex. App.-Austin 1998, no writ)... 8 Nichols v. YJ USA Corp., 2009 U.S. Dist. LEXIS (N.D. Tex. 2009) (memo opin.) North River Ins. Co. v. Transamerica Occidental Life Ins. Co., 2002 U.S. Dist. LEXIS (N.D. Tex. 2002) (memo opin.) Porter & Clements, L.L.P. v. Stone, 935 S.W.2d 217 (Tex. App.-Houston [1st Dist.] 1996, no pet.)... 5 Prudential Sec. Inc. v. Marshall, 909 S.W.2d 896 (Tex. 1995)... 5, 6 Rauscher Pierce Refsnes, Inc. v. Great Southwest Savings., 923 S.W.2d 112 (Tex. App.-Houston [14 th Dist.] 1996, no writ) Shearson/Am. Express, Inc. v. McMahon, 482 U.S. 220 (1987)... 5 Southwestern Bell Tel Co. v. Deanney, 809 S.W.2d 493 (Tex. 1991) Stonewall Ins. Co. v. Modern Exploration, Inc., 757 S.W.2d 432 (Tex. App. Dallas 1988, no writ)... 8 v

6 Temple Eastex, Inc v. Old Orchard Creek Partners, Ltd., 848 S.W.2d 724 (Tex. App.- Dallas 1992, writ denied) Todd v. Steamship Mutual Underwriting Assn., 601 F.3d 329 (5 th Cir. 2010)... 7 Trefny v. Bear Stearns Sec. Corp., 243 B.R. 300 (S.D. Tex. 1999) Villanueva v. Gonzales, 123 S.W.3d 461 (Tex. App.-San Antonio 2003, no pet.) vi

7 STATEMENT OF THE CASE Plaintiff-Appellee Main Carr Development, LLC ( MCD ), filed this case in the 192 nd District Court of Dallas County, Texas against Defendant-Appellant Mark A. Carr ( Carr ), alleging that Carr breached his fiduciary duty as a director of MCD by usurping for himself certain business opportunities contracted for the benefit of MCD by MCD s affiliate, Main Christian Brothers Development, LLC ( Main Christian Brothers or MCBD ), pursuant to a certain Amended and Restated Development Agreement (the Development Agreement ) by and between Carr, Christian Brothers Automotive Corporation ( CBAC ) and Main Christian Brothers. Carr filed Motions to Compel Arbitration and to Abate based on the arbitration provision contained in the Development Agreement. After an evidentiary hearing, the trial court signed orders denying both Motions on October 12, Carr filed his notice of accelerated appeal to this Court on October 21, 2010, appealing the denial of both Motions. Carr also filed an Emergency Motion to Stay Proceedings Pending Interlocutory Appeal in this Court, which was granted by Order dated November 4, vii

8 ISSUES PRESENTED I. The Trial Court Erred In Denying Appellant s Motions To Compel Arbitration And To Abate Because Appellee Is A Third-Party Beneficiary Of The Contract Containing An Obligation To Arbitrate. II. The Trial Court Erred In Denying Appellant s Motions To Compel Arbitration And To Abate Because Appellee Is Estopped From Avoiding Arbitration. A. Appellee Is Suing Based On The Development Agreement B. Appellee Sought And Obtained Substantial Benefits From The Development Agreement III. The Trial Court Erred In Denying Appellant s Motions To Compel Arbitration And To Abate Because Appellee Is The Agent Of Main Christian Brothers Development, LLC, A Signatory To The Development Agreement. IV. The Trial Court Erred In Denying Appellant s Motion To Abate Because Issues In The Pending Arbitration Are Likely To Resolve Material Issues In This Lawsuit. viii

9 STATEMENT OF FACTS On or about December 17, 2008, Christian Brothers Automotive Corporation ( CBAC ), Main Christian Brothers Development, LLC ( Main Christian Brothers or MCBD ) and Mark Carr ( Carr ) entered into an Amended and Restated Development Agreement (the Development Agreement ), which provided for the identification, development, construction and leasing of motor vehicle repair facilities for CBAC and its franchisees. (CR at ). The Development Agreement provides for the arbitration of all disputes arising from or relating to this Agreement. (CR at 154). The Development Agreement amends an earlier Agreement dated as of August 31, (CR at 150). Main Carr Development, LLC ( MCD ) was formed in connection with the Development Agreement to perform certain portions thereof. The Development Agreement provides for joint development of certain projects between CBAC and Main Christian Brothers, and further provides in Section 3 that it is anticipated that all Joint Developments will be owned by a Delaware Series Limited Liability Company so as to create a 65.0% (Mark Carr or designees) and 35.0% (Main Christian Brothers) profit ownership split on a Project by Project basis. Section 3 continues that it is anticipated that a buy-sell or similar provision will exist in favor of Carr as more particularly described in the Operating Agreement of such Delaware Series Limited Liability Company. (CR at ). Section 4 of the Development Agreement provides that in connection with a given project, CBAC shall execute a lease in the form attached as Exhibit C (CR at 152), which in turn reflects that the Owner shall be Main Carr Development, LLC [Series ]. (CR at 159). 1

10 Section 7(c) of the Development Agreement 1 provides that there are no third-party beneficiaries [e]xcept with regards to the provisions of Section 3 above. (CR at 153). The Certificate of Formation for MCD, which is a Delaware series limited liability company, was filed with the Secretary of State of Delaware on or about September 30, (CR at 121). A version of the Operating Agreement for MCD dated effective September 30, 2008 is attached as Exhibit A to Plaintiff s First Amended Petition. 2 (CR at ). The Operating Agreement shows that it was clearly executed at or about the same time as the Development Agreement, but was backdated to an earlier effective date. For example, the definition of Development Agreement which is listed in the Operating Agreement specifically refers to the amended and restated agreement effective December 17, (CR at 123). Additionally, the Operating Agreement reflects that MCD and its operations are intimately founded upon, and intertwined with, the Development Agreement. Section 2.06 of the Operating Agreement (CR at ) provides that MCD shall not engage in any business without Board Approval and the consent of a Majority Interest, except the following: (a) The development, leasing and financing of Christian Brothers Automotive sites; (b) any business activities designated and adopted as the business activities of a Series [which are set forth in Exhibit C to the Operating Agreement and are all restricted to CBAC sites]; and (c) such other activities related to or expanding upon the foregoing The focus of MCD s business activities to CBAC sites is reinforced by Section of the Operating Agreement (CR at 144), which provides that prior to selling any Series Business 1 There is a typo in the Development Agreement resulting in two sections listed as 7(c). The reference in this Brief to Section 7(c) refers to the second section entitled No Third Party Beneficiaries. 2 Appellant Carr disagrees with parts of the Operating Agreement attached to Plaintiff s First Amended Petition, particularly the Exhibit A attached to Appellee s version of the Operating Agreement. Carr does not disagree with the portions of the Operating Agreement referred to in this Brief. 2

11 Assets (specifically, any developed Christian Brothers Automotive facilities), MCD shall offer to sell such Business Asserts to Carr. Further, Section 5.01(c) of the Operating Agreement (CR at 130) provides that: all Joint Developments [a term defined only in the Development Agreement] shall be developed as contemplated by Section 5 of the Development Agreement, and the Board of Directors and Manager [defined as including Main Christian Brothers] shall direct the Company in such a manner as to comply with Section 5 of the Development Agreement. This provision correlates with Section 2 of the Development Agreement (CR at 151), which provides that each Joint Development shall be owned in fee by an entity managed and designated by MCBD. Likewise, Section 7.03 of the Operating Agreement (CR at ) sets forth the buy-sell or similar provision contemplated in Section 3 of the Development Agreement. (CR at 152). In addition to the specific terms of the Development Agreement and the Operating Agreement, which are clearly integrated and interdependent, MCD s claims in this lawsuit are based on the Development Agreement. MCD attaches and incorporates the Development Agreement to its First Amended Petition. (CR at 112). MCD then asserts that certain projects under the Development Agreement were to be owned and leased for the benefit of MCD and/or its Series. (CR at 113). MCD further asserts that Carr breached his fiduciary duties as a director of MCD by scheming to purchase, develop, own and/or lease CBAC sites, thereby usurping contracted for business opportunities from MCD in violation of the terms and conditions of the Developer [Development] Agreement. (CR at 114). MCD finally alleges that it has been damaged by its inability, by and through its Series, to own, develop, lease and/or sell the various projects Carr has usurped or may in the future usurp. (CR at 116). 3

12 After the filing of this lawsuit, Carr and CBAC filed an arbitration with the American Arbitration Association against MCD and Main Christian Brothers raising issues identical and related to MCD s claims in this lawsuit. MCD is resisting the arbitration, but Main Christian Brothers is participating in the arbitration and it has even filed a counterclaim against Carr and CBAC. Interestingly, Main Christian Brothers counterclaim asserts virtually identical allegations to those made by MCD in this lawsuit, except that Main Christian Brothers allegations are being brought as a breach of contract rather than a breach of fiduciary duty. (CR ; 187, n.7). SUMMARY OF ARGUMENT MCD is required to arbitrate its claims against Carr pursuant to the arbitration agreement contained in the Development Agreement. Although MCD is not a signatory to the Development Agreement, MCD is compelled to arbitrate thereunder because the Development Agreement reflects that MCD is a third-party beneficiary thereunder. MCD also is estopped from avoiding arbitration because MCD s lawsuit claims are based on the Development Agreement and/or MCD sought and obtained substantial benefits from the Development Agreement. Furthermore, MCD is required to arbitrate because MCD is an agent of its affiliate, Main Christian Brothers, which is a signatory to the Development Agreement. Notwithstanding any decision to compel arbitration, this Court should stay the litigation pending completion of related arbitration involving MCD s affiliate, Main Christian Brothers, because the related arbitration involves identical material issues and/or issues likely to resolve issues material to this lawsuit, including whether Carr has been in violation of the Development Agreement. 4

13 ARGUMENT I. STANDARD OF REVIEW AND APPLICATION TO MCD S CLAIMS A. Texas And Federal Law Favor Arbitration. Arbitration is a contractual proceeding by which the parties, in order to obtain a speedy and inexpensive final disposition of disputed matters, consent to submit the controversy to arbitrators for determination. See Porter & Clements, L.L.P. v. Stone, 935 S.W.2d 217, 221 (Tex. App.-Houston [1st Dist.] 1996, no pet.). Whether an arbitration agreement is enforceable against a non-signatory is subject to de novo review. See In re Labatt Food Serv., L.P., 279 S.W.3d 640, 643 (Tex. 2009); Meyer v. WMCO-GP, LLC, 211 S.W.3d 302 (Tex. 2006). A party seeking to compel arbitration under the Federal Arbitration Act ( FAA ) must establish that there is a valid arbitration agreement and that the claims fall within that agreement s scope. See In re Kellogg Brown & Root, Inc., 166 S.W.3d 732, 737 (Tex. 2005); J.M. Davidson, Inc. v. Webster, 128 S.W.3d 223, 227 (Tex. 2003). Federal and Texas law strongly favors arbitration. See Cantella & Co. v. Goodwin, 924 S.W.2d 943, 944 (Tex. 1996). Under the FAA, any doubt as to whether a plaintiff s claims fall within the scope of the arbitration agreement must be resolved in favor of arbitration. See Id. Once an agreement is established, 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. Prudential Sec. Inc. v. Marshall, 909 S.W.2d 896, 899 (Tex. 1995). The FAA establishes a strong federal policy favoring arbitration and requires that courts vigorously enforce arbitration agreements. Shearson/Am. Express, Inc. v. McMahon, 482 U.S. 220, 226 (1987). The FAA manifests a liberal federal policy favoring arbitration agreements. Gilmer v. Interstate/Johnson Controls, 500 U.S. 20, 25 (1991). 5

14 Texas courts also recognize a strong presumption favoring arbitration. See EZ Pawn Corp. v. Mancias, 934 S.W.2d 87, (Tex. 1996). The presumption in favor of arbitration is so strong in Texas that courts are to resolve any doubts in favor of arbitration. See, e.g., Cantella, 924 S.W.2d at 944; Jack B. Anglin Co., v. Tipps, 842 S.W.2d 266, (Tex. 1992). The burden of overcoming the presumption in favor of arbitration is on the party that opposes arbitration. See Prudential, 909 S.W.2d at 900. B. The Arbitration Agreement Is Valid And MCD s Claims Fall Within Its Scope. The arbitration agreement in this case is set forth in Section 7(j) of the Development Agreement, which was signed by and between Main Christian Brothers (an affiliate of MCD), CBAC and Carr. (CR at 154). The Development Agreement provides for identification, development, construction, and leasing of CBAC sites in the continental United States. (CR at 150). Because of the development in multiple states, all parties agree that the arbitration agreement contained in the Development Agreement is governed by the FAA. Section 7(j) of the Development Agreement provides that if the parties are unable to resolve any dispute arising from or relating to this Agreement, then the parties shall submit such dispute to binding arbitration before the American Arbitration Association. (CR at 154). MCD is asserting in this lawsuit that Carr, as a director of MCD, breached his fiduciary duty by usurping CBAC projects in violation of the terms and conditions of the Developer [Development] Agreement. (CR at 114). There is no question that MCD s claims constitute a dispute arising from or relating to the Development Agreement. Although the arbitration agreement states that the parties hereto agree to arbitrate any dispute, such language does not exclude non-signatories who are compelled to arbitrate pursuant to estoppel or some other basis. 6

15 See, e.g, In re U.S. Home Corp, 236 S.W.3d 761, 765 (Tex. 2007); Meyer v. WMCO-GP, LLC, 211 S.W.3d 302, (Tex. 2006). Accordingly, while MCD is not a signatory to the Development Agreement, it is still required to arbitrate its claims against Carr pursuant to the terms thereof. The Texas Supreme Court has followed numerous federal courts by recognizing that non-signatories to an arbitration agreement may be compelled to arbitrate under six different theories: (1) incorporation by reference; (2) assumption; (3) agency; (4) alter ego; (5) equitable estoppel; and (6) third-party beneficiary. See, e.g., In re Kellogg Brown & Root, Inc., 166 S.W.3d 732, 739 (Tex. 2005); Bridas Sapic v. Government of Turkmenistan, 345 F.3d 347, 356 (5 th Cir. 2003). Specifically, the Court should compel MCD to arbitrate its dispute with Carr under the third party beneficiary theory, the equitable estoppel theory and/or the agency theory, each as set forth below. II. MCD IS A THIRD PARTY BENEFICIARY OF THE DEVELOPMENT AGREEMENT The United States Supreme Court has declared that the FAA provides for enforcement of arbitration agreements against non-signatories if state law allows a contract containing the arbitration agreement to be enforced by or against the non-signatory as a third party beneficiary. See Arthur Anderson LLP v. Carlisle, 556 U.S., 129 S. Ct (2009). See also, Todd v. Steamship Mutual Underwriting Assn., 601 F.3d 329, (5 th Cir. 2010), which held that prior Fifth Circuit cases to the contrary were no longer applicable because of the Supreme Court s decision in Carlisle. Texas case law makes it is clear that a third-party beneficiary to a contract can compel and/or be compelled to arbitrate under an arbitration provision in the contract. See, e.g., In re Next Fin. Group, Inc., 271 S.W.3d 263, 267 (Tex. 2008) (third-party beneficiary may compel arbitration); In re Golden Peanut Co., LLC, 269 S.W.3d 302,313 (Tex. App.- Eastland 2008, no 7

16 pet.) (court held that non-signatory plaintiff could be required to arbitrate as a third-party beneficiary); In re Rangel, 45 S.W.3d 783, 787 (Tex. App.-Waco, 2001, no pet.) (non-signatory plaintiff compelled to arbitrate as a third-party beneficiary); Nationwide v. Dyer, 969 S.W.2d 518,520 (Tex. App.-Austin 1998, no writ) (non-signatory plaintiff compelled to arbitrate as a third-party beneficiary). The Nationwide case was cited with approval by the Texas Supreme Court in the case of In re FirstMerit Bank, N.A., 52 S.W.3d 749, 755 (Tex. 2001). See also, Stonewall Ins. Co. v. Modern Exploration, Inc., 757 S.W.2d 432, (Tex. App. Dallas 1988, no writ), holding that a third-party beneficiary steps into the shoes of the contracting party and is thus bound by conditions set forth in the contract. Under Texas law, a third party beneficiary is created when the contracting parties explicitly intend to confer a direct benefit upon the third party. See, e.g, Energy Service Co. v. Superior Snubbing Services, Inc., 236 S.W.3d 190, 194 (Tex. 2007). However, it is not necessary to expressly name the third-party beneficiary in the contract. See Energy Service, 236 S.W.3d at 195. Once a non-signatory is determined to be a third-party beneficiary, the non-signatory is bound to arbitrate. See Golden Peanut, 269 S.W.3d at 313: [a non-signatory plaintiff] is, accordingly, a third-party beneficiary. As such, she is bound by the arbitration agreement. In this case, the Development Agreement shows that the parties explicitly intended to confer a direct benefit upon MCD. Section 3 of the Agreement (CR at ) provides that: [A]ll Joint Developments will be owned by a Delaware Series Limited Liability Company or such other structure and/or entity(ies) reasonably acceptable to Mark Carr (or persons or entities designated by Mark Carr) and MCBD so as to create a 65.0% (Mark Carr or designees) and 35.0% (MCBD) profit ownership split on a Project by Project basis. It is also anticipated that a buy-sell or similar provision will exist in favor of Mark Carr or his designees to compel MCBD or its affiliate, as the case may be, to purchase Mark Carr s profit interest in a given Joint Development based upon the net fair market value of each Joint Development (as more particularly described in the Operating Agreement of such Delaware Series 8

17 Limited Liability Company), to be elected no sooner than thirty (30) days prior to an actual sale of the Joint Development in question and to be paid within ten (10) days after the consumption of the sale of such Joint Development. The explicit intent to confer third-party beneficiary status is confirmed in Section 7(c) of the Development Agreement (CR at 153), which provides that [e]xcept with regards to provisions of Section 3 above, no claim as a third party beneficiary under this Agreement by any person shall be made, or be valid against CBAC or MCBD. (emphasis added). The express carve out for Section 3 demonstrates that the parties to the Development Agreement explicitly intended to make the Delaware Series Limited Liability Company a third party beneficiary. Although MCD is not expressly identified as the Delaware Series Limited Liability Company in Section 3 of the Development Agreement, there is no doubt that MCD is the thirdparty beneficiary. This conclusion is consistently demonstrated by the interrelationship between the Development Agreement and the Operating Agreement of MCD. The Development Agreement refers to a Delaware Series Limited Liability Company (CR at 151) and MCD s Operating Agreement (as well as Plaintiff s Second Amended Petition) confirms that MCD was formed as a Delaware Series Limited Liability Company. (CR at 111,119). Additionally, the Operating Agreement of MCD demonstrates that the business and operation of MCD are integrated with, and dependent upon, the Development Agreement. For example, Section 2.06 of the Operating Agreement (CR at ) states that the business of MCD is limited to (1) the development, leasing and financing of CBAC sites, (2) the business activities of a Series, (which are shown in Exhibit C to the Operating Agreement and which all relate to development of 9

18 CBAC sites); and (3) other activities related to or expanding upon the foregoing. 3 Further, Section 5.01(c) of the Operating Agreement (CR at 130) provides as follows: Development Agreement. Notwithstanding anything contained herein to the contrary, all Joint Developments shall be developed as contemplated by Section 5 of the Development Agreement, and the Board of Directors and Manager shall direct the Company in such a manner as to comply with such Section 5 of the Development Agreement. 4 This Section 5.01(c) correlates with Section 2 of the Development Agreement (CR at 151), which provides that [e]ach Joint Development shall be owned in fee by an entity managed and designated by MCBD. (emphasis added). Additionally, Section 9.02 of the Operating Agreement (CR at 139) provides that [e]xcept as described in the Development Agreement, Members may engage in whatever activities they choose, without having or incurring any obligation to offer any interest in such activities to the Company and without incurring any liability to any other Member or the Company for any lost opportunity. (emphasis added). Perhaps the most significant confirmation of MCD s third party beneficiary status is in Section 3 of the Development Agreement which provides that a buy-sell or similar provision exist in favor of Carr as more particularly described in the Operating Agreement of such Delaware Series Limited Liability Company. (emphasis added) (CR at 152). As required by the Development Agreement, this buy-sell or similar provision is described in detail in Section 7.03 of MCD s Operating Agreement. (CR at ). This correlation between the 3 MCD argued in the trial court that its activities extend beyond the ownership, development and leasing of CBAC sites. However, Section 2.06 and Exhibit C to the Operating Agreement (CR at , ) show that all activities of MCD, including its series, relate solely to ownership, development and leasing of CBAC sites. MCD submitted no evidence to the contrary in the trial court. 4 The term Joint Development is never defined in the Operating Agreement, but is defined only in the Development Agreement (CR at 150). In the Development Agreement, Joint Development refers to CBAC locations developed jointly by Main Christian Brothers and CBAC. Significantly, the term Company is defined in the Operating Agreement as meaning only MCD, and the Manager is Main Christian Brothers. 10

19 Development Agreement and Operating Agreement leaves no doubt that such Delaware Series Limited Liability Company refers only to MCD. While the provisions of the Development Agreement and MCD s Operating Agreement demonstrate MCD s third-party beneficiary status, MCD also admits that it is a third-party beneficiary of the Development Agreement. In paragraph 9 of Plaintiff s First Amended Petition (CR at 114), MCD asserts that certain projects developed under the terms of the Development Agreement (referred to therein as Developer Agreement ) were to be owned and leased for the benefit of MCD and its Series. (emphasis added). In paragraph 10 of Plaintiff s First Amended Petition, (CR at 114), MCD further claims that Mark Carr embarked on a scheme to divert CBAC projects to his own benefit, thereby usurping contracted-for business opportunities from MCD in violation of the terms and conditions of the Developer [Development] Agreement. (emphasis added). MCD attempts to confuse the issue by admitting that the MCD Series are third party beneficiaries of the Development Agreement (RR at 23, l. 3-6), but then asserting that each of its Series is a separate entity, which is at best arguable since many parts of the Operating Agreement are contrary to each series being a separate entity and the Delaware statute does not purport to make each series a separate entity. Regardless, MCD has rendered this issue irrelevant for purposes of this lawsuit since MCD s First Amended Petition provides that MCD is filing suit for itself and each Series (as hereinafter defined) contemplated to be established under its Operating Agreement. (CR at 111). Obviously, a series contemplated to be established cannot be a separate entity. MCD is clearly a third-party beneficiary of the Development Agreement and also is seeking in this lawsuit to obtain substantial benefits under the Development Agreement as a 11

20 third-party beneficiary thereof. MCD, whether acting on behalf of itself and/or for its series, cannot seek to derive benefits from the Development Agreement without also accepting the arbitration provision therein. As such, the Court should compel MCD to arbitrate its dispute with Carr based on the fact that MCD is a third party beneficiary of the Development Agreement. III. MCD IS EQUITABLY ESTOPPED FROM AVOIDING ARBITRATION In addition to MCB being compelled to arbitrate as a third party beneficiary, this Court should also compel MCD to arbitrate based on equitable estoppel principles. The Texas Supreme Court has created two separate categories upon which a non-signatory plaintiff may be equitably estopped from avoiding arbitration. A. MCD Is Suing Based On The Development Agreement. The Texas Supreme Court has held that a non-signatory plaintiff who sues based on a contract is estopped from avoiding an arbitration provision in the contract. See In re FirstMerit Bank, 52 S.W.3d 749 (Tex. 2001). In FirstMerit, the Supreme Court was not required to explain the term based on a contract since the non-signatory in that case was suing specifically on a breach of contract claim. The Court compelled the non-signatory to arbitrate the dispute. In 2005, the Texas Supreme Court broadened this basis to equitably estop a non-signatory from avoiding arbitration in a pair of cases, the first being In re Kellogg Brown & Root, Inc., 166 S.W.3d 732, 741 (Tex. 2005). In Kellogg, the Supreme Court explained (and perhaps expanded) the term based on a contract by stating that a non-signatory plaintiff is estopped when it seeks, through the claim, to derive a direct benefit from the contract containing the arbitration provision. The Court refused to compel arbitration only because the non-signatory plaintiff was bringing a quantum meruit claim, which by its very nature does not depend on a contract. As 12

21 noted by the Court, a party generally cannot recover in quantum meruit when there is a valid contract covering the services or materials furnished. See Kellogg, 166 S.W.3d at 740. A few months later, the Supreme Court decided the case of In re Weekley Homes, L.P., 180 S.W.3d 127 (Tex. 2005), whereby the Court provided a further explanation of when nonsignatories will be compelled to arbitrate: Under both Texas and Federal law, whether a claim seeks a direct benefit from a contract containing an arbitration clause turns on the substance of the claim, not artful pleading. Claims must be brought on the contract (and arbitrated) if liability arises solely from the contract or must be determined by reference to it. 180 S.W.3d at (emphasis added). The Court held that the plaintiff s negligence claims were not based on the contract or determined by reference to it. Nevertheless, the Court did require arbitration based on the plaintiff having sought and obtained benefits from the contract, apart from the lawsuit. This alternative basis, as applied to MCD, is discussed below. The next year, the Texas Supreme Court decided In re Vesta Insurance Group, Inc., 192 S.W.3d 759 (Tex. 2006), which dealt with tortious interference claims. The Court held that such claims must be arbitrated, stating that while liability for tortious interference arises from the general law, nonliability arises from connections with the contract. 192 S.W.3d at Finally, in Meyer v. WMCO-GP, LLC, 211 S.W.3d 302 (Tex. 2006), the Supreme Court provided a further explanation for when a lawsuit claim is based on a contract. The Court stated: WMCO further concedes that its damages cannot be calculated without reference to the [contract]. When a party s right to recover and its damages depend on the agreement containing the arbitration provision, the party is relying on the agreement for its claims. 211 S.W.3d at 307. The Court compelled arbitration of tortious interference and statutory violation claims. 13

22 This line of Texas Supreme Court cases demonstrates that a non-signatory plaintiff is required to arbitrate claims under any of the following circumstances: 1) plaintiff s claims seek to derive a direct benefit from the contract containing the arbitration provision, 2) the resolution of plaintiff s claims must be determined by reference to the contract containing the arbitration provision; 3) defendant s nonliability is based on the terms of the contract containing the arbitration provision; or 4) plaintiff s damages depend on the contract containing the arbitration provision. Each of these circumstances applies to MCD s claims in this lawsuit. Plaintiff s First Amended Petition asserts that Carr, CBAC and Main Christian Brothers entered into the Development Agreement (attached thereto as Exhibit B), and that pursuant to the terms thereof, certain projects thereunder were (or were to be) developed for the benefit of MCD and its Series, as owner(s) and lessor(s). (emphasis added) (CR at ). This provision admits that both MCD and its Series received and were to receive direct benefits from the Development Agreement. The Petition further asserts that Carr, in breach of his fiduciary duties as a director of MCD, embarked on a scheme to purchase, develop, own and/or lease, for his pecuniary benefit, and thereby usurping contracted-for business opportunities from MCD, Christian Brothers Automotive sites in violation of the terms and conditions of the Developer [Development] Agreement. (emphasis added) (CR at 114). This provision admits that MCD, apart from its Series, is basing its claims directly on the Development Agreement. Finally, the Petition alleges that MCD has been damaged by its inability, by and through its series, to own, develop, lease and/or sell specified Usurped Projects and additional projects that Carr, by and through his controlled entities, will own, develop, lease and/or sell through the term of the Operating Agreement. (CR at 116). These allegations show that MCD is seeking to 14

23 derive a direct benefit from the Development Agreement and, as such, MCD s claims against Carr must be arbitrated. While MCD s claims against Carr are for alleged breaches of fiduciary duties, in actuality, MCD s claims sound in contract, not tort. As explained by the Texas Supreme Court in Southwestern Bell Tel Co. v. Deanney, 809 S.W.2d 493, 495 (Tex. 1991), [w]hen the injury is only the economic loss to the subject of the contract itself the action sounds in contract alone. In this case, MCD s pleading shows that it is seeking only a benefit of the bargain measure of damages, based upon Carr s alleged breach of the Development Agreement. (CR at 116). See also, Esty v. Beal, 298 S.W.3d 280, (Tex. App.-Dallas 2009, no pet.) (fraud and negligent misrepresentation claims sound in contract, not tort); Villanueva v. Gonzales, 123 S.W.3d 461,467 (Tex. App.-San Antonio 2003, no pet.) (breach of fiduciary duty claim barred as not being independent of contract); Nichols v. YJ USA Corp., 2009 U.S. Dist. LEXIS at 15 (N.D. Tex. 2009) (memo opin.) (breach of fiduciary duty claim sounds in contract). MCD is seeking to recast a breach of contract claim into a breach of fiduciary duty, which is precisely the artful pleading condemned by the Supreme Court. See Weekley, 180 S.W.3d at The case of McMillan v. Computer Translation Systems & Support, Inc., 66 S.W.3d 477, 483 (Tex. App.-Dallas 2001, no writ), is also significant since the plaintiff in that case, like MCD, was asserting only breach of fiduciary duty claims against directors of a corporation. This Court compelled arbitration since the plaintiff relied on the settlement agreement [which contained an arbitration provision] to assert its claims. Even though MCD is not directly asserting a breach of contract claim, Carr s violation of the Development Agreement is essential to MCD s recovery. There can be no breach of the 5 As a third party beneficiary of the Development Agreement, MCD could have brought a breach of contract claim. See, e.g., Temple Eastex, Inc v. Old Orchard Creek Partners, Ltd., 848 S.W.2d 724,730 (Tex. App.- Dallas 1992, writ denied). 15

24 Development Agreement, and no breach of fiduciary duty, concerning the alleged Usurped Projects if Carr s activities comply with the Development Agreement. MCD s recovery must be determined by reference to [the Development Agreement]. Weekley, 180 S.W.3d at 132. As such, MCD should be equitably estopped from avoiding arbitration since MCD s claims must be determined by reference to the Development Agreement. Alternatively, even if MCD s claims can somehow avoid being based on the Development Agreement, MCD still must be compelled to arbitrate because Carr s nonliability arises from the Development Agreement. See Vesta, 192 S.W.3d at If Carr can show that he was not violating the Development Agreement concerning the alleged Usurped Projects, there can be no breach of fiduciary duty. 6 Finally, MCD s alleged right to recover and damages for loss of projects supposedly usurped and/or to be usurped by Carr can only be determined by reference to the Development Agreement. See Meyer, 211 S.W.3d at 307. The Development Agreement sets forth fees and other costs to be included in the Cost of Development for a project, which in turn is used to calculate rent under leases (CR at , 157, 162). Without such information, the actual damages allegedly sustained by MCD for each project cannot be computed. Furthermore, the Development Agreement divides projects among Carr, Main Christian Brothers and MCD. (CR at ). MCD cannot determine which projects were allegedly usurped, and any damages related thereto, without a detailed reference to, and reliance on, the Development Agreement. Since the Development Agreement is so essential to determining MCD s alleged Usurped 6 Plaintiff s Original Petition based its claim solely on the alleged Usurped Projects and any other projects that may be developed by Carr in the future (CR at 10). Apparently fearing that such claims too closely relied on the Development Agreement, MCD filed its First Amended Petition shortly before the hearing in the trial court, which alleges other nebulous conduct of Carr as constituting a breach of fiduciary duty. (CR at 115). However, this alleged other conduct also relates to performance of the Development Agreement. This Court has previously required arbitration of such related claims. See McMillan, 66 S.W.3d at

25 Projects and related damages, MCD is necessarily relying on the Development Agreement and must arbitrate its claims pursuant to the terms thereof. B. MCD Sought And Obtained Benefits From The Development Agreement. The Texas Supreme Court has required non-signatories to arbitrate not only when they file a lawsuit which seeks a benefit from a contract containing an arbitration clause, but also when the non-signatory deliberately seeks and obtains substantial benefits from the contract itself. Weekley, 180 S.W.3d at 132. Arbitration is required in this instance even though the nonsignatory never directly bases its lawsuit claims on the contract. See Weekley, 180 S. W. 3d at 135. As explained by the Supreme Court, the analysis here focuses on the non-party s conduct during the performance of the contract. See Weekley, 180 S.W.3d at See also, In re Kellogg Brown & Root, Inc., 166 S.W.3d 732,741 at fn. 9 (Tex. 2005). The Supreme Court then cited and discussed several federal court cases which illustrate the application of the analysis. In American Bureau of Shipping v. Tencare Shipyard S.P.A, 170 F.3d 349, 353 (2 nd Cir. 1999), the court reversed the trial court and ordered non-signatories to arbitration because they received lower insurance rates and the ability to sail under the French flag as a direct benefit from a contract containing the arbitration provision. In In the Matter of VMS Ltd. Partnership Sec. Lit., 26 F.3d 50, 52 (7 th Cir. 1994), the court held that a non-signatory wife was required to arbitrate because she had accepted services under a financial planning agreement which required arbitration. In Astra Oil Co., Inc. v. Rover Navigation, Ltd., 344 F.3d 276, 281 (2 nd Cir. 2003), the court required a non-signatory to arbitrate when it had taken actions under the contract containing the arbitration provision. The Supreme Court in Weekley then summarized its analysis and held that once [the non-signatory plaintiff] deliberately sought substantial and direct benefits from the contract, and 17

26 [defendant] agreed to comply, equity prevents [the non-signatory plaintiff] from avoiding the arbitration clause that was part of that agreement. Weekley, 180 S.W.3d at 134. Again, this conclusion was reached irrespective of the actual claims brought by the non-signatory plaintiff. In this case there is no question that MCD sought and obtained substantial benefits from the Development Agreement. The Operating Agreement of MCD, a version of which is attached to Plaintiff s First Amended Petition, sets forth the primary business activity of MCD at Section 2.06(a) thereof (CR at ) as the development, leasing and financing of Christian Brothers Automotive sites. The Operating Agreement further specifies in Section 5.01(c) (CR at 130) as follows: Development Agreement. Notwithstanding anything contained herein to the contrary, all Joint Developments shall be developed as contemplated by Section 5 of the Development Agreement, and the Board of Directors and Manager shall direct the Company in such a manner as to comply with such Section 5 of the Development Agreement. This provision alone shows that MCD, from the very beginning, considered that it was an integral part of the performance of the Development Agreement and was required to take actions thereunder. Furthermore, MCD was to take directions concerning performance from its Manager, which is defined in the definitions under Article I of the Operating Agreement (CR at 123) as including Main Christian Brothers, which is not only an affiliate of MCD, but is a signatory of the Development Agreement. Finally, the uncontradicted testimony in the trial court shows that MCD received direct substantial benefits from the Development Agreement by participating in the acquisition, development, leasing and financing of nine Christian Brother Automotive sites, and in receiving lease payments exceeding $50,000 a month. (CR at 6-7). Accordingly, this 18

27 Court should compel MCD to arbitrate its claims against Carr based on the fact that MCD sought and received substantial benefits from the Development Agreement. IV. MCD IS REQUIRED TO ARBITRATE AS AN AGENT OF MAIN CHRISTIAN BROTHERS Finally, this Court should compel MCD to arbitrate its claims against Carr based upon MCD being an agent of Main Christian Brothers. As an agent, MCD is subject to the arbitration provision contained in the Development Agreement of which Main Christian Brothers (the principal) is a party. See, e.g., McMillian, 66 S.W.3d at 481 ( When the principal is bound under the terms of a valid arbitration clause, its agents, employees, and representatives are covered by that agreement. ); North River Ins. Co. v. Transamerica Occidental Life Ins. Co., 2002 U.S. Dist. LEXIS 10637, (N.D. Tex. 2002) (memo opin.), aff d, North River Ins. Co. v. Transamerica, 71 Fed. Appx. 441 (5 th Cir. 2003) ( Using traditional principles of agency law, if a principal is bound under the terms of a valid arbitration clause, its agents, employees, and representatives are also covered by that agreement. ); Javitch v. First Union Sec., Inc., 315 F.3d 619, 629 (6 th Cir. 2003) ( nonsignatories may be bound to an arbitration agreement under ordinary contract and agency principles ); Arnold v. Arnold Corp., 920 F.2d 1269, (6 th Cir. 1990) (claims against nonsignatories must be arbitrated when the claims were based on the nonsignatories actions as agents of a signatory). Stated another way, the law is clear that a nonsignatory to an agreement containing an arbitration clause may be treated as bound by the arbitration agreement under ordinary contract or agency principles. Trefny v. Bear Stearns Sec. Corp., 243 B.R. 300, 316 (S.D. Tex. 1999). Texas courts acknowledge that companies must act through agents. Vesta, 192 S.W.3d at 762. An agent under Texas law is defined as the one who consents to act on behalf of, and subject to control of another, the principal, who has manifested its consent that the agent shall so act. See, 19

28 e.g., Rauscher Pierce Refsnes, Inc. v. Great Southwest Savings., 923 S.W.2d 112, 115 (Tex. App.-Houston [14 th Dist.] 1996, no writ). In this case, the consent of the agent (MCD) to act on behalf of the principal (Main Christian Brothers) in matters related to the Development Agreement is evidenced by the language set forth in MCD s Operating Agreement. Section 2.06(a) states that the Business of the Company is [t]he development, leasing and financing of Christian Brothers Automotive sites and Section 5.01(c) states that all Joint Developments shall be developed as contemplated by Section 5 of the Development Agreement. (CR at 123,130). Notably, MCD s Operating Agreement requires that MCD comply with the terms of the Development Agreement and MCD was created for the same purpose for which the parties, including the principal, Main Christian Brothers, entered into the Development Agreement. (CR at 123,130). Evidence that MCD is acting as an agent of and subject to the control of Main Christian Brothers is also found in the language of MCD s Operating Agreement, which specifically defines Main Christian Brothers as a Manager, and then specifies that the Manager [Main Christian Brothers] shall direct the Company in such a manner as to comply with such Section 5 of the Development Agreement. (CR at 123,130). As such, MCD is clearly subject to the control of Main Christian Brothers. The consent of the principal (Main Christian Brothers) is evidenced in Section 2 of the Development Agreement (CR at 151) which provides that [e]ach Joint Development shall be owned in fee by an entity managed and designated by [Main Christian Brothers] (emphasis added). Although MCD is not specifically identified in this provision, it is clear that this provision refers to MCD. See this Brief at Section II, supra. Accordingly, it is clear that Main 20

29 Christian Brothers consented to MCD acting as its agent for matters relating to the Development Agreement. These provisions in both the Development Agreement and MCD s Operating Agreement are sufficient to establish that MCD is acting as an agent of Main Christian Brothers in connection with the execution and performance of the Development Agreement. As an agent of Main Christian Brothers, MCD is required to arbitrate its claims against Carr, which, as described in the arbitration agreement, is a dispute arising from or relating to this [Development] Agreement. V. COURT CLAIMS SHOULD BE STAYED PENDING ARBITRATION In the unlikely event that this Court decides that fewer than all of MCD s clams are subject to arbitration, this Court must still stay the trial court proceedings until arbitration is completed. In the case of In re Merrill Lynch Trust Co., FSB, 235 S.W.3d 185, 195 (Tex. 2007), the Texas Supreme Court held that plaintiffs had to arbitrate their claims against only one of three defendants, but that court proceedings against all of the defendants should be stayed pending completion of the arbitration. The Supreme Court stated: Thus, when an issue is pending in both arbitration and litigation, the Federal Arbitration Act generally requires the arbitration to go forward first; arbitration should be given priority to the extent it is likely to resolve issues material to this lawsuit. This has been the practice in all the federal courts. The Texas Supreme Court then revisited this issue in the recent case of In re Merrill Lynch & Co., Inc., 315 S.W.3d 888 (Tex. 2010). In this case, the Supreme Court was dealing with two affiliate corporations, only one of which had signed an arbitration agreement with the defendant. Even though the non-signatory did not have to arbitrate its claims against the defendant, the Supreme Court stayed all court proceedings pending the outcome of a potential 21

30 arbitration involving the affiliate corporation which had signed an arbitration agreement with the defendant. The 2010 Merrill Lynch case is similar to the situation in this case since MCD is a nonsignatory to the Development Agreement while its affiliate, Main Christian Brothers, is a signatory to the Development Agreement and is involved in pending arbitration concerning the Development Agreement. (CR at ). MCD argued in the trial court that the Merrill Lynch cases are inapplicable since the issues in the litigation and arbitration are not identical. However, the Supreme Court did not require that the issues be identical. Instead, the Supreme Court quoted from the federal court case of AgGrow Oils, LLC v. Nat l Union Fire Ins. Co., 242 F.3d 777, 783 (8 th Cir. 2001), that arbitration should be given priority to the extent it is likely to resolve issues material to this lawsuit. 315 S.W.3d at 891. The Supreme Court in its 2007 Merrill Lynch case also cited with approval its earlier decision of In re Kellogg Brown & Root, Inc., 166 S.W.3d 732 (Tex. 2005), in which a non-signatory s litigation of a lien claim was abated while arbitrators decided who owned the equipment. Obviously, the issues in the arbitration and the litigation were related, but not identical. In this case, MCD is alleging in its Plaintiff s First Amended Petition (CR at 114) that Carr embarked on a scheme to pursue, develop, own and/or lease, for his pecuniary benefit, and thereby usurping contracted-for business opportunities from MCD, Christian Brothers Automotive sites in violation of the terms and conditions of the Developer [Development] Agreement. (emphasis added). In the pending arbitration (CR at 108), Main Christian Brothers (which is MCD s affiliate) is alleging that Carr materially breached the terms of the Development Agreement by, among other means, purchasing, developing, owning and/or leasing projects in violation of the terms and conditions of the Developer [Development] 22