Opinion
NO. 09-16-00033-CV
07-28-2016
WATTS REGULATOR CO., Appellant v. FOREMOST COUNTY MUTUAL INSURANCE COMPANY, Appellee
On Appeal from the County Court at Law No. 2 Montgomery County, Texas
Trial Cause No. 15-08-08753-CV
MEMORANDUM OPINION
Appellant Watts Regulator Company (Watts) appeals from the trial court's order denying its motion to compel arbitration in a suit brought against it by Foremost County Mutual Insurance Company (Foremost), as subrogee of Kevin McCann. Watts argues that the McCann subrogation claim is subject to binding arbitration because Watts and Foremost were members of Arbitration Forums, Inc. (AF) and signatories to a valid property subrogation arbitration agreement when the McCann claim arose. In its sole issue, Watts contends that because the McCann claim arose before the effective date of Foremost's withdrawal, the claim falls within the scope of the arbitration agreement, and Foremost's subsequent withdrawal from the arbitration agreement in no way impairs Watts's right to compel binding arbitration. We conclude that Watts does not have the contractual right under the agreement to compel arbitration, because the McCann claim does not fall within the scope of the arbitration agreement. Accordingly, we affirm the trial court's order denying arbitration.
Background
Watts and Foremost were signatories to AF's Property Subrogation Arbitration Agreement when the McCann subrogation claim arose. According to Article First of the arbitration agreement, by signing the agreement, signatory companies agreed to "for[]go litigation and submit any personal, commercial, or self-insured property subrogation claims to [AF]." The agreement provided some exclusions to a signatory company's agreement to arbitrate, the first of which states that no company shall be required to arbitrate any claim or suit if it is either not a signatory company or has not given written consent. Article Sixth of the arbitration agreement allowed any signatory company to withdraw from the agreement by giving written notice to AF. According to the language of Article Sixth, "[s]uch withdrawal will become effective sixty (60) days after receipt of such notice except as to cases then pending before arbitration panels."
The agreement also authorized AF to make appropriate rules for the presentation and determination of controversies under the agreement. According to AF's Rules and Regulations that were in effect when the McCann claim arose, compulsory arbitration was applied to a claim up to a maximum of $100,000. AF's rules provide that as a condition precedent to using the rules, the parties should attempt to settle the subject dispute prior to filing arbitration. The filing company initiates arbitration by filing an application via AF's website. When a matter that should have been filed in arbitration under one of AF's agreements is placed in litigation, the party filing in litigation must dismiss the suit within sixty days of being notified of the adverse party's signatory status with AF.
According to the record, Foremost did not initiate arbitration of the McCann claim when it was a signatory to the arbitration agreement. Rather, the record shows that on July 29, 2014, Foremost provided notice to AF of its intent to withdraw as a signatory, and based on the plain language of Article Sixth in the arbitration agreement, Foremost's withdrawal became effective sixty days later on September 29, 2014. According to an affidavit executed by an employee of AF, Foremost did not subsequently become a signatory of the arbitration agreement following its withdrawal, nor did Foremost provide written consent to arbitrate any claim or lawsuit.
In August 2015, almost eleven months after the effective date of Foremost's withdrawal from AF, Foremost filed a subrogation claim against Watts alleging that Watts had manufactured a defective water heater connector that damaged property belonging to McCann, one of Foremost's insured customers. Specifically, Foremost alleged that on or about May 7, 2014, Watts's defective water heater connector leaked, causing $9,409.55 in damages to McCann's real and personal property. In response to Foremost's lawsuit, Watts filed a motion to compel arbitration. Watts argued that the McCann claim was subject to binding arbitration because the claim accrued when Foremost was a signatory to the arbitration agreement.
The trial court conducted a hearing on Watts's motion to compel arbitration. During the hearing, Watts argued that a valid arbitration agreement existed, the McCann claim fell within the scope of the agreement, and it had an accrued right to demand that Foremost submit the McCann claim to binding arbitration. According to Watts, claims that accrue when parties are signatories to the arbitration agreement are subject to mandatory arbitration. In support of its argument, Watts relied on the language in the arbitration agreement's compulsory provisions requiring signatory companies to forego litigation and submit any personal, commercial, or self-insured property subrogation claims to AF, in which the company seeks recovery of less than $100,000 in damages. Watts complained that Foremost's interpretation of the agreement allowed Foremost's withdrawal to apply retroactively to the McCann claim, despite the claim having accrued before the effective date of Foremost's withdrawal. Watts argued that had Foremost honored its contractual obligation under the arbitration agreement by submitting the McCann claim to arbitration when it accrued, the claim would have been a case then pending before an arbitration panel and not subject to Foremost's withdrawal.
Foremost did not dispute that the arbitration agreement was in effect when the McCann claim arose. Rather, Foremost argued that the arbitration agreement's withdrawal provision plainly states that its withdrawal was effective for any cases that were not then pending before arbitration panels as of the effective date of its withdrawal. According to Foremost, the agreement does not support Watts's position that the McCann claim's accrual date controls whether the claim falls within the scope of the arbitration agreement. Foremost pointed out that the agreement does not define "accrual" or "claim," discuss when a loss becomes a claim or case, or instruct that a claim is based on the date of loss. Foremost further argued that the agreement's withdrawal provision is not retroactive, nor does it make the parties' agreement to submit claims to binding arbitration illusory.
The trial court denied Watts's motion to compel arbitration. The trial court's order did not specify its reasoning for denying Watts's motion, nor does the record contain any findings of fact or conclusions of law. Watts timely filed this interlocutory appeal.
Standard of Review and Applicable Law
This is an appeal pursuant to section 51.016 of the Texas Civil Practice and Remedies Code, which authorizes interlocutory appeals of matters subject to the Federal Arbitration Act. See Tex. Civ. Prac. & Rem. Code Ann. § 51.016 (West 2015); see also 9 U.S.C.A § 16. Both parties appear to agree that the FAA governs the arbitration agreement in this case. A party attempting to compel arbitration under the FAA must establish that there is a valid arbitration agreement and show that the claims raised fall within the scope of that agreement. In re Rubiola, 334 S.W.3d 220, 223 (Tex. 2011) (orig. proceeding). There is a presumption favoring agreements to arbitrate under the FAA, but the presumption only arises after the party seeking to compel arbitration proves that a valid arbitration agreement exists. In re Kellogg Brown & Root, Inc., 166 S.W.3d 732, 737-38 (Tex. 2005) (orig. proceeding). If the party seeking to compel arbitration proves that a valid arbitration agreement exists, the burden shifts to the party opposing arbitration to raise an affirmative defense to enforcement of the agreement. J.M. Davidson, Inc. v. Webster, 128 S.W.3d 223, 227 (Tex. 2003). One such generally applicable contract defense includes that the arbitration agreement is illusory. Royston, Rayzor, Vickery, & Williams, LLP v. Lopez, 467 S.W.3d 494, 505 (Tex. 2015) (concluding that illusory defense fails because party cannot avoid its promise to arbitrate all claims within the scope of the arbitration provision).
We review a trial court's denial of a motion to compel arbitration for an abuse of discretion. In re Labatt Food Serv., L.P., 279 S.W.3d 640, 643 (Tex. 2009) (orig. proceeding). The trial court's determination of the arbitration agreement's validity is a question of law which we review de novo. In re D. Wilson Constr. Co., 196 S.W.3d 774, 781 (Tex. 2006) (orig. proceeding); J.M. Davidson, Inc., 128 S.W.3d at 227. In determining the validity of the arbitration agreement under the FAA, we generally apply state-law principles governing the formation of contracts. In re Palm Harbor Homes, Inc., 195 S.W.3d 672, 676 (Tex. 2006) (orig. proceeding). We may not expand upon the terms of the contract or tolerate a liberal interpretation of the contract by reading into it a voluntary agreement to arbitrate when one does not exist. Aldridge v. Thrift Fin. Mktg., LLC, 376 S.W.3d 877, 883 (Tex. App.—Fort Worth 2012, not pet.). We look to the plain meaning of the contractual language to ascertain the parties' intent. Id.
Once the party seeking to compel arbitration establishes that a valid agreement exists, the trial court must then determine whether the arbitration agreement covers the claim at issue. In re FirstMerit Bank, N.A., 52 S.W.3d 749, 753 (Tex. 2001) (orig. proceeding). The determination of whether the arbitration agreement imposes a duty to arbitrate the claims in a particular dispute is a matter of contract interpretation. Jabri v. Qaddura, 108 S.W.3d 404, 410 (Tex. App.—Fort Worth 2003, no pet.). "If a written contract is so worded that it can be given a certain or definite legal meaning or interpretation, then it is not ambiguous and the court will construe the contract as a matter of law." Id. at 411. The court's primary concern in construing the contract is to ascertain the true intention of the parties as expressed in the contract. J.M. Davidson, Inc., 128 S.W.3d at 229. To determine the intent of the parties, we must 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.
In the context of a stand-alone arbitration agreement, such as the one in this case, binding promises are required on both sides as they are the only consideration rendered to create a contract. In re 24R, Inc., 324 S.W.3d 564, 567 (Tex. 2010) (orig. proceeding); In re AdvancePCS Health L.P., 172 S.W.3d 603, 607 (Tex. 2005) (orig. proceeding.). An agreement to arbitrate is illusory if a promisor retains the right to unilaterally alter or terminate the arbitration agreement. In re 24R, Inc., 324 S.W.3d at 567; In re Halliburton Co., 80 S.W.3d 566, 569-70 (Tex. 2002) (orig. proceeding) (holding arbitration agreement non-illusory when language provided a ten day advance notice provision before unilateral termination became effective and prevented employer from retroactively applying arbitration agreement changes to claims of which it had actual knowledge). The promise to arbitrate has been found to be non-illusory when the termination of the agreement is subject to ten days' notice and is inapplicable to arbitration proceedings that have been previously initiated. See Nabors Drilling USA, LP v. Pena, 385 S.W.3d 103, 107-08 (Tex. App.—San Antonio 2012, pet. denied); see also In re Champion Tech., Inc., 222 S.W.3d 127, 131-32 (Tex. App.—Eastland 2006, orig. proceeding) (concluding agreement to arbitrate is not illusory when termination provision required thirty days' notice and provided that no termination would be effective as to disputes for which an arbitration proceeding had been previously initiated).
Analysis
To compel arbitration of the McCann claim, Watts must show that a valid arbitration agreement exists and that the McCann claim falls within the scope of that agreement. See In re Rubiola, 334 S.W.3d at 223. Watts and Foremost do not dispute that they were signatories to AF's arbitration agreement when the McCann subrogation claim arose, and they do not argue that the stand-alone arbitration agreement is invalid. The parties' dispute concerns whether the arbitration agreement imposes a duty to arbitrate the McCann claim. In other words, the dispute concerns whether the McCann claim falls within the scope of the arbitration agreement.
In determining whether the trial court abused its discretion by denying Watts's motion to compel arbitration, we must interpret the plain language of the agreement to ascertain whether the parties intended for the agreement to cover the McCann claim. See Aldridge, 376 S.W.3d at 883; Jabri, 108 S.W.3d at 410-11. According to the plain language of the agreement, Foremost was bound to submit to AF any personal, commercial, or self-insured property subrogation claims in which it sought recovery of less than $100,000. The agreement also clearly provided Foremost with the option to withdraw from its agreement with AF, and further provided its withdrawal was effective "except as to cases then pending before arbitration panels." To determine the intent of the parties, we must harmonize and give effect to the agreement's compulsory and withdrawal provisions. See J.M. Davidson, Inc., 128 S.W.3d at 229.
The plain language of the agreement clearly indicates that the signatory companies intended to be bound by the agreement's compulsory provisions to submit subrogation claims to AF, but upon the effective date of a signatory company's withdrawal from AF, the signatories only intended to be bound to arbitrate cases then pending before arbitration panels. See id.; Aldridge, 376 S.W.3d at 883. Thus, according to the plain language of the arbitration agreement, Foremost is only required to arbitrate cases that were pending in front of arbitration panels as of September 29, 2014, the effective date of its withdrawal.
The record shows that the McCann claim does not fall within the scope of the arbitration agreement. The McCann claim was not pending in front of an arbitration panel as of the effective date of Foremost's withdrawal because neither Foremost nor Watts ever initiated arbitration of the McCann claim by filing an application with AF. Instead, approximately eleven months after the effective date of its withdrawal, Foremost filed a lawsuit involving the McCann claim. When Foremost filed suit, it was no longer a signatory to AF, it had not given written consent to arbitrate the claim, and it was not subject to compulsory arbitration for any matter except those cases that were pending in front of an arbitration panel.
Additionally, the plain language of the arbitration agreement does not support Watts's position that the accrual date or date of loss controls whether the McCann claim falls within the jurisdiction of AF following Foremost's withdrawal. There is no provision in the arbitration agreement or in AF's rules that were applicable during the relevant time period that supports Watts's position that the date of loss dictates whether the McCann claim falls within the scope of the arbitration agreement. Moreover, the record fails to show that there is an existing agreement to arbitrate claims after the effective date of Foremost's withdrawal.
Watts argues that Foremost's interpretation of the arbitration agreement makes the agreement illusory because Foremost would have the unilateral right to withdraw pending claims that had already accrued from mandatory arbitration. We disagree. The express language of the withdrawal provision required sixty days' notice and provided that no termination would be effective as to cases then pending before arbitration panels. We hold that the arbitration agreement is not illusory because it adequately restrained Foremost's ability to avoid arbitration. See In re 24R, Inc., 324 S.W.3d at 567; Nabors Drilling USA, LP, 385 S.W.3d at 107-08.
We conclude that because the McCann claim was not filed in arbitration and pending before an arbitration panel as of the effective date of Foremost's withdrawal from AF, the claim does not fall within the scope of the arbitration agreement. We further conclude that the trial court did not abuse its discretion by denying Watts's motion to compel arbitration because Watts does not have the contractual right under the arbitration agreement to compel arbitration, and we will not read an agreement to arbitrate when, based on the plain language of the arbitration agreement, one does not clearly exist. See Aldridge, 376 S.W.3d at 883. Having concluded that Watts does not have the right to compel arbitration of the McCann claim, we need not address Watts's other arguments as they would not affect the outcome of this appeal. See Tex. R. App. P. 47.1. We overrule Watts's sole issue and affirm the trial court's order denying arbitration.
None of Watts's additional appellate arguments were raised in the trial court.
AFFIRMED.
/s/_________
STEVE McKEITHEN
Chief Justice Submitted on June 16, 2016
Opinion Delivered July 28, 2016 Before McKeithen, C.J., Horton and Johnson, JJ.