Fox Bend Development Associates Ltd et al v. Ennis
Filing
21
MEMORANDUM OPINION AND ORDER: Because Plaintiffs' claims are subject to arbitration, the Court grants Ennis' motion to dismiss 5 . (Ordered by Judge David C Godbey on 8/17/2018) (zkc)
IN THE UNITED STATES DISTRICT COURT
NORTHERN DISTRICT OF TEXAS
DALLAS DIVISION
FOX BEND DEVELOPMENT
ASSOCIATES, LTD., et al.,
Plaintiffs,
v.
TONY ENNIS,
Defendant.
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Civil Action No. 3:17-CV-3137-N
MEMORANDUM OPINION AND ORDER
This Memorandum Opinion and Order addresses Defendant Tony Ennis’ motion to
dismiss [5]. For the reasons set forth below, the Court grants the motion.
I. ORIGINS OF THE DISPUTE
This case is a dispute between shareholders of nonparty ecoLegacy, Ltd.
(“ecoLegacy”), a company organized under the laws of the Republic of Ireland. Plaintiffs
Fox Bend Development Associates, Ltd., Fred and Michele Secker, and Jeffrey Hicks Trust
2005 each invested funds in ecoLegacy. As part of their investment, Plaintiffs each signed
a deed of adherence to the ecoLegacy shareholders agreement (the “Shareholders
Agreement” or the “Agreement”). The Shareholders Agreement contains an arbitration
provision (the “Arbitration Clause”) stating that:
In the event of any dispute or difference between the Shareholders, in regard
to any matter of whatsoever nature arising out of this [Shareholders]
Agreement or in connection therewith, then any Shareholder shall give notice
to the other Shareholders in writing of such dispute or difference and such
dispute or difference shall be referred to arbitration to be conducted by such
MEMORANDUM OPINION AND ORDER – PAGE 1
person as the Shareholders hereto may agree to appoint as arbitrator . . . such
arbitrator shall act as an arbitrator within the meaning of the Arbitration Act,
2010 and shall be governed by the Arbitration Acts for the time being in
force . . . and his decision shall be final and binding on the parties hereto and
the cost of Arbitration shall be payable as the arbitrator shall determine.
App. in Supp. of Def.’s Mot. to Dismiss (“App.”) 13 [6]. On September 28, 2017, Plaintiffs
filed suit against Ennis, a shareholder and former CEO of ecoLegacy, alleging that Ennis
made fraudulent misrepresentations and omitted material facts in soliciting Plaintiffs to invest
a total of $3,250,000 into ecoLegacy.
Plaintiffs assert claims for fraud, negligent
misrepresentation, violation of Texas and federal securities laws, and costs and attorneys’
fees. On November 15, 2017, Ennis removed the case to this Court [1]. Ennis now moves
to dismiss under Federal Rule of Civil Procedure 12(b)(3) and to compel Plaintiffs to
arbitrate their claims [5].1 The Court grants Ennis’ motion.
II. LEGAL STANDARD
The Federal Arbitration Act, 9 U.S.C. §§ 1–16 (“FAA”), governs the enforcement,
interpretation, and validity of arbitration clauses in commercial contracts.2 “The Supreme
Court has made it clear that the [FAA] establishes a ‘liberal policy favoring arbitration’ and
1
Ennis also argues that dismissal under Rule 12(b)(5) is proper because Plaintiffs did not
effect proper service of process on him. Because the Court grants Ennis’ motion to dismiss
under Rule 12(b)(3), the Court does not address Ennis’ Rule 12(b)(5) argument.
2
Ennis argues for the first time in a supplemental reply to Plaintiffs’ supplemental response
that the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral
Awards, June 10, 1958, 21 U.S.T. 2517, 330 U.N.T.S. 38, governs arbitrability [20]. The
Court declines to consider an argument raised for the first time in a reply. Hermitage Ins.
Co. v. Times Square Dallas, Ltd., No. 3:05-CV-0785-N, 2006 WL 8437468, at *3 (N.D. Tex.
Mar. 1, 2006).
MEMORANDUM OPINION AND ORDER – PAGE 2
a ‘strong federal policy in favor of enforcing arbitration agreements.’” Pers. Sec. & Safety
Sys. v. Motorola Inc., 297 F.3d 388, 392 (5th Cir. 2002) (quoting Texaco Expl. and Prod. Co.
v. AmClyde Engineered Prod. Co., Inc., 243 F.3d 906, 909 (5th Cir. 2001)). Courts thus
“resolve any ambiguity as to the availability of arbitration in favor of arbitration.”
PaineWebber Inc. v. Chase Manhattan Private Bank (Switz.), 260 F.3d 453, 462 (5th Cir.
2001). The federal policy favoring arbitration “applies with special force in the field of
international commerce.” Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, 473 U.S.
614, 631 (1985).
In determining whether parties agreed to arbitrate a dispute, courts consider
(1) whether a valid agreement to arbitrate exists between the parties; and (2) whether the
dispute in question falls within the scope of the arbitration agreement. Tittle v. Enron Corp.,
463 F.3d 410, 418–19 (5th Cir. 2006). The “party seeking to invalidate an arbitration
agreement bears the burden of establishing its invalidity.” Carter v. Countrywide Credit
Indus., Inc., 362 F.3d 294, 297 (5th Cir. 2004) (citations omitted).
III. THE COURT GRANTS THE MOTION TO DISMISS
Ennis moves to dismiss, arguing that the Arbitration Clause requires the parties to
arbitrate their dispute [5]. The Court grants Ennis’ motion.
A. The Arbitration Clause is Valid
The Court must first determine whether the Arbitration Clause is valid. See
Tittle, 463 F.3d at 418–19. Plaintiffs assert that Ennis fraudulently induced them to enter into
the Shareholders Agreement such that the Agreement – including the Arbitration Clause
MEMORANDUM OPINION AND ORDER – PAGE 3
therein – is void. But this Court previously rejected a nearly identical argument. See Haden
v. Bank of Am. Corp., No. 3:11-CV-0812-N, 2011 WL 13128696, at *2 (N.D. Tex. Nov. 14,
2011) (rejecting plaintiff’s assertion that arbitration provision was void because entire
contract was unconscionable and fraudulently procured and noting that such defenses “must
specifically relate to the [arbitration provision] itself, not the contract as a whole, if they are
to defeat arbitration.” (alteration in original) (quoting In re FirstMerit Bank, N.A., 52 S.W.3d
749, 756 (Tex. 2001)).
Plaintiffs further argue that the Shareholders Agreement – and thus the Arbitration
Clause – is invalid because two material conditions of their signing deeds of adherence to the
Agreement never occurred. Specifically, Plaintiffs argue that their entering into the
Shareholders Agreement was contingent on Ennis’ promises that (1) he would amend a
particular provision of the Agreement and (2) ecoLegacy would return dividends on profits
to investors. Plaintiffs assert that Ennis has yet to fulfill either promise and that the
Agreement is therefore void. But Plaintiffs’ argument echoes their fraudulent inducement
claim: they argue that they invested in ecoLegacy because Ennis fraudulently misrepresented
that certain conditions would occur after they invested. Plaintiffs’ argument concerns the
Shareholders Agreement as a whole, not the Arbitration Clause. And “defenses that pertain
to the entire . . . contract can be arbitrated.” In re FirstMerit Bank, 52 S.W.3d at 756 (citing
Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395, 403–04 (1967)). The
Arbitration Clause is thus valid.
MEMORANDUM OPINION AND ORDER – PAGE 4
B. The Parties’ Dispute is Within the Scope of the Arbitration Clause
If there is a binding agreement to arbitrate, the Court must then decide whether the
parties’ dispute is within the scope of the agreement. Tittle, 463 F.3d at 418–19 (5th Cir.
2006). “[C]ourts distinguish ‘narrow’ arbitration clauses that only require arbitration of
disputes ‘arising out of’ the contract from broad arbitration clauses governing disputes that
‘relate to’ or ‘are connected with’ the contract.” Pennzoil Expl. & Prod. Co. v. Ramco
Energy Ltd., 139 F.3d 1061, 1067 (5th Cir. 1998) (citations omitted). Arbitration clauses
governing disputes “arising out of or in relation to or in connection with” the contract are
“broad arbitration clauses capable of expansive reach.” Id. (citing Prima Paint, 388 U.S. at
397–98 (describing as “broad” a clause requiring arbitration of “[a]ny controversy or claim
arising out of or relating to this Agreement”) and Nauru Phosphate Royalties, Inc. v. Drago
Daic Interests, Inc., 138 F.3d 160, 164–65 (5th Cir. 1998) (holding that when parties agree
to arbitration clause governing “[a]ny dispute . . . arising out of or in connection with or
relating to this Agreement,” they “intend the clause to reach all aspects of the relationship.”)).
Such a clause covers all claims between the parties that have a significant relationship to the
arbitration agreement. Broad arbitration clauses “are not limited to claims that literally ‘arise
under the contract,’ but rather embrace all disputes between the parties having a significant
relationship to the contract regardless of the label attached to the dispute.” Pennzoil, 139
F.3d at 1067 (citations omitted). Indeed, a claim must only “touch” matters covered by a
broad arbitration clause to be arbitrable. Id. (citations omitted).
MEMORANDUM OPINION AND ORDER – PAGE 5
Here, the Arbitration Clause governs “any dispute or difference between the
Shareholders, in regard to any matter of whatsoever nature arising out of this Agreement or
in connection therewith.” App. 13 [6] (emphasis added). The Arbitration Clause is thus
broad. See Pennzoil, 139 F.3d at 1067 (noting that “arbitration clauses governing disputes
that ‘relate to’ or ‘are connected with’ the contract” are “broad arbitration clauses capable
of expansive reach” (citations omitted)).
Plaintiffs assert that the Shareholders Agreement governs the business and affairs of
ecoLegacy, not disputes over Ennis’ alleged fraudulent inducement of Plaintiffs’ investments
before Plaintiffs became ecoLegacy shareholders. But whether the Shareholders Agreement
itself governs the parties’ dispute is not the relevant question. Instead, the Court must
determine whether Plaintiffs’ claims qualify as a “dispute or difference between the
Shareholders, in regard to any matter of whatsoever nature arising out of this Agreement or
in connection therewith.” See App. 13 [6]. And Plaintiffs’ claims are certainly connected
to the Shareholders Agreement. Plaintiffs assert that their claims “‘arise from’ or ‘connect
with’ the [o]ffering [m]aterials and material misrepresentations and omissions that Ennis
made to Plaintiffs in order [to] fraudulently induce Plaintiffs to invest even before Plaintiffs
became shareholders in Ecolegacy.” Pls.’ Resp. to Mot. to Dismiss 13 [9]. But the
Shareholders Agreement was one of the investment offering documents on which Plaintiffs
allege they relied. Moreover, Plaintiffs claim that Ennis committed fraud for the purpose of
inducing Plaintiffs to agree to the Shareholders Agreement. Plaintiffs’ claims arise in
MEMORANDUM OPINION AND ORDER – PAGE 6
connection with the Shareholders Agreement and therefore fall within the scope of the
Arbitration Clause.
C. The Irish High Court’s Appointment of a Liquidator
Does Not Affect the Arbitrability of Plaintiffs’ Claims
In June 2018, well after Plaintiffs filed this action, the High Court of Ireland in a
separate proceeding appointed a liquidator to wind up ecoLegacy and investigate allegations
that Ennis misappropriated ecoLegacy funds. The Shareholders Agreement contains a
provision stating:
This [Shareholders] Agreement shall terminate immediately if an effective
resolution is passed to wind up the Company or if a liquidator is otherwise
appointed (but without prejudice to any rights any party may have against any
other party arising prior to such termination).
App. 16 [6]. Plaintiffs now assert that when the High Court of Ireland issued its liquidation
order, the Shareholders Agreement – including the Arbitration Clause therein – terminated.
Plaintiffs claim that Ennis’ contractual right to compel arbitration terminated along with the
Arbitration Clause.
Plaintiffs’ argument is misguided. The Agreement itself indicates in broad language
that termination in the case of liquidation shall be “without prejudice to any rights any party
may have against any other party arising prior to such termination.” Id. And while the
Agreement neither defines the term “rights” nor explicitly states that Ennis’ right to compel
arbitration will not be prejudiced by termination, it need not do so. The Agreement states
that any right of any party arising before termination shall not be prejudiced. See id.
Plaintiffs offer no compelling reason why a shareholder’s right to compel arbitration under
MEMORANDUM OPINION AND ORDER – PAGE 7
the Agreement does not qualify as a “right any party may have against any other party.” See
id. And Plaintiffs do not dispute that Ennis’ right to compel Plaintiffs to arbitrate their claims
arose before the Agreement terminated.
Plaintiffs note that, unlike certain other provisions of the Agreement, the Arbitration
Clause does not contain explicit language indicating that it survives termination of the
Agreement. But given the broad language in the Agreement stating that termination due to
liquidation will not prejudice any right held by any party arising prior to termination, an
explicit survival clause is not necessary. Termination of the Agreement thus did not affect
Ennis’ right to compel arbitration of Plaintiffs’ claims.
CONCLUSION
Because Plaintiffs’ claims are subject to arbitration, the Court grants Ennis’ motion
to dismiss [5].
Signed August 17, 2018.
____________________________________
David C. Godbey
United States District Judge
MEMORANDUM OPINION AND ORDER – PAGE 8
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