Capstone Associated Services, Ltd. et al v. Organizational Strategies, Inc. et al

Filing 42

MEMORANDUM AND ORDER (Signed by Judge Nancy F. Atlas) Parties notified.(sashabranner, 4)

United States District Court
Southern District of Texas

ENTERED
IN THE UNITED STATES DISTRICT COURT
FOR THE SOUTHERN DISTRICT OF TEXAS
HOUSTON DIVISION

CAPSTONE ASSOCIATED
SERVICES, LTD., et al.,
Plaintiffs,
v.
ORGANIZATIONAL STRATEGIES,
INC., et al.,
Defendants.

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April 08, 2016
David J. Bradley, Clerk

CIVIL ACTION NO. H-15-3233

MEMORANDUM AND ORDER
This case is before the Court on the Motion to Abate Proceedings Pending
Arbitration and to Compel Arbitration (“Motion”) [Doc. # 32] and Supplement [Doc.
# 34] filed by Plaintiffs Capstone Associated Services, Ltd. and Capstone Associated
Services (Wyoming), Limited Partnership (collectively, “Capstone”). Defendants
Organizational Strategies, Inc. (“OSI”), Nicolette Hendricks, William Hendricks,
Integration Casualty Corp., System Casualty Corp., and Optimal Casualty Corp.
(collectively, the “OSI Entities”) filed a Response [Doc. # 36], and Plaintiffs filed a
Reply [Doc. # 38].
Having reviewed the record and applicable legal authorities, the Court denies
the Motion to the extent it seeks an order compelling arbitration pursuant to the

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parties’ Mediated Settlement Agreement (“MSA”). The Court grants the Motion to
the extent it seeks an order compelling arbitration pursuant to the arbitration provision
in the parties’ Engagement Letter. The Court stays and administratively closes this
case pending arbitration, thereby terminating without prejudice Defendants’ Motion
to Dismiss or in the Alternative for Summary Judgment [Doc. # 27].
I.

BACKGROUND
Defendant Organizational Strategies, Inc. is a defense contractor owned and

operated by Defendants Nicolette and William Hendricks. Integration Casualty Corp.,
System Casualty Corp. and Optimal Casualty Corp. are captive insurance companies,
established to insure the risks of the business with which they are associated.
Capstone offers alternative risk planning and administrative services for captive
managers. The Feldman Law Firm LLP and its principal attorney Stewart Feldman
(collectively, “Feldman”) are the attorneys for Capstone in connection with its
business of providing planning services for captive insurance companies.
Capstone alleges that it and Feldman entered into a contract with Defendants.
Plaintiffs allege that the contract is comprised of a June 20, 2011 Engagement Letter
with “Guidelines on Firm Administration and Billing” attached (“Engagement
Letter”), as amended by the “Capstone Services Agreement.” See Exhibit 1 to
Amended Complaint [Doc. # 21-1]. The Capstone Services Agreement provides

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specifically that it and the Engagement Letter collectively are the entire agreement,
and that the agreement can be “amended, modified, or supplemented only by written
agreement executed by the parties” thereto. See Capstone Services Agreement [Doc.
# 21-1], p. 10. The contract granted a limited license for Defendants to use
Capstone’s intellectual property, and provided that the license would expire upon the
termination of the contract. Additionally, the Engagement Letter contains a provision
that requires arbitration of most disputes among the parties (“Arbitration Provision”).
Capstone alleges that in 2012, Defendants questioned the price of the insurance
premiums for the captives’ insurance policies. A related dispute arose in 2012 when
Defendants failed to pay for Plaintiffs’ services. Defendants notified Plaintiffs in
writing that they would be terminating the contract effective December 31, 2012.
Capstone alleges that, after the Capstone Services Agreement was terminated,
Defendants improperly continued to use the intellectual property that was the subject
of the license and refused to return confidential documents.
On October 1, 2015, Plaintiffs filed this lawsuit against Defendants in Texas
state court. On October 28, 2015, Plaintiffs and Defendants mediated all of their
numerous disputes in a single mediation. The mediation resulted in the execution of
the parties’ Mediated Settlement Agreement (“MSA”), which covers all claims
between the parties except the intellectual property claims pending in this lawsuit.

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The MSA provides that any “dispute arising from this agreement will be referred to
final, binding and non appealable arbitration before Robins Brice in Houston, Texas
who shall conduct the proceedings according to the rules that he announces.” See
MSA, Exh. A to Motion, ¶ 6 (“Arbitration Agreement”).
Plaintiffs have filed a Motion to Compel Arbitration. In the original Verified
Motion, Plaintiffs seek arbitration pursuant to the Arbitration Agreement in the MSA.
See Motion, ¶ 10. Specifically, Plaintiffs argue that Defendants’ affirmative defenses,
asserted in Defendants’ Answer and in their Motions to Dismiss, are based on issues
that were covered by and released under the MSA. Plaintiffs identify the relevant
affirmative defenses as “Prior Material Breach, Conflict of Interest, Unclean Hands,
Statute of Limitations, Fraud and Illegality, and Unconscionability.” See Motion, p. 3.
In the Supplement, Plaintiffs state that Robins Brice has declined his
appointment as arbitrator under the MSA. As a result, Plaintiffs instead seek
arbitration pursuant to the Arbitration Provision in the Engagement Letter between
Feldman and the Capstone entities on one side and the OSI Entities on the other. This
Arbitration Provision specifically excludes disputes or claims for attorneys’ fees
and/or costs, and requires arbitration “with respect to any and all other disputes or
claims whatsoever . . . related to or arising out of [Feldman’s] services.” See
Arbitration Provision [Doc. # 21-1], pp. 14. The Arbitration Provision requires the

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arbitration to “be conducted by a recognized, neutral, arbitral association or arbitrator”
and pursuant to the “single arbitrator, expedited rules.” See id. at 15. Plaintiffs argue
that Defendants’ affirmative defenses are arbitrable pursuant to this Arbitration
Provision because they challenge the propriety of the services provided by Capstone
and Feldman under the Engagement Letter. The Arbitration Provision in the
Engagement Letter provides that it “shall be effective notwithstanding any actions that
may later take place.” Id. at 15. The Arbitration Provision states clearly and
unequivocally that the parties agree that the issue of arbitrability shall be decided by
the arbitrator and not by the court. See id.
Plaintiffs’ Motion to Compel Arbitration has been fully briefed and is now ripe
for decision.
II.

STANDARD FOR MOTION TO COMPEL ARBITRATION
The Federal Arbitration Act (“FAA”) provides that a “party aggrieved by the

alleged failure, neglect, or refusal of another to arbitrate under a written agreement for
arbitration may petition any United States district court which, save for such
agreement, would have jurisdiction . . . for an order directing that such arbitration
proceed in the manner provided for in such agreement.” 9 U.S.C. § 4. When
determining whether to compel parties to arbitrate their dispute, the Court engages in
a two-step analysis: (1) whether the parties agreed to arbitrate; and (2) whether a

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federal statute or policy causes the claim to be nonarbitrable.1 See Robinson v. J&K
Admin. Mgmt. Servs., Inc., __ F.3d __, 2016 WL 1077102, *1 (5th Cir. Mar. 17,
2016). The first question includes two separate inquiries: (1) whether there exists a
valid agreement to arbitrate; and (2) whether the dispute falls within the agreement.
See id.
III.

ANALYSIS
A.

Arbitration Agreement in the MSA

“Arbitration is a matter of consent, not coercion, and parties are generally free
to structure their arbitration agreements as they see fit.” PoolRe Ins. Corp. v.
Organizational Strategies, Inc., 783 F.3d 256, 262 (5th Cir. 2013) (internal quotations
and citations omitted). “Parties are free to ‘specify with whom they choose to
arbitrate their disputes.’” Id. (quoting Stolt-Nielsen S.A. v. AnimalFeeds Int’l Corp.,
559 U.S. 662, 683 (2010)). The FAA “confers only the right to obtain an order
directing that ‘arbitration proceed in the manner provided for in [the parties’]
agreement.’” Volt Info. Sciences, Inc. v. Bd. of Trustees of Leland Stanford Junior
Univ., 489 U.S. 468, 474-75 (1989) (citing 9 U.S.C. § 4).

1

There is no assertion by either party in this case that there exists any statute or policy
that renders any claims in this lawsuit nonarbitrable.

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In the Arbitration Agreement in the MSA, the parties agreed specifically to
arbitrate disputes arising under the MSA before Robins Brice. Mr. Brice, however,
has declined to arbitrate the parties’ dispute, and this Court cannot compel arbitration
in an alternative manner that is inconsistent with the parties’ own agreement. See
Volt, 489 U.S. at 474-75. As a result, the Motion to Compel Arbitration pursuant to
the Arbitration Agreement in the MSA is denied.
B.

Arbitration Provision in the Engagement Letter

“The arbitrability of disputes – in other words, the determination of whether the
agreement applies to the parties’ claims – is generally a gateway issue to be
determined by the courts.” Robinson, __ F.3d __, 2016 WL 1077102 at *2. The
arbitrability issue, however, is deferred to the arbitrator where the agreement
establishes the parties’ intent for the arbitrator to make the decision. See id. (citing
Howsam v. Dean Witter Reynolds, Inc., 537 U.S. 79, 83 (2002); First Options of
Chicago, Inc. v. Kaplan, 514 U.S. 938, 943 (1995); Gen. Motors Corp. v. Pamela
Equities Corp., 146 F.3d 242, 247 (5th Cir. 1998)).
In this case, the parties agreed in the Engagement Letter between Capstone,
Feldman, and the OSI Entities to arbitrate any and all disputes or claims whatsoever
between them “related to or arising out of [Feldman’s] services” (except disputes
relating to attorneys’ fees and/or costs). The arbitration is to be conducted by a

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recognized, neutral, arbitral association or arbitrator” and pursuant to the “single
arbitrator, expedited rules.” See Arbitration Provision [Doc. # 21-1], p. 15.
Defendants argue that the Arbitration Provision in the Engagement Letter was
superseded by the MSA and, therefore, no longer applies. The Arbitration Provision
in the Engagement Letter states explicitly that the “arbitration provision shall be
effective notwithstanding any actions that may later take place.” See id. There is
nothing in the MSA that expressly vacates or otherwise supersedes the Arbitration
Provision in the Engagement Letter. As a result, the current record does not
demonstrate that the MSA’s Arbitration Agreement superseded the Arbitration
Provision in the Engagement Letter such that the Arbitration Provision is no longer
a valid and effective agreement to arbitrate.
The parties dispute which claims and affirmative defenses, if any, are subject
to the Arbitration Provision in the Engagement Letter. The Arbitration Provision
provides specifically that arbitrability issues are to be decided by the arbitrator and not
by the Court. See id. As a result, the Court defers the arbitrability issue to the
arbitrator.
The Court grants the Motion to Compel Arbitration pursuant to the Arbitration
Provision in the Engagement Letter. The arbitrator selected in accordance with the

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Arbitration Provision will determine which claims and defenses, if any, are arbitrable.
The case is stayed and administratively closed pending the arbitrator’s final decision.
IV.

CONCLUSION AND ORDER
The sole arbitrator agreed to by the parties in the MSA has refused to serve as

arbitrator. As a result, this Court cannot compel arbitration pursuant to the Arbitration
Agreement in the MSA.
The parties agreed in the Engagement Letter that any and all disputes or claims
whatsoever between them “related to or arising out of [Feldman’s] services” (except
disputes relating to attorneys’ fees and/or costs) “shall be submitted to a recognized,
neutral, arbitral association or arbitrator for resolution pursuant to its single arbitrator,
expedited rules.” See id. In this Arbitration Provision, the parties specifically agreed
that arbitrability issues were to be decided only by the arbitrator and not by a court.
As a result, it is hereby
ORDERED that Plaintiffs’ Motion to Compel Arbitration [Doc. # 32], as
supplemented [Doc. # 34], is DENIED as to the request for arbitration pursuant to the
Arbitration Agreement in the MSA and GRANTED as to the request for arbitration
pursuant to the Arbitration Provision in the Engagement Letter. The selected
arbitrator, chosen pursuant to the terms of the Arbitration Provision, will decide which
claims, if any, are subject to arbitration. It is further

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ORDERED that this case is STAYED AND ADMINISTRATIVELY
CLOSED pending the arbitrator’s decision. It is further
ORDERED that Defendants’ Motion to Dismiss or for Summary Judgment
[Doc. # 27] is TERMINATED without prejudice.
SIGNED at Houston, Texas, this 8th day of April, 2016.

NAN Y F. ATLAS
SENIOR UNI
STATES DISTRICT JUDGE

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