360 Mortgage Group, LLC v. LoanCare, LLC et al
Filing
47
REPORT AND RECOMMENDATIONS re Motion to Compel filed by 360 Mortgage Group, LLC, 31 Motion to Compel filed by Castle Mortgage Corporation. Signed by Judge Andrew W. Austin. (afd)
IN THE UNITED STATES DISTRICT COURT
FOR THE WESTERN DISTRICT OF TEXAS
AUSTIN DIVISION
360 MORTGAGE GROUP, LLC
VS.
CASTLE MORTGAGE CORPORATION
§
§
§
§
§
1:18-CV-00332-RP
REPORT AND RECOMMENDATION
OF THE UNITED STATES MAGISTRATE JUDGE
TO:
THE HONORABLE ROBERT PITMAN
UNITED STATES DISTRICT JUDGE
Before the Court are: Defendant’s Motion to Compel Arbitration (Dkt. No. 31); Plaintiff’s
Response (which includes a motion to compel production of document) (Dkt. No. 32); and
Defendant’s Reply (Dkt. No. 37). The undersigned submits this Report and Recommendation to the
United States District Court pursuant to 28 U.S.C. § 636(b) and Rule 1(h) of Appendix C of the
Local Court Rules.
I.
GENERAL BACKGROUND
This is a contract dispute between two mortgage finance companies, Castle Mortgage
Corporation and 360 Mortgage Group, LLC. The parties on May 31, 2017, entered into a Mortgage
Servicing Rights Purchase and Sale Agreement (“the Agreement”). Under the Agreement, Castle
sold and transferred the servicing rights to certain mortgage loans to 360 in exchange for six
payments. 360 filed suit in state court against Castle (and LoanCare, which has since been dismissed
– see Dkt. No. 40) challenging whether a specific loan, the “Vargas Loan,” was improperly
transferred to 360 from Castle under the Agreement. With Castle’s consent, LoanCare removed the
suit to federal court on April 23, 2018. Castle now brings this Motion to Compel Arbitration (Dkt.
No. 31).
II. ANALYSIS
In its motion, Castle states that it asked 360 on October, 16 and 18, 2018, to agree to arbitrate
360’s claims against Castle. Castle requested arbitration pursuant to the Agreement, which in
Section 12.10 states:
Any dispute, claim, or controversy arising out of or relating to this Agreement or the
breach, termination, enforcement, interpretation, or validity thereof, including the
determination of the scope or applicability of this agreement to arbitrate, shall be
determinated by arbitration in the city of Austin, Texas, before one or three neutral
arbitrators . . . [and] shall be administered by the American Arbitration Association
(“AAA”) pursuant to its arbitration rules & procedures.
Dkt. No. 31-1. Castle states that it was rebuffed by 360. Thus, on October 25, 2018, Castle
informed 360 it intended to seek arbitration, on October 26, 2018, it filed its Notice of Arbitration
with this Court (Dkt. No. 27), and subsequently filed this motion to compel arbitration. As Castle
points out, 360’s brief does not address the Agreement between the two parties, the arbitration
provision, or whether the claims at the center of the suit are subject to the arbitration provision.
Instead, 360 argues that Castle has waived any right to avoid honoring its agreement to produce
materials responsive to past due discovery, and asks the Court to compel the production of those
documents before the case is sent to arbitration. Thus, it moves to compel Castle to immediately
produce those documents, and states that “[f]ollowing a review of that document production, 360
Mortgage will consider whether it remains opposed to arbitration.” Dkt. No. 32 at 1-2. Castle
replies that this is not responsive to its motion, and asks that the Court require the parties to arbitrate
their dispute.
A.
Substantially Invoking the Judicial Process
There is a “strong federal policy in favor of enforcing arbitration agreements.” Dean Witter
Reynolds, Inc. v. Byrd, 470 U.S. 213, 217 (1985). However, “[t]he right to arbitrate a dispute, like
2
all contract rights, is subject to waiver.” Nicholas v. KBR, Inc., 565 F.3d 904, 907 (5th Cir. 2009).
Thus, “[a] party who has entered into an agreement to arbitrate must insist on this right, lest it be
waived.” Janvey v. Alguire, 847 F.3d 231, 243 (5th Cir. 2017). Although waiver of arbitration is
not a favored finding, “[w]aiver will be found when the party seeking arbitration substantially
invokes the judicial process to the detriment or prejudice of the other party.” Miller Brewing Co.
v. Fort Worth Distrib. Co., 781 F.2d 494, 497 (5th Cir. 1986). As the Fifth Circuit has explained:
A party waives his right to arbitrate when he actively participates in a lawsuit or takes
other action inconsistent with that right. When one party reveals a disinclination to
resort to arbitration on any phase of suit involving all parties, those parties are
prejudiced by being forced to bear the expenses of a trial . . . . Substantially invoking
the litigation machinery qualifies as the kind of prejudice . . . that is the essence of
waiver.
Id. See also Janvey, 847 F.3d at 243. Though a waiver may occur in these circumstances, “[t]here
is a strong presumption against finding a waiver of arbitration, and the party claiming that the right
to arbitrate has been waived bears a heavy burden.” Republic Ins. Co. v. PAICO Receivables, L.L.C.,
383 F.3d 341, 344 (5th Cir. 2004)
“A party generally invokes the judicial process by initially pursuing litigation of claims then
reversing course and attempting to arbitrate those claims.” Nicholas, 565 F.3d at 907. As the Fifth
Circuit has explained, “[t]o invoke the judicial process, a party must, at the very least, engage in
some overt act in court that evinces a desire to resolve the arbitrable dispute through litigation rather
than arbitration.” In re Mirant Corp., 613 F.3d 584, 589 (5th Cir. 2010) (quotations omitted). Castle
did not substantially invoke the judicial process here. Of the 42 docket entries in the case, the vast
majority relate to filings made by 360 or LoanCare—the defendant that has since been dismissed.
The only actions that Castle has taken in the case have been to consent to removal, file a notice of
3
appearance, seek leave to amend its answer to raise its right to arbitrate, and then move to compel
arbitration. Outside of the Court’s purview, it appears Castle was served with and responded to
discovery requests from 360, and subsequently agreed to produce documents it had said it would
produce, but which it had not. These actions are not enough to “substantially invoke” the judicial
process. Castle has done nothing that would come close to requesting the Court to address any of
the merits of the case. In previous cases, the Fifth Circuit has found that a party seeking arbitration
did not substantially invoke the judicial process because it never sought a merits ruling in court but
only delayed or raised procedural concerns. See Gulf Guar. Life Ins. Co. v. Conn. Gen. Life. Ins. Co.,
304 F.3d 476, 485 (5th Cir. 2002); Sedco, Inc. v. Petroleos Mexicanos Mexican Nat’l Oil Co., 767
F.2d 1140 (5th Cir. 1985). More to the point, when the Fifth Circuit, or district courts within it, have
found waiver, far more has taken place before the waiving party requested to send the case to
arbitration.1 Here, it is clear that Castle has not substantially invoked the judicial process.
Further, there is no evidence Castle’s delay in seeking arbitration has caused 360 the type of
prejudice that would preclude the Court from sending the case to arbitration. “Prejudice in the
context of arbitration waiver refers to delay, expense, and damage to a party’s legal position,”
Nicholas, 565 F.3d at 910, and the “inherent unfairness . . . that occurs when the party’s opponent
1
Forby v. One Technologies, L.P., 909 F.3d 780 (5th Cir. 2018) (finding party substantially
invoked the judicial process after pursuing and partially obtaining a dismissal with prejudice);
Precision Builders, Inc. v. Olympic Group, L.L.C., 642 Fed.Appx. 395, 400 (5th Cir. 2016) (finding
defendants substantially invoked the judicial process by filing a motion to dismiss for improper
venue, substantially engaging in discovery, and waiting two-and-a-half- years to move to compel
arbitration); Republic, 383 F.3d at 345 (finding waiver where the party “answered . . . counterclaims;
conducted full-fled discovery, including four depositions; amended its complaint . . . filed the
required pretrial materials with the district” as well as “two motions to compel discovery, a motion
for summary judgment, and a motion in limine”); HTC Corporation v. Telefonaktiebolaget LM
Ericsson, 2019 WL 277479 (E.D. Tex. Jan. 22, 2019) (Plaintiff substantially invoked the judicial
process by waiting until a few weeks before trial to request arbitration).
4
forces it to litigate an issue and later seeks to arbitrate that same issue.” Republic, 383 F.3d at 346.
The only prejudice 360 points to here is the possibility that Castle will not make good on its promise
to produce additional material it has committed to producing, and if that happens, 360 may incur
additional costs or expenses to compel that production in the arbitration proceeding. While the Court
understands 360’s frustration, the time frame in which these issues unfolded is far from egregious.
360 served requests for production on August 21, 2018. Castle responded on October 4, 2018, and
served objections and responses while stating that it would provide responsive documents. However,
less than two weeks after this response, on October 16, 2018, Castle reached out to 360’s counsel
and stated its intention to exercise the arbitration clause in the Agreement. As the Fifth Circuit has
noted, “when only a minimal amount of discovery has been conducted, which may also be useful
for the purpose of arbitration, the court should not ordinarily infer waiver based upon prejudice to
the party opposing the motion to stay litigation.” Tenneco Resins, Inc. v. Davy Int’l., AG, 770 F.2d
416, 421 (5th Cir. 1985); see also Walker v. J.C. Bradford & Co., 938 F.2d 575, 578 (5th Cir. 1991)
(finding party opposing waiver was not prejudiced when “[w]hat little discovery was propounded
. . . either never was answered . . . or still will be relevant when the suit proceeds in arbitration). 360
does not contend it will be prevented from obtaining the requested documents in the arbitration
proceeding, and the AAA Commercial Arbitration Rules—the rules the parties have agreed they will
arbitrate under—give the arbitrator the authority to compel a party to produce records. See AAA
Commercial
Arbitration
Rules
and
Mediation
Procedures,
Rule
22
(available
at
https://www.adr.org/sites/default/files/CommercialRules_Web_FINAL_1.pdf).
Further, the amount of delay in seeking arbitration was not significant. While Castle
certainly delayed in moving to compel arbitration, the Fifth Circuit has held greater periods of delay
5
to be insufficient to waive arbitration. Walker, 938 F.2d at 578 (no waiver where the movant waited
thirteen months to move to compel arbitration and the parties had engaged in some discovery);
Tenneco,770 F.2d at 416 (no waiver where the movant waited eight months to move to compel
arbitration and also participated in discovery). And finally, there is no evidence that Castle tried to
“game the system” by seeing how favorable its arguments would be to the district court while at the
same time keeping its right to seek arbitration in reserve as backup plan in the event it was unhappy
with the district court’s rulings. See In re Mirant Corp., 613 F.3d at 590.
In sum, in light of the parties’ contractual agreement to arbitrate this dispute, and 360’s failure
to carry its heavy burden to show that Castle waived its right to arbitrate, the motion to compel
arbitration should be granted. With regard to the disposition of the case, Castle requests that the Court
stay the case. Dkt. No. 33 at 4. The general rule under the FAA is that when arbitration is ordered,
the proceedings are stayed pending arbitration. See 9 U.S.C. § 3. The Fifth Circuit, however, has
noted that district courts have discretion to dismiss a case in favor of arbitration when all of the
issues raised before the district court are arbitrable. Fedmet Corp. v. M/V Buyalyk, 194 F.3d 674,
676 (5th Cir. 1999). In fact, it has noted that “[t]he weight of authority clearly supports dismissal
of the case when all of the issues raised in the district court must be submitted to arbitration.” Alford
v. Dean Witter Reynolds, Inc., 975 F.2d 1161, 1164 (5th Cir. 1992). Because all of 360’s claims here
are subject to arbitration, the proper exercise of the district court’s discretion would be to dismiss
the case without prejudice.
III. RECOMMENDATION
Based upon the foregoing, the undersigned Magistrate Judge RECOMMENDS that the
District Court GRANT Defendants’ Motion to Compel Arbitration (Dkt. No. 25), DENY AS MOOT
6
Plaintiff’s Motion to Compel (Dkt. No. 32), and DISMISS this case without prejudice to either party
seeking to confirm whatever arbitration award is entered in the case.
IV. WARNINGS
The parties may file objections to this Report and Recommendation. A party filing
objections must specifically identify those findings or recommendations to which objections are
being made. The District Court need not consider frivolous, conclusive, or general objections. See
Battle v. United States Parole Comm’n, 834 F.2d 419, 421 (5th Cir. 1987). A party’s failure to file
written objections to the proposed findings and recommendations contained in this Report within
fourteen (14) days after the party is served with a copy of the Report shall bar that party from de novo
review by the District Court of the proposed findings and recommendations in the Report and, except
upon grounds of plain error, shall bar the party from appellate review of unobjected-to proposed
factual findings and legal conclusions accepted by the District Court. See 28 U.S.C. § 636(b)(1)(c);
Thomas v. Arn, 474 U.S. 140, 150-53, 106 S. Ct. 466, 472-74 (1985); Douglass v. United Servs.
Auto. Ass’n, 79 F.3d 1415, 1428-29 (5th Cir. 1996) (en banc).
SIGNED this 23rd day of May, 2019.
_____________________________________
ANDREW W. AUSTIN
UNITED STATES MAGISTRATE JUDGE
7
Disclaimer: Justia Dockets & Filings provides public litigation records from the federal appellate and district courts. These filings and docket sheets should not be considered findings of fact or liability, nor do they necessarily reflect the view of Justia.
Why Is My Information Online?