Andres Holding Corporation v. Villaje Del Rio, Ltd

Filing 15

ORDER DENYING 9 Motion to Compel arbitration. Signed by Judge Xavier Rodriguez. (ep, )

In the United States District Court for the Western District of Texas
A N D R E S HOLDING C O R P O R A T IO N P la in tiff v. V IL L A J E DEL RIO, LTD., et al. D efen d an ts § § § § § § § § § §

Civil Action No. SA-09-CA-127-XR

ORDER O n this date the Court considered Plaintiff's motion to compel arbitration (d o c k e t no. 9) and Defendants' response thereto. Plaintiff moves to compel D e fe n d a n ts George Geis and Villaje Management, LLC to binding arbitration. F o r the reasons discussed below, the Court DENIES the motion. B a c k g ro u n d O n or about February 13, 2003, Plaintiff Andres Holding Corporation (" A n d r e s " ) and Defendant Villaje del Rio, Ltd. ("VDR") executed a Construction C o n tr a c t ­ Cost Plus (the "Contract"), pursuant to which Andres agreed to serve a s the general contractor for the construction of the multi-million dollar r e s id e n t ia l, commercial, and retail development outside of downtown San A n t o n io known as the Villaje del Rio project (the "Project"). VDR was the owner

o f the Project. The other Defendants in this action are Villaje Management, LLC (" V M " ), the general partner of VDR, and George Geis, VM's sole shareholder. F o llo w in g a number of disputes regarding the construction of and payment fo r the Project, VDR terminated Andres as the Project's general contractor on or a b o u t October 26, 2004. On October 29, 2004, VDR filed a demand for

a rb it r a tio n with the American Arbitration Association ("AAA") under the C o n s t r u c tio n Industry Arbitration Rules. VDR's demand for arbitration was m a d e pursuant to Article 1 of the Contract, which specifically incorporated the " c u r r e n t [1997] edition of AIA Document A201, `General Conditions of the C o n tr a c t for Construction.'" As set forth in section 4.6 of the AIA's "General C o n d it io n s ," the parties to the Contract agreed to submit any disputes to binding a r b it r a t io n . On or about November 4, 2004, Andres filed its own amended d e m a n d for arbitration with the AAA, which the AAA docketed as a counterclaim to VDR's demand. Andres made claims against each of VDR, VM, and Geis s e e k in g the recovery of more than $2,960,000.1 According to Andres, the

a r b it r a t io n was then delayed for years by a myriad of factors, including VDR's b a n k r u p t c y action and the corresponding stay, the parties' efforts to resolve a n u m b e r of subcontractor claims prior to arbitrating their own disputes, and the n e c e s sit y of selecting several alternate arbitrators following the disqualification o f certain original arbitrators as a result of a conflict that arose during the p e n d e n c y of the delayed arbitration.

The case number for the claims pending in arbitration between and among Andres, on the one hand, and VDR, VM, and Geis, on the other hand, is 70 110 Y 00715 04.

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I n addition to the arbitration, Andres filed the present action in the 45th J u d i c ia l District Court of Bexar County, Texas. According to Andres, this action w a s originally filed to preserve its lien rights against the Project. Andres states t h a t it amended the action to incorporate the totality of Andres's claims against V D R , VM, and Geis when ­ after more than three years without lodging an o b je c tio n to arbitration ­ Geis first asserted that he and VM were not proper p a r tie s to the arbitration on the grounds that they were not signatories to the C o n tr a c t in their individual capacities. After VDR declared bankruptcy, this p r o c e e d in g was removed to the United States Bankruptcy Court for the Western D is tr ic t of Texas, San Antonio Division, as Adversary Proceeding No. 08-05116. R e c e n tly , at Andres's request, the reference of this adversary proceeding to the b a n k r u p t c y court was withdrawn, and this lawsuit now sits before this Court. A n d r e s filed a motion with the AAA seeking to compel Geis and VM to a r b itr a tio n on the grounds that any objection to arbitration was waived by their th r e e year delay in resisting it. At the initial hearing on that motion in early 2 0 0 9 , one of the original arbitrators disclosed to the parties that his law firm had m e r g e d with the firm previously representing Geis in the various lawsuits a r is in g from the Project, and another original arbitrator also disclosed certain r e la tio n s h ip s with Geis's prior attorney. Geis thus sought and obtained the d is q u a lific a tio n of these two arbitrators, and the parties participated in a second r o u n d of arbitrator selection. When the new arbitration panel reconvened on J u n e 10, 2009 to decide the question of its jurisdiction over Geis and VM, it d e f e r r e d the arbitrability question to this Court. 3

A n d r e s thus moves the Court for an order staying this case and compelling G e is and VM to arbitration. Neither VM nor Geis was a party to the

c o n s t r u ction contract. Nevertheless, Andres contends that arbitration should be c o m p e lle d because: (a) Geis abused the corporate form of VDR and VM; (b) Geis a n d VM received benefits from Andres's performance of the Contract; and (c) G e is and VM waived their complaint about arbitration by remaining silent on t h is issue for approximately three years. A n a ly s is T h e Federal Arbitration Act (FAA) generally provides that a written a r b it r a tio n provision in any contract is "valid, irrevocable, and enforceable, save u p o n such grounds as exist at law or in equity for the revocation of any contract." 9 U.S.C. § 2. The FAA further provides the Court with the power to compel a m a tt e r to arbitration where appropriate and to stay the matter pending in the d is tr ic t court until the conclusion of the related arbitration. Id. §§ 3, 4. It is undisputed that neither Geis nor VM were signatories to the c o n s t r u c t io n contract that contains the arbitration clause Andres seeks to e n fo r c e . Nevertheless, federal courts have held that so long as there is some w r it t e n agreement to arbitrate, a third party may be bound to s u b m it to arbitration. Carolyn B. Lamm & Jocelyn A. Aqua, D e fin in g the Party-Who is a Proper Party in an International A r b it r a t io n Before the American Arbitration Association and Other I n t e r n a t io n a l Institutions, 34 GEO. WASH. INT'L L. REV. 711, 720 (2 0 0 3 ). Ordinary principles of contract and agency law may be c a lle d upon to bind a nonsignatory to an agreement whose terms h a v e not clearly done so. See E.I. DuPont de Nemours & Co. v. R h o n e Poulenc, 269 F.3d 187 (3d Cir.2001); Thomson-C.S.F., S.A. v.

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A m e r ic a n Arbitration Ass'n, 64 F.3d 773, 776 (2d Cir.1995). Six t h e o r ie s for binding a nonsignatory to an arbitration agreement h a ve been recognized: (a) incorporation by reference; (b) assumption; ( c ) agency; (d) veil-piercing/alter ego; (e) estoppel; and (f) third-party b e n e fic ia r y . B r id a s S.A.P.I.C. v. Gov't of Turkmenistan, 345 F.3d 347, 355­56 (5th Cir. 2003) (fo o t n o t e omitted). Andres argues for enforcement of the arbitration clause a g a in s t Geis and VM under alter-ego, estoppel, and waiver theories. A. A lte r -E g o A n d r e s argues that the arbitration clause should be enforced against Geis a n d VM because VM and VDR were mere alter egos of Geis. Under the alter ego doctrine, a corporation may be bound by an a g r e e m e n t entered into by its subsidiary regardless of the a g r e e m e n t's structure or the subsidiary's attempts to bind itself a lo n e to its terms,"when their conduct demonstrates a virtual a b a n d o n m e n t of separateness." Thomson-C.S.F., 64 F.3d at 777.... T h is is not to say that the decision to apply the alter ego doctrine to b in d a parent is made routinely. "Courts do not lightly pierce the c o r p o r a te veil even in deference to the strong policy favoring a r b it r a t i o n ." ARW Exploration Corp. v. Aguirre, 45 F.3d 1455, 1461 (1 0 t h Cir. 1995). The corporate veil may be pierced to hold an alter e g o liable for the commitments of its instrumentality only if (1) the o w n e r exercised complete control over the corporation with respect to the transaction at issue and (2) such control was used to commit a fraud or wrong that injured the party seeking to pierce the veil. A m e r ic a n Fuel Corp. v. Utah Energy Dev't Co., Inc., 122 F.3d 130, 1 3 4 (2d Cir. 1997). Accord First Nat'l City Bank v. Banco Para El C o m e r c io Exterior de Cuba, 462 U.S. 611, 629-30, 103 S. Ct. 2591, 7 7 L. Ed.2d 46 (1983); Gardemal v. Westin Hotel Co., 186 F.3d 588 (5 th Cir. 1999). Cf. Matter of Sims, 994 F.2d 210 (5th Cir. 1993) (h o ld in g that an element of fraud must be present before courts will p ier ce the corporate veil in a case based upon a contract). B r id a s S.A.P.I.C., 345 F.3d at 358­59. A district court should consider "those fa c to r s normally explored in the context of parent-subsidiary alter ego claims,"

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in c lu d in g whether: (1) the parent and subsidiary have common stock ownership; (2) the parent and subsidiary have common directors or officers; (3) the parent and subsidiary have common business departments; (4) the parent and subsidiary file consolidated financial statements; (5) the parent finances the subsidiary; (6) the parent caused the incorporation of the subsidiary; (7) the subsidiary operated with grossly inadequate capital; (8) the parent pays salaries and other expenses of subsidiary; (9) the subsidiary receives no business except that given by the parent; (1 0 ) the parent uses the subsidiary's property as its own; (11) the daily operations of the two corporations are not kept separate; (12) the subsidiary does not observe corporate formalities; (1 3 ) the directors of the "subsidiary" act in the primary and independent in te r e s t of the "parent"; (14) others pay or guarantee debts of the dominated corporation; and (15) whether the alleged dominator deals with the dominated corporation a t arms length. I d . at 360 n.11. Andres submitted evidence that Geis created VDR, set up VM as the g e n e r a l partner of VDR, and is the sole manager and shareholder of VM. D e fe n d a n t s do not dispute these facts. Andres further alleges that Geis

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e x e r c is e d total control over VDR's and VM's involvement in the Project, used o t h e r entities to exercise control over architectural duties related to the Project, w a s integrally involved in day-to-day operations at the Project, regularly com m u n ica te d with Andres's subcontractors regarding the Project's construction, a n d exercised "near unilateral dominion over the monthly pay application p r o c e s s ." In sum, Andres alleges that "the actions of VDR and VM at issue in t h e arbitration were the actions of Geis himself." Andres, however, failed to p r o v id e any evidence to support these assertions. Andres thus established m e r e ly that Geis owned VM, the general partner of VDR, who was a signatory t o the contract that contains the arbitration clause. Without further proof as to t h e other factors, the Court cannot conclude that Geis and/or VM should be b o u n d by the arbitration clause as alter-egos of VDR. See, e.g., In re Trammel, 2 4 6 S.W.3d 815, 820 (Tex. App.­Dallas 2008, no pet.) ("[A] corporate relationship is generally not enough to bind a nonsignatory to an arbitration agreement.").2 B. E s t o p p e l /D i r e c t Benefits A n d r e s further argues that Geis and VM should be compelled to a rb it r a tio n because they have sought to obtain substantial benefits from the c o n s tr u c tio n contract. Under "direct benefits estoppel," a non-signatory plaintiff seeking th e benefits of a contract is estopped from simultaneously a t t e m p t in g to avoid the contract's burdens, such as the obligation to a r b it r a t e disputes. Thus, a non-signatory plaintiff may be compelled

Moreover, Andres neither alleges nor proves that Geis's or VM's "control w a s used to commit a fraud or wrong that injured the party seeking to pierce the v e il." Bridas S.A.P.I.C., 345 F.3d at 358­59. 7

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t o arbitrate if it seeks to enforce terms of a contract containing an a r b it r a tio n provision. For example, if a non-signatory's b r e a c h -o f-w a r r a n t y and breach-of-contract claims are based on c e r ta in terms of a written contract, then the non-signatory cannot a v o id an arbitration provision within that contract. If, however, a n o n -s ig n a to r y 's claims can stand independently of the underlying c o n t r a c t, then arbitration generally should not be compelled under t h is theory. I n re Kellogg Brown & Root, Inc., 166 S.W.3d 732, 739-40 (Tex. 2005) (citations o m itt e d ). Andres argues that the direct benefits theory applies to estop Geis and VM fr o m objecting to the application of the arbitration clause. Specifically, Andres a rg u e s that Geis treated VDR and VM as his own alter ego, controlled or sought t o control the entire construction of the Project, sent out daily missives to Andres in s t r u c t in g it as to his own specifications for the Project's construction, p erson a lly directed Andres and certain of its subcontractors regarding the means a n d details of their work, and personally engaged in extensive settlement n e g o t ia t io n s with Andres, the Project's lender, and the Project's guarantor. F u r t h e r , Andres alleges that any benefits from Geis's actions with respect to the c o n s tr u c tio n contract would directly inure to Geis, as the individual with sole fin a n cia l and corporate control over VDR and VM. Again, aside from producing d o c u m e n t s indicating Geis's ownership of VM, the general partner of VDR, A n d r e s provided no evidence to prove its allegations. In this action, neither Geis nor VM has asserted a cause of action or o t h e r w is e taken a legal position from which they seek to benefit from the terms o f the contract. It is Andres, rather, who asserts breach of contract and other

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c la im s which seek benefits under the terms of the contract. In a similar case, t h e Fifth Circuit has remarked that courts do not "seriously consider applying d ir e c t benefits estoppel" in these situations. Bridas, 345 F.3d at 362. Nevertheless, the direct benefits estoppel theory has been expanded to in c lu d e parties who "seek and obtain direct benefits from a contract by means o th e r than a lawsuit." In re Weekley Homes, L.P., 180 S.W.3d 127, 132 (Tex. 2 0 0 5 ). In some cases, a nonparty may be compelled to arbitrate if it delib e ra te ly seeks and obtains substantial benefits from the contract it s e lf. The analysis here focuses on the nonparty's conduct during t h e performance of the contract. Thus, for example, a firm that uses a trade name pursuant to an agreement containing an arbitration c la u se cannot later avoid arbitration by claiming to have been a n o n p a r ty . Nor can nonsignatories who received lower insurance r a t e s and the ability to sail under the French flag due to a contract a v o id the arbitration clause in that contract. Id. at 132-33 (footnotes omitted); see also Hellenic Invsest. Fund, Inc. v. Det N o r s k e Veritas, 464 F.3d 514, 517-18 (5th Cir. 2006) ("Direct-benefit estoppel `in v o lv e [s ] non-signatories who, during the life of the contract, have embraced t h e contract despite their non-signatory status but then, during litigation, a t t e m p t to repudiate the arbitration clause in the contract.'"). Yet, without e v id e n c e to the contrary, it appears that the bulk of Andres's

a lle g a t io n s -- in c lu d i n g , for example, Geis's efforts in controlling the progress of c o n stru ctio n -- rela tes to Geis's performance, as VDR's agent, of VDR's duties, not G e is's pursuit or receipt, in his individual capacity, of benefits under the c o n tr a c t.

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A n d r e s also alleges that Geis, as the sole owner of VM, which is the g e n e r a l partner of VDR, stood to reap all benefits from the construction contract. A gain, however, Andres has provided no actual evidence to demonstrate whether a n d the extent to which Geis stood to profit directly from the contract. By way o f example, given the sparse record before the Court, it is possible that VDR w o u ld have retained all profits earned from performance of the contract for r e in v e s tm e n t in new projects. Finally, Andres specifies no conduct on the part of VM that would suggest t h a t VM sought or obtained benefits under the contract. For the foregoing r e a s o n s , the Court is without sufficient information from which it can conclude t h a t VM and Geis are estopped from opposing arbitration. C. W a iv e r F in a lly , Andres argues that Geis and VM waived their right to object to a r b it r a t io n by permitting the arbitration to proceed for more than three years b e fo r e objecting to their inclusion in the arbitration. Andres cites no case law t o suggest that Geis and VM's delay waived their right to object. Moreover, even t h o u g h the arbitration has been pending for some time, the parties agree that t h e arbitration virtually stalled after Andres filed its amended counterclaim on N o v e m b e r 4, 2004. Nevertheless, Geis and VM have never maintained that they w e r e subject to the arbitration and in fact objected to the arbitration during their fir s t appearance in the matter, made at a status conference held in 2009 at A n d r e s 's request. A n d r e s cites to Rule 8 of the Construction Industry Arbitration Rules, 10

w h ic h governs the parties' arbitration and states, "A party must object to the ju r is d ic t io n of the arbitrator or to the arbitrability of a claim or counterclaim no la te r than the filing of the answering statement to the claim or counterclaim t h a t gives rise to the objection. The arbitrator may rule on such objections as a p r e l im in a r y matter or as part of the final award." See Docket No. 9 at Exh. F. H o w e v e r , neither Geis nor VM has filed an answering statement to Andres's c la im . Therefore, Rule 8 does not apply to waive Geis and VM's objections. A n d r e s thus fails to set forth a valid reason for concluding that Geis and VM w a iv e d their right to object to arbitration. C o n c lu s io n F o r the foregoing reasons, Andres's motion to compel arbitration (docket n o . 9) is DENIED. It is so ORDERED. S I G N E D this 24th day of July, 2009.

_________________________________ X A V IE R RODRIGUEZ U N I T E D STATES DISTRICT JUDGE

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