CMH Manufacturing, Inc., et al v. Hensel Phelps Construction Co., et al
Filing
64
ORDER GRANTING 47 Motion to Compel Arbitration; GRANTING 56 Motion to Compel Arbitration. The case is hereby STAYED pending resolution of the arbitration proceedings. The Clerk is directed to ADMINISTRATIVELY CLOSE the case until further notice. The parties are ORDERED to provide the Court with status updates every six months from the date of this order on the status of arbitration. Signed by Judge Xavier Rodriguez. (rg)
IN THE UNITED STATES DISTRICT COURT
FOR THE WESTERN DISTRICT OF TEXAS
SAN ANTONIO DIVISION
CMH MANUFACTURING, INC., d/b/a
CLAYTON HOMES, and NTA, INC.,
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§
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Plaintiffs,
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v.
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HENSEL PHELPS CONSTRUCTION CO., §
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et al.,
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Defendants.
Civil Action No. SA-12-CV-1223-XR
ORDER
On this date, the Court considered Plaintiffs’ opposed motion to compel arbitration and
stay the case. Doc. No. 47 & Doc. No. 56.
After careful consideration, the Court GRANTS
the motion.
BACKGROUND
In 2006, Defendant Hensel Phelps entered into a contract with the United States Army
Corps of Engineers (the “Army”) to design and construct modular military housing at Fort
Bliss, Texas. Hensel Phelps subcontracted many of its requirements to third parties. This case
arises out of the subcontract that Hensel Phelps awarded to the Warrior Group (collectively,
the “Hensel-Warrior Agreements”). In turn, Warrior subcontracted with Fleetwood Homes of
Texas, L.P. (collectively, the “Warrior-Fleetwood Agreements”).
Fleetwood agreed to
manufacture, assemble, and furnish the modular housing units for the Fort Bliss project. Doc.
No. 47, Ex. 2. The Warrior-Fleetwood Agreements all contain an identical arbitration clause
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that is the focus of this dispute. The clause provides that “[a]ny dispute between Warrior and
Vendor (Fleetwood) not arising from or relating to the acts or omissions of the Owner (Army)
shall be resolved through arbitration.” Doc. No. 47, Ex. 1-C.
On March 10, 2009, Fleetwood Homes filed for bankruptcy. Plaintiff CMH purchased
Fleetwood’s modular housing production facility in Belton, Texas, and entered into a
Warranty Assumption Agreement.
Under this agreement, the rights and obligations that
Fleetwood possessed under the Warrior-Fleetwood agreements were assigned to CMH. On
January 1, 2011, the fire sprinkler pipes in five of the modular buildings manufactured by
Fleetwood allegedly burst, causing significant damage to the housing units. The Army
demanded that Hensel Phelps make repairs. Hensel Phelps passed this demand down to
Warrior, who in turn passed it down to CMH. Warrior then withheld payment to CMH until
the repairs were made. Doc. No. 47, Ex. I.
On March 1, 2012, CMH filed suit in this Court against Warrior, Hensel Phillips, and
Travelers Surety Company of America to collect on the unpaid balance. Specifically, CMH
sued under a breach of contract theory as well as for violations of the Miller Act. Defendants
moved to compel arbitration on the basis of the aforementioned clause in the WarriorFleetwood Agreements. On June 22, 2012, this Court granted Defendants’ motion and stayed
the case under 9 U.S.C. § 3. CMH Mfg., Inc. v. The Warrior Grp., Inc., No. 5:12-CV-001985XR. Doc. No. 10. The arbitration related to the breach of contract claim is ongoing.
On December 28, 2012, CMH filed a second lawsuit in this Court against Hensel
Phelps alleging that it negligently designed the sprinkler system that CMH was required by
contract to install. In addition, in this second lawsuit, CMH alleges a cause of action for
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negligent misrepresentation relating to the design specifications. Doc. No. 1. On September
13, 2013, CMH filed this motion to compel arbitration. Doc. No. 47.1 Warrior, a defendant in
the related case who actually signed the arbitration agreement, is not a party to this action.
CMH only seeks to compel arbitration against Hensel Phelps and not against the remaining
five Defendants.
A hearing on this motion was held on November 7, 2013. At the hearing, counsel for
CMH represented to the Court that developments in the arbitration proceeding in the related
case may make this motion to compel moot. Accordingly, the Court ordered counsel to
provide a status report on or before January 6, 2014.
In that report, CMH noted that the
arbitration panel in the related case had not yet issued a ruling and that the issue was still
pending. On March 1, 2014, CMH filed a second status report, noting again that the related
arbitration is still pending. At this point, it does not appear likely that this motion to compel
arbitration will be mooted by any timely developments in the ongoing arbitration in the related
case. Accordingly, the Court turns to the merits of Plaintiffs’ motions to compel arbitration.
DISCUSSION
1. Can CMH & NTA compel Hensel Phelps to Arbitrate?
A motion to compel arbitration requires the Court to assess whether the parties agreed
to arbitrate the dispute in question. “This determination involves two considerations: (1)
whether there is a valid agreement to arbitrate between the parties; and (2) whether the dispute
in question falls within the scope of that arbitration agreement.” Tittle v. Enron Corp., 463
F.3d 410, 418-19 (5th Cir. 2006) (quoting Webb v. Investacorp, 89 F.3d 252, 258 (5th Cir.
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On December 18, 2013, co-plaintiff NTA, Inc., joined in CMH’s motion to compel Hensel Phelps to arbitrate
and stay this case. Doc. No. 56.
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1996)). In addition, a court must ensure that there are no external legal barriers to enforcing
an arbitration clause. Id. “Generally under the FAA, state law governs whether a litigant
agreed to arbitrate, and federal law determines the scope of the arbitration clause.” Fleetwood
Enters., Inc. v. Gaskamp, 280 F.3d 1069, 1077-78 (5th Cir. 2002).
Is There an Enforceable Agreement Between the Parties?
The arbitration clause that CMH seeks to enforce comes from its contract with
Warrior, to which Hensel Phelps is not a party.
Arbitration agreements are generally
considered matters of contract law. Grigson v. Creative Artists Agency, L.L.C., 210 F.3d 524,
528 (5th Cir. 2000). Accordingly, courts are hesitant to bind non-signatories unless there is a
clear reason to do so. See Westmoreland v. Sadoux, 299 F.3d 462, 467 (5th Cir. 2002).
Federal courts applying Texas law2 have compelled arbitration involving non-signatories when
one of the following doctrines applies: (a) incorporation by reference, (b) assumption, (c)
agency, (d) veil piercing/alter ego, (e) estoppel; and (f) third-party beneficiary. Wood v.
PennTex Res., L.P., 458 F. Supp. 2d 355, 362 (S.D. Tex. 2006) (citing In re FirstMerit Bank,
N.A., 52 S.W.3d 749 (Tex. 2001)).
The case law on this issue can be divided into two categories. The first category
includes cases where the non-signatory seeks to enforce an arbitration agreement against a
signatory. Westmoreland, 299 F.3d at 467. This was the situation in the prior action involving
these parties where the non-signatory (Hensel Phelps) enforced this arbitration agreement
against the signatory (CMH). Courts are clear that the standards for enforcing an agreement
against a non-signatory are different than the standards for enforcing such an agreement
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State law applies to the question when a non-signatory such as Hensel Phelps can be bound. Todd v. Steamship
Mut. Underwriting Ass'n (Bermuda) Ltd., 601 F.3d 329, 334 (5th Cir. 2010) (citing Arthur Andersen LLP v.
Carlisle, 556 U.S. 624, 629 (2009)).
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against a signatory. Bridas S.A.P.I.C. v. Gov't of Turkmenistan, 345 F.3d 347 (5th Cir. 2003).
In Bridas, the Fifth Circuit reasoned that “it is more foreseeable, and thus more reasonable,
that a party who has actually agreed in writing to arbitrate claims with someone might be
compelled to broaden the scope of his agreement to include others.” Id. at 361. Accordingly,
the fact that Hensel Phelps once enforced this arbitration clause against CMH, although
relevant, does not automatically mean that CMH can enforce it against Hensel Phelps.
CMH argues that Hensel Phelps can be compelled to arbitrate under a direct-benefit
estoppel theory. Doc. No. 47. The Fifth Circuit has accepted direct-benefit estoppel as a basis
for “compelling a non-signatory to arbitrate with a signatory to an agreement when the nonsignatory ‘knowingly exploits the agreement containing the arbitration clause.’” Bridas, 345
F.3d at 362 (quoting E.I. DuPont de Nemours & Co. v. Rhone Poulenc, 269 F.3d 187, 199 (3d
Cir. 2001)); Hellenic Inv. Fund, Inc. v. Det Norske Veritas, 464 F.3d 514, 517-18 (5th Cir.
2006) (upholding enforcement of forum-selection clause against non-signatory on the basis of
direct-benefit estoppel).
Hensel Phelps counters with the argument that a non-signatory
cannot be bound to an arbitration clause when they have not asserted a claim under that
contract. Doc. No. 49.
In Wood, a federal district court in the Southern District of Texas applied direct-benefit
estoppel to enforce an arbitration agreement against a non-signatory who was not asserting a
claim under the contract. 458 F.Supp.2d at 355.
Wood involved an arbitration clause
contained in a stock purchase agreement between two companies. The owner and soleshareholder of the seller later brought suit against the buyer. When the buyer moved to
compel arbitration based on a clause in the stock purchase agreement, the plaintiff seller
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argued that the clause did not apply to him personally because he was a non-signatory who
was not asserting a claim under the contract. After finding that the sole shareholder, in his
individual capacity, was not technically a party to the agreement containing the arbitration
clause, the court applied direct-benefit estoppel to enforce the clause against him. Id. In doing
so, the federal court relied heavily on the Texas Supreme Court’s decision in In re Weekley
Homes, 180 S.W.3d 127 (Tex. 2005) (holding that non-signatories may be bound even when
not asserting a claim on the contract if they “deliberately seek and obtain substantial benefits
from the contract itself.”).
In Weekley Homes, a father entered into a contract with a home builder to construct a
home for his adult daughter and her husband. The contract contained an arbitration clause.
Later, the father and daughter sued the home builders who subsequently sought to enforce the
arbitration agreement.
The trial court enforced the agreement against the father only,
reasoning that it could not apply to the daughter’s claims because she was a non-signatory who
was not asserting any claims under the contract. The Texas Supreme Court reversed on this
issue. The court held that because the daughter had participated in the performance of the
contract by making specific demands of the home builders, she had benefited from the
agreement containing the arbitration clause and was therefore estopped from avoiding
arbitration. Id. at 133. Specifically, the court reasoned that “when a nonparty consistently and
knowingly insists that others treat it as a party, it cannot later turn its back on the portions of
the contract, such as an arbitration clause, that it finds distasteful.” Id. at 135. 3
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More recently, in Rachal v. Reitz, the Texas Supreme Court extended Weekley Homes to compel arbitration
against the beneficiaries of a trust containing an arbitration agreement. 403 S.W.3d 840 (Tex. 2013). The court
focused its inquiry on whether the party seeking to avoid arbitration had derived benefit from the Trust. Finding
that they had derived such a benefit, the Court applied direct-benefit estoppel even though there was no
underlying contract.
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In applying Weekley Homes, the court in Wood assessed whether the non-signatory had
received substantial and direct benefits from the contract. In particular, the court found it
relevant that the non-signatory: (1) participated in negotiating the agreement, (2) was named in
the agreement, (3) was involved in the execution and performance of the agreement; and (4)
was provided with indemnity under the agreement. Id. at 370.
Hensel Phelps directly benefited from the contract containing the arbitration
agreement. Accordingly, direct-benefit estoppel applies and Hensel Phelps cannot avoid an
obligation to arbitrate. As the prime contractor on a lucrative government contract, Hensel
Phelps benefited financially from the execution of its subcontracts. Prime contractors utilize
subcontractors to carry out their contractual obligations when it is economically beneficial for
them to do so. Thus, a contractor in Hensel Phelps’ position necessarily benefits from the
performance of its subcontracts.
As to the factors identified in Wood, Hensel Phelps argues that there is no evidence of
their role in negotiating the Warrior-Fleetwood Agreements. Doc. No. 49. The Court agrees
with Hensel Phelps in the limited respect that the use of common language in both the HenselWarrior and the Warrior-Fleetwood Agreements does not establish that Hensel Phelps played
a role in drafting the latter set of agreements. However, the Hensel-Warrior Agreements
required Hensel Phelps’ written consent before any of Warrior’s obligations could be
subcontracted to Fleetwood/CMH. Hensel Phelps was therefore on notice of the arbitration
agreement contained in the Warrior-Fleetwood Agreements.
All of the other Wood factors point towards the application of direct-benefit estoppel.
Hensel Phelps is named in the Warrior-Fleetwood Agreements. Doc. No. 47, Ex. 1-D. These
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agreements also provide Hensel Phelps with indemnification for certain claims Id. Perhaps
most importantly, Hensel Phelps was involved in the execution of the Warrior-Fleetwood
agreements. The contract provided that Fleetwood was to “furnish and install piping and
fittings . . . in accordance with [the designs] provided by others.” Id. at 19 (emphasis added).
The “others” referenced in the contract turned out to be Hensel Phelps. CMH alleges (and
Defendants do not appear to contest) that CMH was required by the contract to use the
sprinkler system designs provided by Hensel Phelps.
Therefore, Hensel Phelps directly
participated in the execution of the Warrior-Fleetwood Agreements by providing the sprinkler
designs that are the subject of this lawsuit.4
Finally, and most importantly, Hensel Phelps has directly benefited from the arbitration
clauses in the Warrior-Fleetwood Agreements. Hensel Phelps successfully moved this Court
to compel arbitration against CMH in a prior related action. While this fact alone is an
insufficient basis for CMH to compel arbitration against Hensel Phelps, it serves as a strong
example of how Hensel Phelps has benefited from the Warrior-Fleetwood Agreements. As an
equitable doctrine, the application of direct-benefit estoppel is at the court’s discretion. Other
courts have applied direct benefit estoppel when the non-signatory merely benefited from the
contract in some manner unrelated to the arbitration clause. Here, however, the non-signatory
has benefited from the arbitration clause itself. Accordingly, the Court finds that this is a rare
situation where it is appropriate to enforce an arbitration agreement against a non-signatory.
b. Are the Claims Within the Scope of the Arbitration Agreement?
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Hensel Phelps is therefore similarly situated to the non-signatory daughter in Weekley Homes who participated
in the execution of the contract by imposing her own requirements on one of the parties.
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CMH has asserted tort claims against Hensel Phelps for negligent design of the
sprinkler system and negligent misrepresentation. Doc. No. 1. For arbitration to be
appropriate, these claims must be within the scope of the arbitration clauses set forth in the
Warrior-Fleetwood Agreements. Under federal law, which governs the scope of arbitration
agreements, “any doubts concerning the scope of arbitrable issues should be resolved in favor
of arbitration.” Moses H. Cone Mem’l Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 24-25
(1983).
As an initial matter, however, the Court must determine who decides whether these
claims are covered by the arbitration agreement. As a general rule, because arbitrators derive
their authority from the arbitration agreement itself, determining the scope of that clause (i.e.
arbitrability) is a task for judicial determination. Tittle, 463 F.3d at 419 (citing AT&T Techs.,
Inc. v. Commc'ns Workers of Am., 475 U.S. 643 (1986)).
At the same time, however, it is
established that the parties have the power to determine by contract whether the court or the
arbitrator decides arbitrability. First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938, 943
(1995). On this issue, the Supreme Court has instructed courts not to assume that the parties
agreed to arbitrate arbitrability “[u]nless the parties clearly and unmistakably provide
otherwise.” AT&T Techs., 475 U.S. at 649. In the Fifth Circuit, adoption of the American
Arbitration Association (“AAA”) Rules “presents clear and unmistakable evidence that the
parties agreed to arbitrate arbitrability.” Petrofac, Inc. v. DynMcdermott Petroleum Operations
Co., 687 F.3d 671, 675 (5th Cir. 2012). The arbitration clause in the Warrior-Fleetwood
Agreements expressly incorporates the AAA rules. Accordingly, it appears as though the
parties intended for the arbitrator to decide his or her own jurisdiction.
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However, in a case where the arbitration agreement is being enforced against a nonsignatory, the Court finds it appropriate to ensure that the claim falls within the scope of the
arbitration agreement. The agreement here provides, in pertinent part, that “any dispute
between Warrior Group and Vendor not arising from or relating to the acts or omissions of the
Owner shall be resolved through arbitration.” Doc. No. 47, Ex. 1-D. The contract defines the
“owner” to be the Army. The claims here do not pertain to any Army acts or omissions.
Instead, they solely relate to the acts or omissions of Hensel Phelps and the other Defendants.
Hensel Phelps argues that these claims are unrelated to the contract. Doc. No. 49.
There are two problems with this argument. First, the tort claims are in fact related to the
underlying contract. The contract containing the arbitration clause required CMH to use a
certain sprinkler system designed by Hensel Phelps. Whether Hensel Phelps was negligent in
designing this sprinkler system therefore directly relates to CMH’s performance of the
contract. More importantly, the arbitration clause refers to “any dispute” between the parties.
Unlike some arbitration clauses, it is not expressly limited to claims arising out of the contract.
Accordingly, the claims in this case fall within the scope of the arbitration agreement. Finally,
the parties have not alleged the existence of any independent impediment to compelling
arbitration.
2. Can the Case be Stayed Against the Other Non-Signatory Defendants?
While the Court has authority to compel Hensel Phelps to arbitrate as discussed herein, this
does not apply to the other five Defendants in this case.
None of these other parties were
signatories to the arbitration agreement. Unlike Hensel Phelps, direct-benefit estoppel does
not apply to these other Defendants. CMH has not established how these parties benefited
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from the contract containing the arbitration agreement. Accordingly, the Court lacks authority
to compel arbitration against the remaining Defendants.
However, under § 3 of the FAA, this Court retains discretion to “stay all litigation between
signatories and non-signatories pending completion of arbitration to prevent the litigation from
undermining the arbitration.” Halliburton Energy Services, Inc. v. NL Indus., Inc., 2006 WL
3949170 (S.D. Tex. July 25, 2006); see also Moses H. Cone, 460 U.S. at 103 (“[i]n some
cases, of course, it may be advisable to stay litigation among the non-arbitrating parties
pending the outcome of the arbitration.”). At the November hearing on this motion, the Court
questioned whether staying the case while CMH and Hensel Phelps arbitrated would unfairly
prejudice the other five Defendants. At the hearing none of these parties indicated that they
would be unfairly prejudiced by a stay pending resolution of the arbitration. Likewise, in the
intervening months none of these parties have indicated their opposition to a stay.
Accordingly, the Court exercises its discretion to stay the case.
CONCLUSION
In light of the foregoing analysis, Plaintiffs’ motion to compel arbitration is
GRANTED as against Hensel Phelps. Doc. No 47, Doc. No. 56.
STAYED pending resolution of the arbitration proceedings.
The case is hereby
The Clerk is directed to
ADMINISTRATIVELY CLOSE the case until further notice. The parties are ORDERED to
provide the Court with status updates every six months from the date of this order on the status
of arbitration.
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SIGNED this 5th day of March, 2014.
XAVIER RODRIGUEZ
UNITED STATES DISTRICT JUDGE
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