Texas

Warning: The following opinion is provided for purposes of discussion only. We have not Shepardized™ this opinion, and do not know the subsequent disposition of this case nor whether the effect of the opinion has been overruled or superceded by other law.

In re Steger Energy Corp.,
2002.TX.0000121 (Tex.App. Dist.4 01/09/2002)

THE COURT OF APPEALS OF THE FOURTH DISTRICT OF TEXAS

No. 04-01-00556-CV

2002.TX.0000121

January 9, 2002

OPINION WITHDRAWN and new opinion issued April 24, 2002.

IN RE STEGER ENERGY CORPORATION AND STEPHEN R. HENSON IN RE J. HIRAM MOORE LTD., RICHARD MOORE, MICHAEL HARRISON MOORE, STEPHEN SCOTT MOORE, AND J. HIRAM MOORE

Original Mandamus Proceeding Arising from the 49th Judicial District Court, Zapata County, Texas Trial Court No. 4,248 Honorable Manuel Flores, Judge Presiding & No. 04-01-00670-CV

Original Mandamus Proceeding Arising from the 49th Judicial District Court, Zapata County, Texas Trial Court No. 4,248 Honorable Manuel Flores, Judge Presiding

Sitting: Tom Rickhoff, Justice *fn1, Catherine Stone, Justice, Karen Angelini, Justice

Catherine Stone, Justice

PETITIONS FOR WRIT OF MANDAMUS CONDITIONALLY GRANTED

In these original proceedings, we are asked to determine whether, when the issue of a party's mental capacity to enter into a contract has been raised and the contract sought to be rescinded contains an arbitration clause, the determination regarding capacity should be made by the trial court or by an arbitrator. We conclude this determination should be made by an arbitrator. Therefore, we conditionally grant the petitions for writ of mandamus.

Factual & Procedural Background

In July 1996, Steger Energy entered into a written contract with Clarence Jennings to purchase the oil, gas, and mineral interests in real property he and his mother (Gladys Guerra, who was deceased at the time of the offer but for whom Jennings had a power of attorney) owned.

After signing the contract, Jennings and his wife immediately attempted to rescind the sale. *fn2 They eventually sued for rescission two years later, contending Jennings (1) was incompetent at the time he signed the contracts-in the early stages of Alzheimer's; (2) believed the conveyances were leases, not sales; and (3) was fraudulently induced into signing the contracts. The contract includes a provision for disputes to be arbitrated under the Federal Arbitration Act (FAA). *fn3

Relators filed a motion to stay the proceedings and compel arbitration. The trial court ruled that the issue of competency should first be determined in the courts, and these original proceedings ensued.

Standards of Review

Mandamus relief is available when under the circumstances of the case the facts and law permit the trial court to make but one decision-and the trial court has refused to make that decision-and remedy by appeal to correct the ruling is inadequate. Johnson v. Fourth Court of Appeals, 700 S.W.2d 916, 917 (Tex.1985). A party seeking to compel arbitration by mandamus must first establish the existence of an arbitration agreement subject to the FAA. In re FirstMerit Bank, N.A., 52 S.W.3d 749, 753 (Tex. 2001). Once the movant establishes an agreement, the court must then determine whether the arbitration agreement covers the non-movant's claims. Id. Because state and federal policies continue to favor arbitration, a presumption exists favoring agreements to arbitrate under the FAA, and courts must resolve any doubts about an arbitration agreement's scope in favor of arbitration. Id.

Once the trial court concludes that the arbitration agreement encompasses the claims, and that the party opposing arbitration has failed to prove its defenses, the trial court has no discretion but to compel arbitration and stay its own proceedings. Id. at 753-54. A party erroneously denied the right to arbitrate under the FAA has no adequate remedy on appeal, and mandamus relief is appropriate. In re Oakwood Mobile Homes, Inc., 987 S.W.2d 571, 575 (Tex. 1999).

Discussion

The Relators bore the burden to show they were entitled to arbitration under the FAA by establishing the existence of an arbitration agreement within a contract that affected interstate commerce. See FirstMerit Bank, N.A., 52 S.W.3d at 753.

Agreement to Arbitrate Under the FAA

The royalty conveyances Clarence Jennings signed includes the following provision:

4. PARTIES' AGREEMENT TO MEDIATION AND/OR ARBITRATION: IN THE EVENT OF ANY DISPUTE (AS DEFINED HEREIN BELOW) ARISING OUT OF OR RELATING TO THIS CONTRACT, OR THE BREACH THEREOF, THE PARTIES FIRST AGREE TO PARTICIPATE IN AT LEAST FOUR (4) HOURS OF MEDIATION IN ACCORDANCE WITH THE COMMERCIAL MEDIATION RULES OF THE AMERICAN ARBITRATION ASSOCIATION, BEFORE HAVING RECOURSE TO ARBITRATION.

If the mediation procedure provided for herein does not resolve any such dispute, the parties agree that all disputes between the parties shall be resolved by binding arbitration administered by the American Arbitration Association in accordance with its commercial arbitration rules and pursuant to the Federal Arbitration Act, 9 U.S.C. Sections 1 - 14. Judgment (sic) upon the award rendered by the arbitrator may be entered in any Court having Jurisdiction. The term "disputes" shall include, but is not limited to, all claims, demands and causes of action of any nature, whether in contract or in tort, at law and in equity, or arising under or by virtue of an statute or regulation of judicial reason, that are now recognized by law or that may be created or recognized in the future, for resulting past, present and future personal injuries, contract damages, intentional and/or malicious conduct, actual and/or constructive fraud, statutory and/or common-law fraud, class action suit, misrepresentation of any kind and/or character, liable (sic), slander, negligence, gross negligence, and/or deceptive trade practices/consumer protection act damages, and for all other losses, damages and/or remedies of any kind and/or character, including without limitation, all actual damages, exemplary and punitive damages, all attorney's fees, all penalties of any kind, prejudgment interest and costs of court by virtue of the matters alleged and/or matters arising between the parties. The award of the arbitrator issues pursuant hereto shall be final, binding and non-appealable. EXEMPLARY & PUNITIVE DAMAGES. Parties hereby waive any rights to punitive or exemplary damages and the Arbitrator(s) will not have the authority to award exemplary or punitive damages to either party.

LIMITATION. Any arbitration proceedings must be instituted within two (2) years from the date of this conveyance. Failure to institute an arbitration proceeding within such period will constitute an absolute bar and waiver to the institution of any of any proceeding, whether arbitration or a court proceeding, with respect to such Dispute.

By its terms, the provision invokes the FAA. In addition, the subject of the conveyances are oil, gas, and mineral leases, which involve interstate commerce. See McCoy-Elkhorn Coal Corp. v. United States Envtl. Prot. Agency, 622 F.2d 260, 265 (6th Cir. 1980) (noting that the sale of energy sources is unquestionably in the stream of interstate commerce). Because the Relators have established the existence of an agreement to arbitrate under the FAA, we must determine whether the arbitration agreement covers the Jennings's claims. See FirstMerit Bank, N.A., 52 S.W.3d at 753.

Scope of Arbitration Agreement

To determine whether a party's claims fall within an arbitration agreement's scope, we focus on the complaint's factual allegations rather than the legal causes of action asserted, resolving any doubts about the agreement's factual scope in favor of coverage. Id. at 754. The scope of the agreement here is very broad, covering all claims or causes of action in contract, tort, intentional or malicious conduct, actual or constructive fraud, statutory or common-law fraud, misrepresentation, class action suits, libel, slander, negligence, gross negligence, and deceptive trade practices/consumer protection act damages.

In their pleadings, the Jenningses stated they relied on representations made by Steger Energy and Stephen R. Henson to execute the royalty conveyances, but mistakenly entered into the agreements. They contended Clarence Jennings did not have the capacity to enter into the agreements because of a debilitating mental condition and that Relators made numerous misrepresentations to them. The Jenningses contended the conveyances were invalid due to lack of consideration, that the agreements were unconscionable, and that they withdrew their consent before the agreements were accepted. Based on these allegations, they argued they were entitled to rescind the contracts, and pled claims for conversion, quantuum meruit, unjust enrichment, violation of the Deceptive Trade Practices Act (DTPA), *fn4 and fraudulent transfer. Given the arbitration agreement's very broad language, we conclude that all of the Jennings's factual allegations fall within its scope. The remaining question, then, is whether there is a valid defense to arbitration.

Defenses to Arbitration

Generally, when there is a valid arbitration agreement, all substantive and procedural matters are determined by the arbitrator. See In re Weekley Homes, 985 S.W.2d 111, 114 (Tex. App.-San Antonio 1998) (orig. proceeding) (holding that once it is determined parties are obligated to submit the subject matter in dispute to arbitration, procedural questions growing out of the dispute and bearing on its final disposition are also left to the arbitrator). Defenses of unconscionability, duress, fraudulent inducement, and revocation must specifically relate to the arbitration agreement itself, not to the contract as a whole, if they are to defeat arbitration. FirstMerit Bank, 52 S.W.3d at 756. While fraud in the inducement of an arbitration agreement is a defense to arbitration, fraud in the inducement of a contract containing an arbitration provision relates to the contract's validity; as such, it can be arbitrated. Id. The crux of the defense asserted here is that Clarence Jennings lacked the capacity to contract. The Jenningses do not challenge the arbitration clause itself. Thus, the defense asserted relates to the contract as a whole, not the arbitration provision. While there are no cases specifically holding that the defense of lack of mental capacity is subject to arbitration, it appears to be a defense indistinguishable from such defenses as unconscionability and fraudulent inducement, which, if proved, would render the contract void. . We hold that the issue of Jennings's capacity to enter into the contract is one for the arbitrator to determine, not the trial court.

Invalidity of the Arbitration Provision

In their response to Relator's petition for writ of mandamus, the Jenningses raised an issue before this court that was not argued before the trial court: whether the arbitration clause itself is void ab initio because it violates section 16.070 of the Texas Civil Practices & Remedies Code. That section provides:

[A] person may not enter a stipulation, contract or agreement that purports to limit the time in which to bring suit on the stipulation, contract or agreement to a period shorter than two years. A stipulation, contract or agreement that establishes a limitations period that is shorter than two years is void in this state. See Tex. Civ. Prac. & Rem. Code Ann. § 16.070 (Vernon 1997).

By virtue of section 16.070, a contract that limits the time in which to bring suit to a period shorter than two years is void. See, e.g., Webb v. Smith, 288 S.W. 624, 625 (Tex. Civ. App.-Waco 1926, writ dism'd w.o.j.). At oral argument, the Jenningses further contended (1) the arbitration provision violates section 17.42 of the DTPA because it vitiates their statutory rights as consumers, and (2) the arbitration provision is void because it bars recovery of punitive or exemplary damages. The Relators argue that, because the trial court never had an opportunity to address these arguments, this court is precluded from addressing them. We agree.

Although there are references in the pleadings to the contract being void and the Jenningses have submitted amended pleadings to the trial court, there was nothing before the court at the time of the hearing on the motion to compel arbitration that set out any of the arguments regarding section 16.070, the DTPA, or the prohibition against exemplary damages. It is incumbent on a party to sufficiently notify the trial court of a claimed error, and a theory argued on appeal must comport with claimed error before the trial court. See Gutierrez v. County of Zapata, 951 S.W.2d 831, 844 (Tex. App.-San Antonio 1997, no pet.); see also In re Acevdo, 956 S.W.2d 770, 775-76 (Tex. App.-San Antonio 1997) (orig. proceeding) (refusing to consider alternative ground for ruling not considered by trial court). Accordingly, we cannot presently consider these alternative challenges to arbitration. Because Jennings has amended his petition, he will have an opportunity to submit these challenges to the trial court if Relators file another motion to compel arbitration.

Conclusion

Because the sole claim we may consider falls within the scope of the parties' agreement to arbitrate, we hold the trial court abused its discretion in denying the motion to compel arbitration. Therefore, we conditionally grant the writ of mandamus and direct the trial court to vacate its order denying the motion to compel arbitration. The clerk is instructed to issue the writ only if the trial court fails to do so.

Catherine Stone, Justice

DO NOT PUBLISH

Opinion Footnotes

*fn1 J. Rickhoff not participating.

*fn2 There is some indication in the record that Jennings may have believed he had signed another royalty lease, not a conveyance, as the amount paid for the conveyance was roughly the same as the amount he had been receiving in royalties each month.

*fn3 9 U.S.C. §§ 1-14 (1999)

*fn4 Tex. Bus. & Comm. Code Ann. §17.41 (Vernon 1994).

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