Cotton Commercial USA, Inc. v. Clear Creek Indep. Sch. Dist.

• Decision Date: 06 November 2012
• Docket Number: No. 14–12–00272–CV.,14–12–00272–CV.
• Citation: 387 S.W.3d 99
• Parties: COTTON COMMERCIAL USA, INC., Appellant v. CLEAR CREEK INDEPENDENT SCHOOL DISTRICT, Appellee.
• Court: Texas Court of Appeals

387 S.W.3d 99

COTTON COMMERCIAL USA, INC., Appellant

v.CLEAR CREEK INDEPENDENT SCHOOL DISTRICT, Appellee.

No. 14–12–00272–CV.

Court of Appeals of Texas, Houston (14th Dist.).

Nov. 6, 2012.

Cynthia Ann Holub, Lauren Beck Harris, Houston, TX, for Appellant.

Richard A. Morris, Jonathan Griffin Brush, Houston, TX, for Appellee.

Panel consists of Justices BOYCE, CHRISTOPHER, and McCALLY.

OPINION

SHARON McCALLY, Justice.

Appellant, Cotton Commercial USA, Inc. (hereinafter “SURVIVING COMPANY”), appeals the trial court's order denying its motion to compel arbitration of appellee's, Clear Creek Independent School District (hereinafter “the School District”), claims. We affirm, in part, and reverse and remand, in part.

I. Background

On September 8, 2012, the School District executed a “Restoration Service Agreement” with Cotton Commercial USA, L.P. d/b/a Cotton USA (hereinafter “CONTRACTOR”) for debris removal and remediation and restoration services to the School District's school campuses after Hurricane Ike (the Restoration Agreement).¹ It is undisputed that the Restoration Agreement contained the following arbitration provision:

Any controversy, dispute or claim arising out of this Agreement or the Work done hereunder (which can not [sic] be amicably resolved by senior management representatives of Cotton and the Customer), shall first be submitted to non-binding mediation. Both parties shall share equally in the expense of such mediation in which a non-interested mediator shall serve to facilitate the resolution of the dispute. If such controversy, dispute or claim can not [sic] be settled or resolved by non-binding mediation, either party may then submit such dispute to arbitration in accordance with the terms of this Article VII, provided, however, that in circumstances where equitable (non-monetary) relief is sought, such dispute may be submitted to a court of competent jurisdiction sitting in equity who may issue injunctive relief or other equitable remedy. ²

According to the School District's amended petition, under the Restoration Agreement, CONTRACTOR was “to remove debris from its premises and perform remediation and restoration services following clean up.” The Restoration Agreement specifically authorized the use of subcontractors and provided for payment in accordance with a rate schedule. The Restoration Agreement also authorized the use of “a particular trade or service” on a “cost plus 10% overhead and 10% profit” basis if there was a “specific need” because CONTRACTOR did not provide those services.

The debris removal occurred from approximately September 18, 2008, through September 29, 2008. Remediation occurred through the end of October 2008. CONTRACTOR invoiced the School District, and its invoices reflected work performed by Cottonwood Debris Company, LLC (hereinafter “SUBCONTRACTOR”). The School District questioned the invoices; the relationship between CONTRACTORand SUBCONTRACTOR; and the characterization of SUBCONTRACTOR as a “subcontractor,” which gave rise to the higher billing under the Restoration Agreement.

CONTRACTOR sent its final invoice in December 2008, but persisted in billing SUBCONTRACTOR'S services as a subcontractor. The School District refused to pay the 20% markup associated with SUBCONTRACTOR'S characterization as a subcontractor because it had determined that SUBCONTRACTOR was an entity “closely related to” CONTRACTOR.

In the subsequent negotiations over SUBCONTRACTOR'S invoices, SUBCONTRACTOR provided the School District with documentation to support certain fuel charges billed by SUBCONTRACTOR. The School District determined that these were fraudulent or fabricated invoices. Further, SUBCONTRACTOR included in its billings a $6,000 per campus charge for “food disposal services.” SUBCONTRACTOR could not back these charges up with supporting documentation; the School District determined from its own records that the services had not been performed at all. SUBCONTRACTOR'S billings included a $170.73 per cubic yard charge for debris removal that was three times the cost permitted by Federal Emergency Management Agency (“FEMA”), to whom the School District was applying for reimbursement. The School District informed FEMA that it had concerns about the “authenticity of the underlying invoices from [SUBCONTRACTOR].” FEMA denied the School District's application, resulting in the loss of $700,000 in FEMA reimbursements.

Prior to this suit, and as alleged in the School District's petition, CONTRACTOR and SUBCONTRACTOR were “merged out of existence” to form SURVIVING COMPANY. Thus, when, on December 1, 2010, the School District filed suit arising from the previously described conduct by SUBCONTRACTOR, the School District named only SURVIVING COMPANY. Specifically, its claims are for fraud and money had and received.

On May 18, 2011, SURVIVING COMPANY filed its motion to stay and compel arbitration of the School District's claims. In its motion to stay and to compel arbitration, SURVIVING COMPANY stated that it had not formally asserted its counterclaims for the School District's failure to pay $705,123 in the action pending in the trial court because of the arbitration clause in the Restoration Agreement. Instead, in its draft statement of claim and demand for arbitration filed with the American Arbitration Association, which was attached to its motion to compel arbitration, SURVIVING COMPANY asserted causes of action for breach of contract and violations of the Prompt Pay Act for failing to pay $705,123.

On March 1, 2012, the trial court (1) denied SURVIVING COMPANY'S motion to stay and compel arbitration with respect to the School District's claims against SURVIVING COMPANY; and (2) granted SURVIVING COMPANY'S motion to stay and compel arbitration with respect to SURVIVING COMPANY'S counterclaims against the School District.

On April 23, 2012, the trial court made the following findings of fact:

1. After Hurricane Ike made landfall, Clear Creek Independent School District (CCISD) and Cotton Commercial USA, L.P. d/b/a Cotton USA (Cotton USA) entered into a contract for hurricane remediation.

2. CCISD and Cotton USA's contract contained on [sic] arbitration provision.

3. Cotton USA employed a subcontractor, Cottonwood Debris Company, LLC, to perform some hurricane remediation for CCISD.

4. Cottonwood was not a party [to] or a signatory to the contract between Cotton USA and CCISD.

5. Cottonwood was not a party to or a signatory to the arbitration agreement between Cotton USA and CCISD.

6. Cottonwood and Cotton USA merged into a single entity in September 2010, Cotton Commercial USA, Inc. f/k/a Cottonwood Debris Company, LLC, (Cotton Commercial).

7. In December 2010, CCISD filed suit against Cotton Commercial asserting claims related to Cottonwood's hurricane remediation work.

8. Cotton Commercial failed to present any evidence demonstrating that Cottonwood and CCISD were signatories to an arbitration agreement.

9. Cotton Commercial failed to present any evidence demonstrating that Cottonwood was an intended third-party beneficiary of the contract between CCISD and Cotton USA.

The trial court also reached the following conclusions of law:

1. In the absence of an agreement to arbitrate, a party cannot be compelled to arbitrate a claim.

2. A non-signatory to an arbitration agreement cannot compel a party to proceed to arbitration.

3. The party moving to compel arbitration bears the burden of proving the existence of an enforceable arbitration agreement.

SURVIVING COMPANY appeals the trial court's order denying its motion to compel arbitration of the School District's claims. The School District has not appealed the trial court's order granting SURVIVING COMPANY'S motion to compel arbitration of its claims against the School District.

II. Analysis

On appeal, SURVIVING COMPANY contends that the trial court erred in denying its motion to compel arbitration of the School District's claims. ³ The School District asserts that its claims are actually against SUBCONTRACTOR, but it only sued SURVIVING COMPANY because SUBCONTRACTOR ceased to exist after the merger. The School District maintains that it cannot be compelled to arbitrate its claims against SUBCONTRACTOR because there is no agreement to arbitrate between the School District and SUBCONTRACTOR. The trial court determined that there was no valid arbitration agreement. We reverse the portion of the trial court's order denying arbitration of the School District's claims.

A. Whether an Agreement to Arbitrate Exists

A party must establish the existence of a valid arbitration agreement, and that the claims fall within the scope of that agreement. In re Dillard Dep't Stores, Inc., 186 S.W.3d 514, 515 (Tex.2006) (orig. proceeding) (per curiam); McReynolds v. Elston, 222 S.W.3d 731, 739 (Tex.App.-Houston [14th Dist.] 2007, no pet.). Whether a valid arbitration agreement exists is a legal question subject to de novo review. J.M. Davidson, Inc. v. Webster, 128 S.W.3d 223, 227 (Tex.2003).

The parties agree and the trial court determined that there is an arbitration provision in the Restoration Agreement between CONTRACTOR and the School District. There is, however, no arbitration agreement between the School District and SUBCONTRACTOR. Contrary to appellant's suggestion, SURVIVING COMPANY is not a signatory to the Restoration Agreement. Moreover, contrary to appellee's insistence that its claims are “really against” SUBCONTRACTOR, the School District's claims are and must be against SURVIVING COMPANY, not SUBCONTRACTOR. See Bailey v. Vanscot Concrete Co., 894 S.W.2d 757, 759 (Tex.1995) (“Civil suits may be maintained only by or against parties having an actual legal existence.”); Smith v. CDI Rental Equip., Ltd., 310 S.W.3d 559, 565 (Tex.App.-Tyler 2010, no pet.) (explaining that one of two named plaintiffs ceased to exist after it had merged with another entity and, therefore, had no actual or legal existence).

Generally, an...