Ctr. Rose Partners, Ltd. v. Bailey

• Decision Date: 07 November 2019
• Docket Number: NO. 14-17-00739-CV,14-17-00739-CV
• Citation: 587 S.W.3d 514
• Parties: CENTER ROSE PARTNERS, LTD., Individually and Derivatively as a Member of Rose Acquisition LLC, David Felt, Nicole Felt, and Lloyd Hall, Appellants v. Jerry W. BAILEY and David Sonnier, Appellees
• Court: Texas Court of Appeals

587 S.W.3d 514

CENTER ROSE PARTNERS, LTD., Individually and Derivatively as a Member of Rose Acquisition LLC, David Felt, Nicole Felt, and Lloyd Hall, Appellants

v.Jerry W. BAILEY and David Sonnier, Appellees

NO. 14-17-00739-CV

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

Opinions filed November 7, 2019

Kem Thompson Frost, Chief Justice

In this case involving appeals from a judgment rendered on an arbitration award, the appellees move to dismiss on the grounds that (1) one of the appellants lacks standing to appeal; (2) another appellant is estopped from challenging the trial court's judgment on appeal; and (3) all appellants waived their right to appeal the judgment. We deny the appellees' motion to dismiss.

On the merits of the appeals, we conclude that appellant Lloyd Hall did not challenge the arbitration award in a timely manner and that appellants Center Rose Partners, Ltd., Individually and Derivatively as a Member of Rose Acquisition, LLC, David Felt, and Nicole Felt have not shown that the trial court erred in denying their applications to vacate the arbitration award. We affirm.

I. FACTUAL AND PROCEDURAL BACKGROUND

Appellant/plaintiff Center Rose Partners, Ltd., ("Center Rose Partners") appellees/defendants Jerry W. Bailey and David Sonnier (collectively the "Bailey Parties"), and appellant/defendant Lloyd Hall are members of Rose Acquisition, LLC ("Rose Acquisition"), a Texas limited liability company. In Rose Acquisition's Articles of Organization, Bailey and L.J. Black are named as Rose Acquisition's managers. According to the Bailey Parties, Black stopped performing his job responsibilities and by 2007, several Rose Acquisition members had become unhappy with Black's behavior. In 2008, Center Rose Partners purchased Black's 330 units in Rose Acquisition. To finance this purchase, Center Rose Partners obtained a $2,650,000 loan from Capital One, N.A. (the "Loan"). Center Rose Partners signed a Promissory Note in favor of the bank (the "Note"). After Center Rose Partners's purchase of Black's interest in Rose Acquisition, Bailey became the sole manager of Rose Acquisition. The Bailey Parties claimed that Center Rose Partners and David Felt promised that Center Rose Partners would pledge 100 of the units it bought from Black to Bailey as an added inducement for Bailey to remain with Rose Acquisition. According to the Bailey Parties, Center Rose Partners promised that if Rose Acquisition allowed Center Rose Partners to receive 55% of the distributions to Rose Acquisition members (even though Center Rose Partners owned only a 45% interest in Rose Acquisition), Center Rose Partners would use the distributions received from Rose Acquisition to pay off the Loan. The Bailey Parties later discovered that Center Rose Partners had defaulted on the Loan, and Bailey purchased the Loan from Capital One, N.A. to avoid a possible foreclosure by Capital One on assets of Rose Acquisition that had been pledged as collateral for the Loan.

In 2014, appellant/plaintiff Center Rose Partners, Ltd., a Texas limited partnership, Individually and Derivatively as a Member of Rose Acquisition, LLC ("Center Rose")¹ filed suit in the trial court below against Bailey, Sonnier, and Hall, asserting various claims relating to Bailey's management of Rose Acquisition. Center Rose sought various declarations under the Texas Declaratory Judgments Act and also asserted breach-of-contract, breach-of-fiduciary-duty, and quantum-meruit claims against Bailey. Center Rose also demanded an accounting and asked the trial court to impose a constructive trust.

In 2015, Bailey filed a separate lawsuit against Center Rose Partners and Nicole Felt seeking to recover the amount Center Rose Partners owed under the Note and against Nicole Felt as a guarantor.

In the trial court below, after Bailey, Sonnier, and Hall answered, the Bailey Parties filed a motion to compel arbitration of Center Rose's claims based on an arbitration provision contained in the Membership Agreement, executed in 1999 by all of the parties who were then members of Rose Acquisition. Under the Membership Agreement, the parties agreed that if they were unable to resolve "any dispute or controversy arising out of this [Membership Agreement], then any such dispute or controversy shall be settled by arbitration in Houston, Texas by a panel of three arbitrators in accordance with the rules of the American Arbitration Association, whose decisions shall be final, binding[,] and non-appealable." The Bailey Parties asserted that all of Center Rose's claims fell within the scope of this arbitration provision.

The trial court granted the motion to compel arbitration, ordered Center Rose, the Bailey Parties, and Hall to submit their dispute to arbitration in accordance with the Membership Agreement's arbitration provision, and stayed the case pending completion of the arbitration.

The Bailey Parties, individually and derivatively as members of Rose Acquisition, filed a demand for arbitration with the American Arbitration Association ("AAA") asserting claims for fraud, breach of fiduciary duty, conversion, and unjust enrichment against Center Rose Partners, David Felt, and Nicole Felt. The Bailey Parties alleged that the Felts were agents of Center Rose Partners. The Bailey Parties also sought declaratory relief and the imposition of a constructive trust. Though the trial court had compelled arbitration under the Membership Agreement's arbitration provision, the Bailey Parties did not base their arbitration demand on that provision. Instead, the Bailey Parties sought arbitration under section 11.15 of Rose Acquisition's Regulations. Under that provision, if the parties were unable to resolve "any dispute or controversy arising out of these Regulations, then any such dispute or controversy shall be settled by arbitration in Houston, Texas by a panel of three arbitrators in accordance with the rules of the [AAA], whose decisions shall be final, binding[,] and non-appealable."

In the arbitration, Center Rose Partners and the Felts filed an answer and claims for affirmative relief, in which they submitted to "the jurisdiction of the arbitration proceedings for those matters that are required to be arbitrated." They sought all of the relief Center Rose sought in the lawsuit and requested additional declaratory relief. Though Hall was a defendant in Center Rose's lawsuit, Hall did not file any claims in the arbitration, and no claimant in the arbitration named Hall as a respondent.

The arbitration panel based the arbitration on the arbitration provision contained in section 11.15 of Rose Acquisition's Regulations. In January 2017, the arbitration panel issued a unanimous award. Two months later the arbitrators issued an amended award (the "Award") to correct typographical errors in the original award. In the Award, the arbitration panel made findings, including the following:

• The parties failed to adhere to the governance sections of the Articles of Organization of Rose Acquisition, the Membership Agreement, and the Regulations of Rose Acquisition, LLC.

• On July 2, 2008, Center Rose Partners entered into a Letter Agreement with Capital One Bank to borrow $2,650,000 to be used to purchase the 330 units² of "Buzz" Black in Rose Acquisition.

• Capital One and Center Rose Partners entered into the Note and a Deed of Trust and Security Agreement for the $2,650,000 secured by .9147 acres on Center Street.

• The Note was to be paid from distributions allocated to Center Rose Partners for the 330 units.

• Pursuant to a Trust Agreement, 100 units of the 330 units were held in trust for Bailey.

• During the approximately sixty months that Center Rose Partners was paying on the Note, it received approximately $2,315,005 in distributions attributed to the 330 units in Rose Acquisition.

• Center Rose Partners failed to introduce any documentary evidence to support its contention that it paid income taxes at a rate of 33% on the distributions received attributable to the 330 units.

• Though Bailey received several salary increases without the appropriate vote of the members, the members acquiesced to these raises.

• Center Rose Partners defaulted on the Note. Bailey purchased the Note from Capital One for approximately $1,241,966.69.

• The misconduct of the Bailey Parties, Center Rose Partners, David Felt, and Nicole Felt "was neither ‘intentional’ nor a ‘knowing violation of the law.’ "

The arbitration panel determined that Center Rose Partners breached its agreement to pay Capital One the entire $2,650,000 and that this breach caused a default on the Note. The arbitration panel also concluded that Center Rose Partners held the 330 units it purchased from Black in "a special trust for Rose Acquisition members." The arbitration panel granted the following relief in the Award:

• Bailey is entitled to receive the 100 units held in trust under the Trust Agreement.

• Because Center Rose Partners breached its agreement to pay Capital One the entire $2,650,000, and to prevent unjust enrichment, the remaining 230 units shall be held in a constructive trust for the benefit of Rose Acquisition.

• If Rose Acquisition chooses to sell the 230 units held in constructive trust, Rose Acquisition and the members must adhere to the Agreement Restricting Transfer of Units ("Restriction Agreement") in determining the value of the units and the selection of an appraiser under section 2 of the Restriction Agreement. Center Rose Partners is not entitled to receive any of the 230 units except through this procedure.

• Center Rose Partners shall reimburse Bailey $1,241,966.69 — the amount the arbitrators found that Bailey had paid to purchase the Note from Capital One.

The arbitration panel made the Award in full settlement of all claims and counterclaims submitted in the arbitration, stating that the panel denied all claims not expressly granted in the Award.

The Bailey Parties filed a motion to confirm the Award under section 171.087 of the Texas...