Dewey v. Wegner

• Decision Date: 22 June 2004
• Docket Number: No. 14-02-00985-CV.,14-02-00985-CV.
• Citation: 138 S.W.3d 591
• Parties: Andrew C. DEWEY, Dewey Investment Partnership, Ltd., and A.C. Dewey & Company, Appellants, v. David WEGNER, Appellee.
• Court: Texas Court of Appeals

138 S.W.3d 591

Andrew C. DEWEY, Dewey Investment Partnership, Ltd., and A.C. Dewey & Company, Appellants, v. David WEGNER, Appellee.

No. 14-02-00985-CV.

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

June 22, 2004.

Appeal from the County Civil Court at Law No. 2, Harris County, Gary Michael Block, J Robert Joseph Killeen and Robert L. Negrin, Houston, for appellants.

Dan Krocker, Houston, for appellees.

Panel consists of Justices ANDERSON and SEYMORE and Senior Chief Justice MURPHY.^*

OPINION

CHARLES W. SEYMORE, Justice.

Appellants, Andrew C. Dewey, Dewey Investment Partnership, Ltd., and A.C. Dewey & Company, appeal a summary judgment in favor of appellee, David Wegner, in his suit arising from his investment in the partnership. In four issues, appellants contend (1) the trial court erred by refusing to compel arbitration, (2) there is no evidence or insufficient evidence to support the summary judgment, (3) Wegner's claims are time barred under the Texas Securities Act, and (4) the trial court abused its discretion in setting the amount of security to supercede the judgment. Because the trial court erred by refusing to compel arbitration, we reverse and remand.

I. BACKGROUND

Andrew C. Dewey is the president of A.C. Dewey & Company. A.C. Dewey & Company is the general partner of Dewey Investment Partnership, Ltd. The partnership issued a private placement memorandum offering units in the partnership for sale. In September 1996, Wegner purchased fifty units and executed a subscription agreement governing his purchase.¹ The subscription agreement contains the following provision:

2. Arbitration. Any controversy or claim arising out of or relating to this Subscription Agreement, an investment in the Partnership Units or a breach of the Subscription Agreement, or any claim or dispute between the parties to this Agreement (including disputes involving the General Partner of the Partnership or Andrew C. Dewey), shall be settled by arbitration in accordance with the Securities Arbitration Rules of the American Arbitration Association, and judgment upon the award rendered by the arbitrator(s) may be entered in any court having jurisdiction thereof. All arbitration proceedings shall be held in Houston, Texas and all arbitrators shall be appointed by the American Arbitration Association under their rules.

Eventually, the partnership invested in an internet "dot.com" company despite Wegner's objection. In October 2001, he withdrew from the partnership and liquidated his interest after losses were attributed to this investment. Wegner sued the partnership, A.C. Dewey & Company, and Dewey personally (hereafter collectively "the Deweys") for violations of Texas and federal securities laws, fraud, deceit, breach of fiduciary duty, and rescission. In essence, he alleges the partnership, as comprised, was an illegal mutual fund because the Deweys were not licensed to sell securities, and the offering was not registered or exempt from registration under federal and state law. He also complains about the investment in the internet company because the partnership agreement provided for investments in initial public offerings.

The Deweys filed an application to compel arbitration, and after substitution of counsel, a supplemental application to compel arbitration. On August 20, 2002, the trial court denied the application to compel arbitration. Previously, Wegner had filed a motion for summary judgment. The trial court granted the motion for summary judgment on August 22, 2002 awarding Wegner $43,028.31 plus attorneys' fees, costs, prejudgment interest, and postjudgment interest. In response to the Deweys' motion for new trial, the trial court reopened the summary judgment evidence. After reviewing additional evidence, the trial court denied the motion for new trial. This appeal followed.

II. APPLICATION TO COMPEL ARBITRATION

In their first issue, the Deweys contend the trial court erred in denying their application to compel arbitration.

A. WHICH ARBITRATION ACT APPLIES?

Initially, we must decide which arbitration act governs this dispute. The Deweys cite both the Federal Arbitration Act ("FAA") and Texas Arbitration Act ("TAA") but primarily argue the FAA applies because performance of the subscription agreement involves interstate commerce. The Deweys contend the TAA applies because performance of the subscription agreement does not involve interstate commerce.

The FAA renders enforceable arbitration agreements in contracts "evidencing a transaction involving commerce." 9 U.S.C. § 2 (West 1999);² see Allied-Bruce Terminix Cos. v. Dobson, 513 U.S. 265, 273-75, 115 S.Ct. 834, 130 L.Ed.2d 753 (1995); Jack B. Anglin Co. v. Tipps, 842 S.W.2d 266, 269-70 (Tex.1992) (orig.proceeding). "Commerce" is construed broadly and encompasses all contracts relating to interstate commerce. See Jack B. Anglin Co., 842 S.W.2d at 269-70; In re Tenet Healthcare, Ltd., 84 S.W.3d 760, 765 (Tex.App.-Houston [1st Dist.] 2002, orig. proceeding). The sale of securities has been held to involve interstate commerce. See Eurocapital Group, Ltd. v. Goldman Sachs & Co., 17 S.W.3d 426, 430 (Tex.App.-Houston [1st Dist.] 2000, no pet.) (recognizing account agreement concerning sale of securities involved interstate commerce); Thomas James Associates, Inc. v. Owens, 1 S.W.3d 315, 319 (Tex.App.-Dallas 1999, no pet.) (same); see also Williams v. Cigna Fin. Advisors, 56 F.3d 656, 659 (5th Cir.1995) (reasoning U-4 Registration involved interstate commerce because it was contract involving sale of securities).

Here, the subscription agreement concerns the sale of securities. In the subscription agreement, Wegner agreed to purchase units of the partnership. The partnership agreement states that the partnership was formed "[t]o buy, sell and trade publicly traded common stocks and other publicly traded equity securities including convertible preferred stocks, convertible debt securities and foreign equity securities, to invest in fixed income securities, to invest monies in money market accounts and other liquid investments and engage generally in the stock, option trading, securities and investment business." Further, the subscription agreement incorporates the private placement memorandum which provides that the partnership will invest in publicly traded equity markets. Therefore, because the sale of securities is incorporated in the subscription agreement, it involves interstate commerce.³

Nevertheless, Wegner contends the TAA is applicable because the subscription agreement contains a Texas choice-of-law clause. However, the FAA preempts otherwise applicable state law including the TAA. See U.S. CONST. art. VI, cl. 2; Jack B. Anglin Co., 842 S.W.2d at 271; Thomas James Associates, 1 S.W.3d at 319. Further, a choice-of-law clause that does not specifically exclude application of federal law will not preclude application of the FAA. See In re L & L Kempwood Associates, L.P., 9 S.W.3d 125, 127-28 (Tex.1999) (orig.proceeding) (holding FAA, not TAA, applied to arbitration dispute despite Texas choice-of-law clause because clause did not specifically exclude application of federal law); In re Educ. Mgmt. Corp., 14 S.W.3d 418, 423 (Tex.App.-Houston [14th Dist.] 2000) (orig.proceeding) (citing Kempwood and noting choice-of-law provision that does not specifically exclude application of federal law cannot be read to have such an effect).⁴ Therefore, the FAA governs this arbitration provision despite the choice-of-law clause because the clause does not specifically exclude application of federal law.⁵

B. APPLICATION OF THE FAA

To compel arbitration under the FAA, a party must prove the existence of an arbitration agreement and that the subject claims fall within the scope of that agreement. See In re FirstMerit Bank, N.A., 52 S.W.3d 749, 753 (Tex.2001) (orig.proceeding); In re Media Arts Group, Inc., 116 S.W.3d 900, 904 (Tex.App.-Houston [14th Dist.] 2003, orig. proceeding [mand. denied]). Once the trial court concludes that the arbitration agreement encompasses the claims, and the opposing party has failed to prove any defenses to its enforcement, the trial court has no discretion but to compel arbitration and stay its own proceedings. FirstMerit Bank, 52 S.W.3d at 753-54; Media Arts Group, 116 S.W.3d at 904.

1. STANDARD OF REVIEW

Appellate courts ordinarily apply the abuse of discretion standard to orders denying arbitration under the FAA. See, e.g., Jack B. Anglin Co., 842 S.W.2d at 272-73; FirstMerit Bank, 52 S.W.3d at 753-54; Media Arts Group, 116 S.W.3d at 904. However, courts have applied this standard because such orders are generally reviewed in mandamus proceedings. See Jack B. Anglin Co., 842 S.W.2d at 272-73 (allowing mandamus review of orders denying arbitration under the FAA because interlocutory appeal is not allowed);⁶ see also, e.g., FirstMerit Bank, 52 S.W.3d 749; Media Arts Group, 116 S.W.3d 900. Here, the Deweys challenge the order denying arbitration in their appeal from the final summary judgment.⁷ Therefore, the abuse of discretion standard is not necessarily applicable.

However, even in a mandamus proceeding, whether an arbitration agreement is enforceable under the FAA is a question of law and reviewable de novo. See In re Kellogg Brown & Root, 80 S.W.3d 611, 615 (Tex.App.-Houston [1st Dist.] 2002, orig. proceeding) (citing Tenet Healthcare Ltd. v. Cooper, 960 S.W.2d 386, 388 (Tex.App.-Houston [14th Dist.] 1998, pet. dism'd w.o.j.)); see also Kline v. O'Quinn, 874 S.W.2d 776, 782 (Tex.App.-Houston [14th Dist.] 1994, writ denied) (stating whether an agreement imposes a duty to arbitrate a particular dispute is a matter of contract interpretation and a question of law for the court). In addition, when we review by interlocutory appeal an order denying arbitration under the TAA, which has similar requirements to the FAA,⁸ we apply a "no evidence" standard to factual determinations and a de novo standard to legal...