In re Bath Junkie Franchise, Inc.

• Decision Date: 07 February 2008
• Docket Number: No. 09-07-395 CV.,No. 09-07-437 CV.,09-07-395 CV.,09-07-437 CV.
• Citation: 246 S.W.3d 356
• Parties: In re BATH JUNKIE FRANCHISE, INC. and Bath Junkie Franchise, Inc., Appellant, v. Hygiene, L.L.C., Cheryl Pinson, Individually, and Debra Redden, Individually, Appellees.
• Court: Texas Court of Appeals

246 S.W.3d 356

In re BATH JUNKIE FRANCHISE, INC. and Bath Junkie Franchise, Inc., Appellant, v. Hygiene, L.L.C., Cheryl Pinson, Individually, and Debra Redden, Individually, Appellees.

No. 09-07-395 CV.

No. 09-07-437 CV.

Court of Appeals of Texas, Beaumont.

Submitted October 22, 2007.

Decided February 7, 2008.

Steven E. Couch, Charles W. Kelly, Kelly, Sutter & Kendrick, P.C., Houston, for relator and appellant.

Kip Patterson, Andrea C. Peel, Baker & Patterson, L.L.P., Houston, for real parties in interest and appellees.

Before McKEITHEN, C.J., KREGER and HORTON, JJ.

OPINION

PER CURIAM.

By way of petition for writ of mandamus and interlocutory appeal, Bath Junkie Franchise, Inc. ("Bath Junkie") seeks relief from the trial court's denial of its motion to compel arbitration. In a single issue, Bath Junkie contends that the trial court abused its discretion in denying the motion. We have consolidated the two proceedings and dispose of them simultaneously. We agree that the trial court erred when it denied Bath Junkie's request for arbitration and conditionally grant the petition for mandamus in Cause No. 09-07-437 CV. Having granted full relief under our mandamus jurisdiction, we dismiss as moot Bath Junkie's interlocutory appeal in Cause No. 09-07-395 CV.

Background and Procedural History

On April 9, 2005, Bath Junkie, an Arkansas corporation, and Hygiene, L.L.C. ("Hygiene"), a Texas corporation, entered into a franchise agreement ("Franchise Agreement") whereby Hygiene was to open a Bath Junkie franchise in The Woodlands, Texas.¹ The Franchise Agreement contained an arbitration clause providing that any dispute or controversy arising out of or relating to this Agreement not settled by informal negotiations shall, at the request of either party, be settled by final and binding arbitration conducted in accordance with the then current Commercial Arbitration Rules of the American Arbitration Association or its successor organization (the "AAA")....

Several sections in the Franchise Agreement, including the arbitration provision, were subject to a survival clause that made such terms "survive termination or expiration of this Agreement (regardless of which party initiates termination or whether termination is wrongful)...."

Subsequently, the relationship between the parties deteriorated, and on October 19, 2005, the parties executed a Termination of Franchise Relationship ("Termination Agreement"). The Termination Agreement required Bath Junkie to pay Hygiene $61,400 in exchange for the termination of the parties' franchise relationship. Hygiene also agreed to transfer its unencumbered lease to Bath Junkie.

In January of 2006, Bath Junkie issued a check to fund the Termination Agreement. Subsequently, Bath Junkie stopped payment on the check. Bath Junkie claimed that Hygiene "failed and refused to transfer its lease free and clear of all encumbrances, insisting on the return of its security/rental deposit."

Hygiene sued Bath Junkie claiming that Bath Junkie breached the Termination Agreement, committed fraud, and engaged in a conspiracy. Bath Junkie subsequently counterclaimed against Hygiene, alleging that Hygiene breached the Termination Agreement and tortiously interfered with an existing contract between Bath Junkie and its new franchisee.

A year after filing its answer and counterclaim, Bath Junkie filed its Application to Compel Arbitration and Verified Motion to Abate Proceedings Pending Arbitration. In response, Hygiene pled the defense of novation. Under that doctrine, Hygiene asserted that the legal obligations of the parties under the Termination Agreement replaced the parties' obligations under the Franchise Agreement, thereby making the Franchise Agreement's arbitration provision unenforceable. Hygiene also claimed that Bath Junkie waived its right to compel arbitration of the claims. The trial court, after conducting a hearing, denied Bath Junkie's request for abatement and arbitration. The trial court's order does not identify the reasons for its decision. Bath Junkie filed a petition for writ of mandamus and interlocutory appeal, claiming that the trial court erred in denying its motion to compel arbitration.

Mandamus and Interlocutory Appeal

Initially, we address whether this case is properly before us by way of petition for writ of mandamus, interlocutory appeal, or both. When, as here, a parallel mandamus proceeding and an interlocutory appeal are brought under the Federal Arbitration Act (FAA)² and the Texas Arbitration Act (TAA),³ we consolidate the two proceedings, consider them together, and dispose of both in a single opinion. In re Valero Energy Corp., 968 S.W.2d 916, 916-17 (Tex.1998) (orig.proceeding). When a trial court denies a motion to compel based on the FAA, the motion is reviewed by mandamus. Jack B. Anglin Co. v. Tipps, 842 S.W.2d 266, 272 (Tex. 1992). When a trial court denies a motion to compel based on the TAA, the motion is reviewed by interlocutory appeal. TEX. CIV. PRAC. & REM.CODE ANN. § 171.098 (Vernon 2005).

The FAA applies to contracts evidencing transactions that involve interstate commerce. 9 U.S.C.A. §§ 1, 2 (West 1999); Tipps, 842 S.W.2d at 269-70. The Franchise Agreement involves interstate commerce because it involves an Arkansas corporation's franchise of its business to a Texas corporation. Thus, the FAA applies to this case.

In addition, the Franchise Agreement contains an Arkansas choice of law provision. When the relevant contract provides that another state's substantive law applies, there is no legal or contractual basis to invoke the TAA. See In re J.D. Edwards World Solutions Co., 87 S.W.3d 546, 551 (Tex.2002) (orig.proceeding); In re Citigroup Global Markets, Inc., 202 S.W.3d 477, 480-81 (Tex.App.-Dallas 2006, orig. proceeding). Finally, the parties do not dispute the application of the FAA. Accordingly, we conclude that the FAA governs and review the trial court's decision by virtue of Bath Junkie's mandamus petition. Therefore, we dismiss Bath Junkie's interlocutory appeal.

Standard of Review

Mandamus will issue to correct a clear abuse of discretion for which the remedy by appeal is inadequate. In re Prudential Ins. Co. of Am., 148 S.W.3d 124, 135-36 (Tex.2004). A trial court has no discretion in determining what the law is or in applying the law to the facts, and a clear failure to analyze or apply the law correctly will constitute an abuse of discretion. Walker v. Packer, 827 S.W.2d 833, 840 (Tex.1992). When a motion to compel arbitration under the FAA has been erroneously denied, there is no adequate remedy by appeal, and mandamus will issue. In re Merrill Lynch Trust Co. FSB, 123 S.W.3d 549, 553 (Tex.App.-San Antonio 2003, orig. proceeding); see also In re Nexion Health at Humble, Inc., 173 S.W.3d 67, 69 (Tex.2005) (per curiam)

Analysis

A party seeking to compel arbitration must establish the existence of a valid arbitration agreement and show that the claims in dispute fall within the scope of that agreement. In re Bank One, N.A., 216 S.W.3d 825, 826 (Tex.2007) (per curiam); In re Kellogg Brown & Root, Inc., 166 S.W.3d 732, 737 (Tex.2005). In determining the validity of arbitration agreements under the FAA, we generally apply state-law principles governing the formation of contracts.⁴ In re Palm Harbor Homes, Inc., 195 S.W.3d 672, 676 (Tex. 2006) (citing First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938, 944, 115 S.Ct. 1920, 131 L.Ed.2d 985 (1995)).

Whether a valid arbitration agreement exists is a legal question subject to de novo review. In re D. Wilson Const. Co., 196 S.W.3d 774, 781 (Tex.2006). Once the trial court determines that a valid arbitration agreement exists, the burden shifts to the party opposing arbitration to prove its defenses. J.M. Davidson, Inc. v. Webster, 128 S.W.3d 223, 227 (Tex.2003). Once the moving party establishes the existence of a valid arbitration agreement, the trial court then determines whether the nonmovant's claims fall within the scope of the arbitration clause. In re FirstMerit Bank, N.A., 52 S.W.3d 749, 753 (Tex.2001).

Valid Agreement to Arbitrate

First, we determine whether Bath Junkie met its burden to establish that a valid agreement to arbitrate existed. Bath Junkie's motion to compel arbitration is based on the Franchise Agreement's arbitration provision. Hygiene does not deny that the Franchise Agreement contains an arbitration provision; instead, it contends that the Termination Agreement terminated the Franchise Agreement and constituted a new contract between the parties, thus, taking the place of the Franchise Agreement. Hygiene points out that the Termination Agreement does not include or incorporate the Franchise Agreement's arbitration provision. Hygiene further relies on the Termination Agreement's merger clause, contending that the clause defeats the Franchise Agreement's survival clause.

Bath Junkie asserts that the arbitrator, and not the trial court, should decide the effect of the Termination Agreement. We disagree. When determining whether a later agreement between the parties revokes an arbitration clause, the determination lies with the court because "[w]ithout an agreement to arbitrate, arbitration cannot be compelled." Valero Energy Corp. v. Teco Pipeline Co., 2 S.W.3d 576, 586 (Tex.App.-Houston [14th Dist.] 1999, no pet.) (citing Freis v. Canales, 877 S.W.2d 283, 284 (Tex.1994) (orig.proceeding) (per curiam)); see also TransCore Holdings, Inc. v. Rayner, 104 S.W.3d 317, 321-23 (Tex.App.-Dallas 2003, pet. denied). By considering the novation claim, the trial court fulfills its obligation to determine whether an enforceable arbitration agreement exists between the parties. See TransCore, 104 S.W.3d at 323.

The party urging novation as a defense bears the burden of proof. Honeycutt v. Billingsley, 992 S.W.2d 570, 577 (Tex.App.-Houston [1st Dist.] 1999, pet. denied). Novation occurs if a contract evidences an intention to relinquish and extinguish...