McGrath v. Fsi Holdings, Inc.

• Decision Date: 26 February 2008
• Docket Number: No. 05-06-01432-CV.,05-06-01432-CV.
• Citation: 246 S.W.3d 796
• Parties: Daniel Roehrs, Kieran McGRATH, Ardella Simacek, Michael Flower, Thomas Hazelton, and Rick Hobbs, Appellants v. FSI HOLDINGS, INC., Appellee.
• Court: Texas Court of Appeals

246 S.W.3d 796

Daniel Roehrs, Kieran McGRATH, Ardella Simacek, Michael Flower, Thomas Hazelton, and Rick Hobbs, Appellants v. FSI HOLDINGS, INC., Appellee.

No. 05-06-01432-CV.

Court of Appeals of Texas, Dallas.

February 26, 2008.

Craig A. Haynes, Scott P. Stolley, Thompson & Knight, L.L.P., Dallas, TX, for Appellant.

Hugh E. Hackney, Greenberg Traurig, LLP, Dallas, and Mary-Olga Lovett, Greenberg Traurig, LLP, Houston, TX, for Appellee.

Before Justices MOSELEY, FITZGERALD, and MAZZANT.

OPINION

Opinion by Justice MAZZANT.

Appellee FSI Holdings, Inc. ("FSI") arbitrated a dispute with appellants. A three-arbitrator panel awarded FSI roughly $576,000 against appellants Roehrs and McGrath, awarded FSI nothing on its claims against the other four appellants, and awarded no attorneys' fees. FSI then sought judicial confirmation of its award, which the trial court granted. Appellants Roehrs and McGrath complain about the entry of judgment against them. The other appellants complain that the trial court did not award them their attorneys' fees despite their prevailing in the arbitration. We affirm in part, reverse in part, and remand for further proceedings.

I. Background and Issues Presented

A. Facts

This case arises from a dispute over control of a company called Fiber Systems International, Inc. Appellants owned a minority of the shares in that company; a company called CCR, Ltd. owned a majority. The dispute resulted in litigation, which in turn was settled by means of a Stock Purchase Agreement. By that Agreement, appellants agreed to sell their shares in Fiber Systems International, Inc. to CCR, Ltd. and Michael Roehrs. Those purchasers later assigned all their rights under the Agreement to appellee FSI. The Agreement contained a mandatory arbitration clause.

The Agreement marked a cease-fire instead of a lasting peace, and less than a year later FSI demanded arbitration with the American Arbitration Association ("AAA"). In its arbitration demand, FSI accused appellants of breaching warranties and representations contained in the Agreement, and it sought damages totaling about $1.15 million. The parties then skirmished over the make-up of the arbitration panel. The Agreement called for each side to appoint one arbitrator to the panel, and for the two party-appointed arbitrators to appoint the third. At first, FSI selected John A. Chalk, and appellants selected Mark A. Shank. FSI asked the AAA to disqualify Shank, which the AAA eventually did over appellants' protest. Appellants then selected Judge Karen Willcutts as their party-appointed arbitrator and objected to Chalk. The AAA disqualified Chalk, and FSI replaced him with Richard Faulkner. A third arbitrator, Mike Tabor, was duly appointed, and the dispute was arbitrated over the course of several days.

The arbitration ended in a split decision. The panel unanimously concluded that FSI had not established its claims against appellants Simacek, Flower, Hazelton, and Hobbs, and it ordered that FSI take nothing on its claims against them. A majority of the panel found that FSI had established its breach-of-warranty claim against appellants Roehrs and McGrath, and it awarded FSI $576,118 against those two parties jointly and severally. Judge Willcutts dissented from this part of the award, opining that FSI had failed to prove its damages and that it should take nothing. The panel majority further found that each side had incurred exactly the same amount of attorneys' fees and expenses ($612,000). It ruled that each side was entitled to recover half of its fees and expenses to reflect the parties' "relative success on the merits," and that the resulting awards should be offset so that no one recovered any fees or expenses. Judge Willcutts would have awarded appellants all of their fees and costs. Simacek, Flower, Hazelton, and Hobbs filed a motion with the AAA asking the panel to reconsider its award and to award them their attorneys' fees and expenses, but the panel unanimously denied their motion.

B. Procedural history

FSI filed this lawsuit against appellants Daniel Roehrs and Kieran McGrath to confirm its arbitration award against them. They answered and counterclaimed for vacatur of the arbitration award on the ground that the arbitration panel exceeded its powers or was unlawfully assembled. FSI then amended to join appellants Simacek, Flower, Hazelton, and Hobbs (the "prevailing defendants"). It still sought confirmation of the award against Roehrs and McGrath, but it prayed alternatively for vacatur of the entire award, including the take-nothing award in favor of the prevailing defendants, in the event Roehrs and McGrath succeeded in their counterclaim. The prevailing defendants answered and counterclaimed for the attorneys' fees and expenses that they had incurred in the arbitration. They styled their counterclaim as one for modification or, in the alternative, partial vacatur of the arbitration award.

FSI filed a "Motion to Confirm, Motion for Summary Judgment, No Evidence Motion for Summary Judgment, and Brief in Support" in which it addressed all of the counterclaims that appellants had then pleaded. Appellants filed their own competing motions for summary judgment, one by Roehrs and McGrath and one by the prevailing defendants. Roehrs and McGrath amended their pleadings to assert fraud, misconduct, and misbehavior as additional grounds for vacatur. FSI then filed a supplemental motion to confirm and for summary judgment. All parties filed responses. After two hearings, the trial court granted FSI's motion and supplemental motion, denied appellants' motions, and confirmed the arbitration award in its entirety. The court later signed a final judgment awarding FSI $576,118 against Roehrs and McGrath jointly and severally. In keeping with the arbitration award, the court awarded no attorneys' fees to any party.

Roehrs, McGrath, and the prevailing defendants appealed. FSI filed a notice of conditional cross-appeal.

C. Issues presented

Appellants Roehrs and McGrath raise essentially two issues. First, they contend that the trial court erred by refusing to vacate the arbitration award based on the AAA's disqualification of appellants' initial chosen arbitrator. Second, they contend that the trial court erred by refusing to vacate the arbitration award based on fraud or misconduct by FSI's chosen arbitrator.

The prevailing defendants raise essentially one issue. They contend that the trial court erred by refusing to modify or vacate the portion of the award denying them recovery of their attorneys' fees and expenses incurred in defending the arbitration.

FSI argues principally that the judgment should be affirmed, but it asserts two alternative positions in the event of reversal. First, it contends that a reversal of the judgment against Roehrs and McGrath should result in the vacating of the entire arbitration award, including the part of the award dealing with the prevailing defendants, and a rearbitration of the entire case. Second, it contends that a reversal of the judgment only as to the prevailing defendants should result in the vacating of the award as to attorneys' fees and rearbitration of that issue rather than rendition of the amount of fees and expenses requested by the prevailing defendants.

II. Analysis

A. Choice of law

Appellants argue that the Federal Arbitration Act and the Texas Arbitration Act apply concurrently to the issues raised in this case. FSI argues that the TAA alone applies, based on a choice-of-law clause in the Stock Purchase Agreement. That clause provides, "This Agreement shall be governed by and construed in accordance with the laws of the State of Texas, without giving effect to its ruled [sic] governing conflict of laws." Whether the FAA applies in the face of a general choice-of-law clause such as this one presents a "particularly thorny question of contract construction." Note, An Unnecessary Choice of Law: Volt, Mastrobuono, and Federal Arbitration Act Preemption, 115 HARV. L.REV. 2250, 2250 (2002).

The FAA generally governs the enforceability of an arbitration agreement when the transaction involves interstate commerce. 9 U.S.C.A. §§ 1-2 (West 1999); Jack B. Anglin Co., Inc. v. Tipps, 842 S.W.2d 266, 269-70 (Tex.1992) (orig.proceeding). FSI does not dispute that the Agreement involves interstate commerce, but it contends that the parties' general choice-of-law clause trumps the FAA and requires application of the TAA. Some authorities support FSI's position. E.g., Ruedemann v. Energy Operators, Inc., 198 F.Supp.2d 894, 896-97 (S.D.Tex. 2002). But the Texas Supreme Court has held that a choice-of-law clause will not be construed to select the TAA to the exclusion of the FAA unless the clause "specifically exclude[s] the application of federal law." In re L & L Kempwood Assocs., L.P., 9 S.W.3d 125, 127-28 (Tex.1999) (per curiam). A general choice-of-law clause such as the one in the Agreement does not satisfy this standard. Dewey v. Wegner, 138 S.W.3d 591, 596 & n. 5 (Tex.App.-Houston [14th Dist.] 2004, no pet.). Accordingly, we apply the FAA, while recognizing that the TAA also applies to the extent it is consistent with the FAA. In re D. Wilson Constr. Co., 196 S.W.3d 774, 779-80 (Tex.2006).

On issues of federal law, such as the proper interpretation of the FAA, we must follow the decisions of the United States Supreme Court and the Texas Supreme Court; the decisions of other federal courts, by contrast, may be persuasive but are not binding on us. Penrod Drilling Corp. v. Williams, 868 S.W.2d 294, 296 (Tex.1993).

B. Standard of review

The parties also dispute the proper standard of review. Appellants contend that the summary-judgment standard applies to all issues because FSI sought enforcement of the arbitration award by means of a motion for summary judgment. FSI asserts that their motions automatically shifted the burden of proof onto appellants Roehrs and McGrath as to all of their...