Will-Drill Resources, Inc. v. Samson Resources Co.

• Decision Date: 26 November 2003
• Docket Number: No. 02-31185.,02-31185.
• Parties: WILL-DRILL RESOURCES, INC.; C. Allen Williams; L W/E W Family Partners Ltd. # 2; L W/E W Family Partners Ltd. # 2, # 3; Vista Ventures LLC; et al., Plaintiffs-Counter Defendants-Appellees, v. SAMSON RESOURCES CO., Defendant-Counter Claimant-Appellant.
• Court: U.S. Court of Appeals — Fifth Circuit

352 F.3d 211

WILL-DRILL RESOURCES, INC.; C. Allen Williams; L W/E W Family Partners Ltd. # 2; L W/E W Family Partners Ltd. # 2, # 3; Vista Ventures LLC; et al., Plaintiffs-Counter Defendants-Appellees, v. SAMSON RESOURCES CO., Defendant-Counter Claimant-Appellant.

No. 02-31185.

United States Court of Appeals, Fifth Circuit.

Filed November 26, 2003.

Philip Edward Downer, III (argued), William R. Huguet, Downer, Kyle & Wilhite, Shreveport, LA, for Plaintiffs-Counter Defendants-Appellees.

Michael Vance Powell (argued), Thomas F. Loose, Locke, Liddell & Sapp, Dallas, TX, Adam B. Zuckerman, Locke, Liddell & Sapp, New Orleans, LA, for Samson Resources Co.

Appeal from the United States District Court for the Western District of Louisiana.

Before JOLLY, HIGGINBOTHAM and STEWART, Circuit Judges.

PATRICK E. HIGGINBOTHAM, Circuit Judge:

Samson Resources Co. appeals an order staying litigation and compelling arbitration pursuant to an arbitration clause in a Proposed Sale Agreement between Samson, Will-Drill Resources and several other sellers of mineral leases and related assets. Samson contends that the Proposed Sale Agreement it signed was an offer to purchase all of the sellers' property, which was rejected when less than all of the sellers signed the Proposed Sale Agreement. Thus, Samson contends that no agreement of any kind was reached between the parties. The district court held that because Samson's argument attacked the agreement generally, rather than the arbitration clause specifically, the separability doctrine of Prima Paint applied, and the court ordered arbitration. We vacate the order compelling arbitration and remand the case to the district court, concluding that where the very existence of any agreement to arbitrate is at issue, it is for the courts to decide based on state-law contract formation principles.

I.

Will-Drill Resources Inc., acting for itself and as agent for over forty others, offered for sale mineral leases and related assets in Mississippi. Samson Resources Co., an oil and gas company interested in purchasing the properties, entered into a Confidentiality Agreement with Will-Drill which permitted Samson to review proprietary information about the properties and set out the process that would lead to a possible transaction.

After reviewing the information and negotiating with representative owner Earnest E. Nix Jr. ("Nix"), Samson presented Nix with a Proposed Sale Agreement ("PSA"). The PSA provided that Samson agreed to buy all of the sellers' properties. It was signed by Samson and had a separate signature block for each seller to sign. It also contained a provision which provided for arbitration of any "action dispute, claim or controversy of any kind now existing or hereafter arising between the parties in any way arising out of, pertaining to or in connection with" the PSA.

Nix later contacted Samson indicating that eight of the sellers included on the signature pages had decided not to sell their properties at the price offered and identified four new sellers who wanted in on the deal.¹ Samson then notified Nix that it was withdrawing the PSA. Samson contended that the PSA was an offer to buy all of the properties listed in the PSA, and with less than all of sellers' signatures, Samson's offer was rejected and a counter-offer was made by Nix, which Samson was rejecting. Thus, there was no contract. Samson based its argument in part on the Confidentiality Agreement, which was included by reference in the PSA. Samson contended that the PSA requires the signature of all parties before any legally binding agreement can be formed.

Will-Drill and several of the sellers who had signed the PSA brought suit against Samson in Louisiana state court seeking specific performance of the contract or damages. They then amended their complaint seeking to invoke the arbitration provisions of the PSA. Based on diversity jurisdiction, Samson removed the case to the District Court and counterclaimed for breach of the Confidentiality Agreement. After removal, additional plaintiffs were added, all of whom had signed the PSA. The plaintiffs moved to stay the proceedings and compel arbitration pursuant to the Federal Arbitration Act,² as well as partial summary judgment. Samson moved for partial summary judgment and moved to strike portions of an affidavit of Nix that had been presented to the court.

The magistrate judge reviewing the case applied the doctrine of separability,³ and determined that whether the PSA was an enforceable contract was an issue for the arbitrator, not the court, to decide. The magistrate judge recommended that the court grant partial summary judgment in favor of Will-Drill by ordering arbitration, deny Samson's motion for partial summary judgment, and deny the motion to strike as moot. The district court agreed and entered the judgment as recommended. Samson appeals the judgment compelling arbitration and the denial of its motion for partial summary judgment.

II.

A.

We review de novo the grant or denial of a petition to compel arbitration pursuant to § 4 of the FAA.⁴ Courts perform a two-step inquiry to determine whether parties should be compelled to arbitrate a dispute. "First, the court must determine whether the parties agreed to arbitrate the dispute. Once the court finds that the parties agreed to arbitrate, it must consider whether any federal statute or policy renders the claims nonarbitrable."⁵ When considering the first question, there are two considerations: "`(1) whether there is a valid agreement to arbitrate between the parties; and (2) whether the dispute in question falls within the scope of that arbitration agreement.'"⁶ Although there is a strong federal policy favoring arbitration, "this federal policy favoring arbitration does not apply to the determination of whether there is a valid agreement to arbitrate between the parties."⁷ "Because the FAA is at bottom a policy guaranteeing the enforcement of private contractual arrangements, we look first to whether the parties agreed to arbitrate a dispute, not to general policy goals, to determine the scope of the agreement."⁸ In determining whether an agreement to arbitrate exists, we apply "ordinary contract principles."⁹

Will-Drill argues that the separability doctrine articulated in Prima Paint,¹⁰ as recently applied by this court in Primerica,¹¹ required the district court to order arbitration. In Primerica, the plaintiff resisted arbitration, claiming he lacked the mental capacity to execute a contract under Mississippi law, and therefore the contract containing an arbitration clause which he signed was void and the court could not order arbitration.¹² Applying the separability doctrine, we held that because the capacity defense was directed at the contract generally and not a specific challenge to the arbitration clause, the capacity defense must be submitted to arbitration along with the rest of the dispute between the parties.¹³ We stated the separability principle in broad terms: "[U]nless a defense relates specifically to the arbitration agreement, it must be submitted to the arbitrator as part of the underlying dispute."¹⁴

Samson argues that Prima Paint does not apply here, even though Samson's argument that all of the sellers' signatures were required for the formation of the contract is directed at the making of the contract generally, rather than the arbitration clause specifically. Samson characterizes its argument as challenging the very existence of a contract, rather than a defense to an existing contract which it seeks to have declared void or voidable.¹⁵ Samson notes that it is for the courts, and not an arbitrator, to decide whether the parties have agreed to arbitrate. Thus, Samson concludes that the court, not the arbitrator, must decide whether less than all of the sellers' signatures constitutes acceptance of the offer and the creation of a contract. Where no contract exists, there is no agreement on anything, including an agreement to arbitrate.

Samson's argument finds some support in our precedent. In Jolley v. Welch, investors brought suit against their stockbroker and brokerage firm.¹⁶ The brokerage firm moved to submit the claims against it to arbitration, and an issue arose about the possible forgery of the plaintiffs' signatures on forms containing the arbitration clauses.¹⁷ The forgery issue was referred to the magistrate judge "for an evidentiary hearing on which, if any, of the original arbitration agreements bear legitimate signatures, and which, if any, are forgeries."¹⁸ The brokerage firm argued that the district court erred in referring the forgery issue to the magistrate judge because under Prima Paint, "a claim of fraud in the inducement of the contract generally, as opposed to fraud in the inducement of the arbitration clause, may not be passed on by a federal court."¹⁹

We held that "`the first task of a court asked to compel arbitration of a dispute is to determine whether the parties agreed to arbitrate that dispute.'"<sup>20</sup> Because the brokerage firm declined to introduce an agreement signed by one of the plaintiffs, we concluded that "the district court accordingly had no opportunity to reach even its `first task,'" and therefore the district court did not err in refusing to order arbitration of that plaintiff's claim.²¹ Although not explicitly stated in the opinion, we implicitly rejected the argument that the forgery issue should have been presented to the arbitrator, and was improperly before the district court.

Similarly, in Fleetwood Enterprises, Inc. v. Gaskamp,²² we refused to order arbitration of a dispute where one of the parties claimed that it was not bound by the entire agreement, including the arbitration clause.²³ In Gaskamp, the parents brought suit against the manufacturer of their mobile home on behalf of themselves and as next friend of their minor children for injuries sustained from exposure to toxic fumes present in their new...