Xtria L.L.C. v. Intern. Ins. Alliance Inc.

• Decision Date: 15 May 2009
• Docket Number: No. 06-08-00073-CV.,06-08-00073-CV.
• Citation: 286 S.W.3d 583
• Parties: XTRIA L.L.C., Appellant v. INTERNATIONAL INSURANCE ALLIANCE INCORPORATED, Appellee.
• Court: Texas Court of Appeals

286 S.W.3d 583

XTRIA L.L.C., Appellant v. INTERNATIONAL INSURANCE ALLIANCE INCORPORATED, Appellee.

No. 06-08-00073-CV.

Court of Appeals of Texas, Texarkana.

Submitted April 30, 2009.

Decided May 15, 2009.

Gary E. Smith, Graham, Bright & Smith, PC, Dallas, TX, J. Bruce Bennett, Cardwell, Hart & Bennett, LLP, Austin, TX, for appellant.

Ernest E. Figari, Jr., Lance V. Clack, Figari & Davenport, LLP, Dallas, TX, for appellee.

Before MORRISS, C.J., CARTER and MOSELEY, JJ.

OPINION

Opinion by Justice MOSELEY.

Xtria, L.L.C. (Xtria) appeals the trial court's refusal to vacate a commercial arbitration award made in favor of International Insurance Alliance Incorporated (International) in the amount of $1,350,000.¹ In its appellate brief, Xtria claims that the arbitrator made a gross mistake and/or manifestly disregarded the law because International's claims were barred due to a previous settlement entered into between Xtria and International's subsidiary.

I. FACTUAL AND PROCEDURAL HISTORY

A. 2000 Xtria-Tracking Systems Contract

A software product was designed by e.Liens, Inc., for insurance companies that electronically notified mortgagees and lienholders if a borrower failed to comply with insurance requirements specified in their loan agreements. Tracking Systems, Inc., acquired this software through the purchase of all e.Liens, Inc., stock. In 2000, Tracking Systems sold this software to Xtria's predecessor pursuant to an Asset Purchase Agreement. This agreement contained a provision that allowed Tracking Systems a right to twenty percent of the increase in value of the e.Liens software if Xtria ever sold it to another party ("earn-out provision").

B. 2004 Xtria-International Contract

In 2004, Xtria and Tracking Systems's parent company, International,² entered into a Sales Representative Agreement (International Sales Agreement) whereby International agreed to act as Xtria's "agent . . . with respect to all software, information systems, products and services, together with all updates, revisions and improvements," and as "non-exclusive agent for the sale of Products in North America." International was also to "assist [Xtria] by soliciting and marketing . . . the Products within the Product Territory."³ In exchange, International would receive fifteen percent "commission, in perpetuity, for the sale of [Xtria's] Products." Further, the contract allowed International to have exclusive marketing rights within twelve months of termination. These provisions were designed to protect International from the possibility that it would expend its time and effort to develop the marketing of the product only to have Xtria then abruptly sell the product to a third party who would benefit from International's efforts, thereby depriving International of the fruits of its labors expended in obtaining prospective buyers.⁴

C. Xtria Sells e.Liens Business

Xtria sold the software to ISO Claims Service, Inc. in 2005, triggering obligations under both the agreement with Tracking Systems and the agreement with International.

Since there were several insurance companies negotiating to sign on to use the e.Liens product, and ISO would benefit from these new customers, International believed that ISO would assume the contract, even after the 2005 sale had been completed. A schedule to the ISO Purchase Agreement clarified that Xtria was retaining the International Sales Agreement. However, ISO, which had its own sales force, did not assume the International Sales Agreement. Upon learning of the sale, Tracking Systems demanded that Xtria pay it what it said that it believed it had coming to it under the earn-out provision, but the parties disagreed as to the amount of money Xtria owed Tracking Systems. It resulted in a July 2006 mediated Settlement Agreement and Release (Tracking Systems—Xtria Settlement) that awarded Tracking Systems $555,000. Tracking Systems's release disposed of all "past, present and future claims," whether known or unknown, "relating to or arising from (i) the [Tracking Systems]-Xtria Agreement,⁵ and/or (ii) any oral or other written agreement between [Tracking Systems] and Xtria." The definition of Tracking Systems and Xtria included "past, present and future affiliates." While the release executed by Xtria included "Xtria and the future assigns of all Persons within the definition of Xtria ...," Tracking Systems's release did not include such language. Nevertheless, Xtria argues that this release covers independent claims made by International arising from the facts set out below.

In December 2006, asserting that it could have received commissions in connection with sales of the e.Liens product, International alleged that Xtria breached the International Sales Agreement to market the software. International invoked the contract's arbitration clause, filed an arbitration demand with the American Arbitration Association, and a California arbitrator was chosen to mediate the case.

In February 2007, Xtria brought suit against Tracking Systems (not International) in the United States District Court for the Northern District of Texas seeking a declaration that the Tracking Systems— Xtria Settlement discharged and extinguished Xtria's liability to International since it resolved claims that could be asserted by "past, present and future affiliates" of Tracking Systems. At the same time, Xtria moved the California arbitrator to stay its arbitration with International until the federal case against Tracking Systems was resolved.

D. Procedural History of the Arbitration

The arbitrator denied the motion to stay but told Xtria it could present evidence on the affiliate issue at the evidentiary hearing. The arbitrator reasoned:

[O]wnership or management, if such be the case, does not make one entity an affiliate of another. In California, a corporation is an affiliate of another corporation "if it is directly, or indirectly through one or more intermediaries, controls, is controlled by or is under common control with the other specified corporation." Corp.Code § 150. The essence of an affiliate is control. Here there is a lack of proof of such control.⁶

1. The Affiliate Issue

The arbitration hearing on International's claims and the "affiliate defense" raised by Xtria commenced December 10, 2007, and continued for four days. In it, Xtria argued that International and Tracking Systems had common control. Barry Maashoff was president of Tracking Systems and served as International's secretary, treasurer, and chairman of its board of directors. Mike Cooney was president of International and there is some evidence that Cooney was also involved with Tracking Systems at a managerial level. A business plan developed during Tracking Systems's acquisition of e.Liens listed Cooney as the CEO/manager "managing this business day to day" and outlined his respective responsibilities.⁷ Maashoff's and Cooney's positions allowed them to sign off on documents for both International and Tracking Systems interchangeably. For example, Cooney signed the e.Liens acquisition documents for Tracking Systems as an officer authorized by Maashoff "for this one project" while Maashoff signed off on International documents instead of Cooney. Based on Maashoff's and Cooney's close connection to both companies, Xtria argued that Tracking Systems and International were commonly controlled.

Next, Xtria tried to establish International's affiliation with Tracking Systems through evidence of stock ownership by Maashoff and Cooney. Xtria demonstrated that Maashoff owned forty-one percent and Cooney owned ten percent of the Tracking Systems stock—enough to collectively give them majority shareholder status. Then, Xtria demonstrated that because Maashoff owned sixty percent of International through his family company JenJeffJo (JJJ), and Cooney owned the other forty percent, they were also majority shareholders of International. Xtria claims the majority ownership of both companies amounted to control, evidencing International's affiliation with Tracking Systems. Finally, Xtria also pointed out that International, Tracking Systems, Cooney, and Maashoff officed in the same building.

International countered by claiming that there was no evidence that Tracking Systems and International were related, worked toward the same goal, or that there was mutual control. Tracking Systems stated "[International] is not an affiliate of [Tracking Systems] ... [they] have separate corporate structures, different shareholders, and different members on the board of directors.... [Tracking Systems] has no control or authority over [International] and cannot dictate its actions." Cooney testified that he owned International and called the shots, characterizing Maashoff as just an investor.

2. The Intent of the Parties

There was also testimony about the parties' intent when Tracking Systems and Xtria entered into the settlement agreement. Howard Wadsworth, an officer of Xtria, stated he would not have recommended that Xtria agree to pay $555,000 under the Tracking Systems—Xtria Settlement unless he believed that the settlement successfully exculpated Xtria from any liability for subsequent claims by International.

Wadsworth's testimony was countered by the testimony of Kenneth Owensby, a former vice president of Xtria, who was responsible on behalf of Xtria for the sale of e.Liens and who had negotiated and signed the International Sales Agreement on its behalf. Owensby testified that the agreement was a back-end-weighted deal (meaning that International would not get the typical front-end commission, but would collect revenues as transactions processed and throughout the term of the insurance company's agreement). He further explained that this kind of arrangement motivated companies like International to not only make the initial sale of the software, but to continue to service the business in order to keep the insurance company clients who purchased it...