Opinion
23-CV-027-DC-RCG
08-11-2023
CHICORY COURT MIDLAND, LP, Plaintiff, v. COLONY INSURANCE COMPANY, Defendant.
REPORT AND RECOMMENDATION OF THE U.S. MAGISTRATE JUDGE
BEFORE THE COURT is Defendant Colony Insurance Company's Motion to Compel Arbitration and to Dismiss or, in the Alternative, to Stay (“Motion to Compel Arbitration”) (Doc. 7) and Plaintiff Chicory Court Midland, LP's Brief in Opposition to Defendant's Motion to Compel Arbitration and to Dismiss, or in the Alternative, to Stay and Cross Motion to Compel Arbitration and to Stay the Instant Action until Final Resolution of Arbitration (Doc. 13). This case is before the Court through an Order pursuant to 28 U.S.C. § 636 and Appendix C of the Local Court Rules for the Assignment of Duties to United States Magistrate Judges. After due consideration, the Court RECOMMENDS that Defendant's Motion to Compel Arbitration be GRANTED. (Doc. 7).
All citations are to CM/ECF generated pagination unless otherwise noted.
I. Background
On February 14, 2023 Chicory Court Midland, LP (“Plaintiff”) filed this lawsuit against Defendant Colony Insurance Company (“Defendant”), alleging claims of breach of contract, breach of duty of good faith and fair dealing, and breach of Texas Insurance Code §§ 541 and 542. (Doc. 1).
According to Plaintiff's Complaint, it purchased a commercial property insurance policy (“the Policy”) from Defendant, which ran from January 24, 2021 to January 24, 2022. Id. at 3. The Policy provided coverage for water damage to Plaintiff's property. Id. Plaintiff alleges that on or about February 15, 2021 its property “suffered not less than $2,037,632.32 in frozen pipe water damage.” Id. Plaintiff then provided Defendant with timely notice of its claim and Defendant “began to adjust the claim and made partial payments, however those payments only covered a portion of the Plaintiff's total losses.” Id.
After the filing of Plaintiff's Complaint, Defendant filed the instant Motion to Compel Arbitration seeking to enforce the Policy's arbitration provision. (Doc. 7). The arbitration provision, in relevant part, states:
1. If we and you (each a “party”) disagree on the value of the property or the amount of the loss, or have any other disagreement or dispute relating to or arising out of appraisal, it is mutually agreed that any and all such disagreements and/or disputes shall be submitted to mandatory binding arbitration as the sole and exclusive remedy. The terms of this Endorsement shall apply to all such disputes without reference to when they arise, including after expiration or termination of this policy.(Doc. 1-1 at 92).
Thereafter, the Court granted Plaintiff's requested extension of its deadline to respond, and Plaintiff filed its Response and Cross Motion to Compel Arbitration on April 14, 2023. (Doc. 13). Defendant filed its Reply on April 21, 2023. (Doc. 14). On April 28, 2023, Plaintiff filed its Reply as to its Cross Motion to Compel Arbitration. (Doc. 15). Accordingly, the instant matter is ripe for disposition.
II. Legal Standard
The Federal Arbitration Act (“FAA”) “embodies the national policy favoring arbitration.” Buckeye Check Cashing, Inc. v. Cardegna, 546 U.S. 440, 443 (2006). Courts in the Fifth Circuit utilize a two-step analysis when deciding a motion to compel arbitration under the FAA. Tittle v. Enron Corp., 463 F.3d 410, 418 (5th Cir. 2006) (quoting Webb v. Investacorp, Inc., 89 F.3d 252, 258 (5th Cir. 1996)). First, the court must decide whether there is “a valid agreement to arbitrate between the parties,” and second, “whether the dispute in question falls within the scope of that arbitration agreement.” Id. State contract law governs the scope and validity of an agreement. Morrison v. Amway Corp., 517 F.3d 248, 254 (5th Cir. 2008). “If the party seeking arbitration argues that there is a delegation clause, the court performs the first step-‘an analysis of contract formation'-‘[b]ut the only question, after finding that there is in fact a valid agreement, is whether the purported delegation clause is in fact a delegation clause.' ” Edwards v. Doordash, Inc., 888 F.3d 738, 743-44 (5th Cir. 2018) (quoting Kubala v. Supreme Prod. Servs., Inc., 830 F.3d 199, 202 (5th Cir. 2016)). “If there is a delegation clause, the motion to compel arbitration should be granted in almost all cases.” Id. (quoting Kubala, 830 F.3d at 202).
III. Discussion
Defendant argues that the Policy requires the Court compel arbitration of the entire case, as all of Plaintiff's causes of action fall within the scope of the Policy's arbitration provision. (Doc. 7 at 4). Additionally, Defendant moves to dismiss or, in the alternative, stay the case pending arbitration. Id. at 6. In response, Plaintiff argues Defendant's Motion should be denied based on “Defendant's dilatory tactics, bad faith conduct and unclean hands.” (Doc. 13 at 2). Further, Plaintiff's Cross Motion to Compel Arbitration moves the Court to compel the Parties to arbitration on the breach of contract claim only, as Plaintiff argues that its other causes of action are not subject to the Policy's arbitration clause. Id. at 9-13. Finally, Plaintiff requests that the Court stay the proceedings until arbitration is complete. Id. at 14-15.
A. Waiver of Right to Arbitration
Although the parties do not dispute this matter, the Court notes that “the Fifth Circuit has considered litigationconduct waivers . . . to be an external legal constraint and an issue that is for the courts, not the arbitrator, to decide.” McDaniel v. Crescent Drilling and Prod., Inc., SA-19-CV-01194-FB, 2021 WL 800601, at *3 (W.D. Tex. Mar. 1, 2021) (citing Vine v. PLS Fin. Servs., Inc., 689 Fed.Appx. 800, 803-04 (5th Cir. 2017); Tellez v. Madrigal, 292 F. Supp. 3d 749, 754-56 (W.D. Tex. 2017)), report and recommendation adopted, 2021 WL 8443999 (W.D. Tex. Mar. 17, 2021).
As a threshold matter, “Plaintiff does not dispute Defendant's assertion that the Policy contained a mandatory arbitration provision.” Id. at 6. However, Plaintiff argues Defendant waived its right to compel arbitration “by substantially invoking the judicial process to the other party's detriment or prejudice.” Id. (quoting Rojas v. Ross Dress for Less, Inc., 1:19-CV-812-RP, 2020 WL 13442036, at *1 (W.D. Tex. Dec. 8, 2020)). According to Plaintiff, “Defendant has done absolutely nothing to proceed with the arbitration process since September 2022 despite Plaintiff's good faith attempts to proceed with this dispute in arbitration in an effort to expedite a resolution.” (Doc. 13 at 6).
“Although waiver of arbitration is a disfavored finding,” the Fifth Circuit recognizes that “the right to arbitrate-like all contract rights-is subject to waiver.” Forby v. One Techs., L.P., 909 F.3d 780, 783 (5th Cir. 2018) (quoting Nicholas v. KBR, Inc., 565 F.3d 904, 907 (5th Cir. 2009)). However, “a party claiming that another party waived the contractual right to arbitrate bears a heavy burden to establish the claim. ‘There is a strong presumption against' a finding that a party waived its contractual right to arbitrate, and ‘any doubts thereabout must be resolved in favor of arbitration.' ” Gulf Guar. Life Ins. Co. v. Conn. Gen. Life Ins. Co., 304 F.3d 476, 484 (5th Cir, 2002) (quoting Texaco Expl. & Prod. Co. v. AmClyde Engineered Prods. Co., Inc., 243 F.3d 906, 911 (5th Cir. 2001)). Whether a party has waived its right to arbitration through litigation conduct is a question for the Court to decide. See Int'l Energy, 999 F.3d at 263-64 (citations omitted).
“A party waives its right to arbitrate if it (1) ‘substantially invokes the judicial process' and (2) thereby causes ‘detriment or prejudice' to the other party.” Forby, 909 F.3d at 783 (quoting Al Rushaid v. Nat'l Oilwell Varco, Inc., 757 F.3d 416, 421 (5th Cir. 2014)) (internal alteration omitted). Additionally, “[t]he question of what constitutes a waiver of the right of arbitration depends on the facts of each case ....” Petroleum Pipe Americas Corp. v. Jindal Saw, Ltd., 575 F.3d 476, 480 (5th Cir. 2009) (quoting Walker v. J.C. Bradford & Co., 938 F.2d 575, 576 (5th Cir. 1991)).
1. Substantial Invocation of the Judicial Process
First, the Court must determine whether Defendant substantially invoked the judicial process. “To invoke the judicial process, a party ‘must, at the very least, engage in some overt act in court that evinces a desire to resolve the arbitrable dispute through litigation rather than arbitration.' ” Forby, 909 F.3d at 784 (quoting In re Mirant, 613 F.3d 584, 589 (5th Cir. 2010)). However, “[a] presumption against waiver exists such that the party asserting waiver ‘bears a heavy burden of proof in its quest to show' waiver.” Petroleum Pipe, 575 F.3d at 480 (quoting Republic Ins. Co. v. PAICO Receivables, LLC, 383 F.3d 341, 344 (5th Cir. 2004)). The Fifth Circuit also recognizes that “[o]rdinarily a party waives its right to arbitrate when it ‘initially pursues litigation and then reverses course and attempts to arbitrate. . . .' ” Gulf Guar., 304 F.3d at 484 (quoting Subway Equip. Leasing Corp. v. Forte, 169 F.3d 324, 329 (5th Cir. 1999)).
It is clear “seeking a decision on the merits before attempting to arbitrate” is enough to substantially invoke the judicial process. Forby, 909 F.3d at 784 (quoting In re Mirant, 613 F.3d at 589) (emphasis added). For example, in Forby, the defendant One Tech:
[W]as fully aware of its right to compel arbitration when it filed its 12(b)(6) motion to dismiss. After all, it presented the right to arbitration as the reason it sought to transfer the case from Illinois to Texas. However, once in Texas, One Tech did not move to compel arbitration even in the alternative to its motion to dismiss. Rather, it pursued and partially obtained a dismissal with prejudice of Forby's claims. One Tech's action of moving to dismiss Forby's
claims with no mention of compelling arbitration demonstrated a desire to resolve the dispute in litigation rather than arbitration.Id. The Fifth Circuit characterized this as a “full-throated attempt to win this case on the merits in federal court.” Id.
Conversely, it is also clear that “mere delay falls far short of the waiver requirements.” Gulf Guar., 304 F.3d at 484 (quoting Texaco, 243 F.3d at 911). The Fifth Circuit recognizes that “even where a party takes substantial steps toward litigation of the arbitral dispute, or participates substantially in litigation procedures, it ordinarily will not waive the right to arbitrate.” Id. (citing Tenneco Resins, Inc. v. Davy Int'l, AG, 770 F.2d 416, 420-21 (5th Cir. 1985)). Nor is participation in discovery alone sufficient to waive the right to arbitrate. In Tenneco, the Fifth Circuit found “a party had not waived its right to arbitrate when it waited ‘almost eight months before moving that the district court proceedings be stayed pending arbitration, and in the meantime participated in discovery.' ” Id. (quoting Tenneco, 770 F.2d at 420-21). Further, the Fifth Circuit noted that “this and other courts have allowed such actions as well as considerably more activity without finding that a party has waived a contractual right to arbitrate.” Tenneco, 770 F.2d at 421 (citing J. & S. Const. Co., Inc. v. Travelers Indem., 520 F.2d 809 (1st Cir. 1975) approvingly wherein “defendant answered, demanded jury trial, answered interrogatories, permitted depositions, and waited thirteen months to move for stay without waiving right to arbitrate[.]”).
In arguing that Defendant has waived its right to arbitration, Plaintiff points exclusively to Defendant's pre-litigation conduct. (Doc. 13 at 6-8). For example, Plaintiff asserts that: (a) “Defendant invoked the arbitration process in December 2021 to Plaintiff's detriment”; (b) Since September 2022 Defendant has “not done one single thing to progress the arbitration despite repeated emails, calls and text messages by the Plaintiff and its representatives to do so”; and (c) “Plaintiff has been forced to engage an arbitrator and counsel to enforce its rights under the Policy to no avail.” Id. at 7 (internal citations omitted). In looking at what activity has taken place since the filing of the lawsuit, it is even more clear Defendant has not substantially invoked the judicial process-in litigating this case Defendant filed one Motion and that is the instant Motion to Compel Arbitration. Here, Plaintiff failed to show that Defendant substantially invoked the judicial process. Thus, the Court finds Plaintiff has not met its “heavy burden to establish” that Defendant waived its contractual right to arbitration. Id. (quoting Texaco, 243 F.3d at 911).
B. Arbitrability
As stated above, there is no dispute regarding whether an arbitration agreement exists between the parties. (See Doc. 13 at 9 (“Given that there is no dispute between the parties that they entered into a valid contract - the Policy - which contains the arbitration provision making the first element of Halliburton supra, is satisfied.”)) (citing Halliburton Energy Servs, Inc. v Ironshore Specialty Ins. Co., 921 F.3d 522, 530 (5th Cir 2019)). Therefore, the only remaining dispute revolves around whether the arbitration's delegation clause is a valid delegation clause. See Edwards, 888 F.3d at 743-44 (quoting Kubala, 830 F.3d at 202). “A delegation clause is a provision in an arbitration agreement that ‘transfer[s] the power to decide threshold questions of arbitrability to the arbitrator.' ” Reed v. Royal Sonesta Inc., Civil Action No. 20-384-WBV-KWR, 2020 WL 3545392, at *8 (E.D. La. June 30, 2020) (quoting Reyna v. Int'l Bank of Com., 839 F.3d 373, 378 (5th Cir. 2016)). Therefore, “[w]hen determining that intent, ‘[c]ourts should not assume that the parties agreed to arbitrate arbitrability unless there is “clear and unmistakable” evidence that they did so.' ” Clearwater Benefits, LLC v. Planstin Admin., Inc., Case No. A-22-CV-802-RP, 2023 WL 130415, at *5 (W.D. Tex. Jan. 9, 2023) (quoting Archer & White Sales, Inc. v. Henry Schein, Inc., 935 F.3d 274, 279 (5th Cir. 2019)), report and recommendation adopted, 2023 WL 3035400 (W.D. Tex. Mar. 7, 2023).
Defendant argues that the scope of the Policy encompasses all of Plaintiff's claims and that, because the arbitration agreement included a delegation clause, the Court must compel the parties to arbitration. (Doc. 7 at 4). Plaintiff disagrees, arguing in its Cross-Motion to Compel Arbitration that the arbitration agreement's scope is limited to “only the disputes which relate to the value of the property or the amount of the loss.” (Doc. 13 at 9-10). Hence, only Plaintiff's breach of contract claim is subject to arbitration. Id.
To reiterate, the Policy's arbitration provision, in relevant part, states:
1. If we and you (each a “party”) disagree on the value of the property or the amount of the loss, or have any other disagreement or dispute relating to or arising out of appraisal, it is mutually agreed that any and all such disagreements and/or disputes shall be submitted to mandatory binding arbitration as the sole and exclusive remedy. The terms of this Endorsement shall apply to all such disputes without reference to when they arise, including after expiration or termination of this policy.(Doc. 1-1 at 92). Defendant asserts the following sentence in the arbitration provision's third paragraph constitutes a delegation clause: “The Arbitration panel shall have authority and jurisdiction to resolve disputes, if any, regarding whether the matters before them are properly arbitrable.” Id. Plaintiff claims “[t]his sentence was not intended to include every single dispute that could ever potentially arise throughout the course of the policy period and it certainly does not encompass allegations of Defendant's bad faith conduct.” (Doc. 13 at 12).
Although the exact language used in the Policy may not be overly complex, the Court finds that the arbitration provision's third paragraph provides clear and unmistakable evidence that the Parties agreed to arbitrate the issue of arbitrability. “[A] delegation provision ‘need not recite verbatim that the “parties agree to arbitrate arbitrability” in order to manifest “clear and unmistakable” agreement.' ” Butler v. TFS Oilfield Servs., LLC, Cause No. SA-16-CV-1150-FB, 2017 WL 7052306, at *6 (W.D. Tex. Aug. 24, 2017) (quoting Hous. Ref., L.P. v. United Steel, Paper & Forestry, Rubber, Mfg., 765 F.3d 396, 410 n.28 (5th Cir. 2014)), report and recommendation adopted, 2017 WL 7052277 (W.D. Tex. Sept. 28, 2017). At issue in Butler was whether paragraph 2 alone constituted a delegation clause. Id. at *7. Paragraph 2 stated: “. . . if the Company and you have a dispute concerning the interpretation or enforceability of one or more conditions of your employment or any Claim related thereto, you and the Company will resolve the dispute through arbitration.” Id. The court found paragraph 2, on its own, was not a delegation clause, “as it [was] devoid of any mention of the interpretation of the agreement itself.” Id. (citing Firstlight Fed. Credit Union v. Loya, 478 S.W.3d 157, 165 (Tex. App.-El Paso 2015)). However, the court ultimately held the agreement did contain a delegation clause because paragraph 2, read in conjunction with paragraph 7 which required the parties to submit to arbitration “[a]ny claim(s) involving the construction or application of this Agreement,” constituted a clear intent to delegate arbitrability to the arbitrator. Id.
Additionally, the Fifth Circuit and courts in the Western District of Texas have repeatedly held that incorporation of certain rules, such as the rules of the American Arbitration Association, demonstrate clear and unmistakable evidence of an intent to delegate arbitrability. Petrofac, Inc. v. DynMcDermott Petroleum Operations Co., 687 F.3d 671, 675 (5th Cir. 2012); see Broussard v. FinWise Bank, Inc., SA-21-CV-01238-OLG, 2022 WL 2057488, at *4 (W.D. Tex. May 12, 2022). For example, the Broussard Court found the agreement in question contained a delegation clause because it incorporated the Expedited Procedures of the JAMS Comprehensive Arbitration Rules and Procedures which state: “The Arbitrator has the authority to determine jurisdiction and arbitrability issues.” Broussard, 2022 WL 2057488, at *4 (quoting JAMS Compr. Arb. R. R-11(b)); compare Klebba v. Netgear, Inc., 1:18-CV-438-RP, 2019 WL 453364, at *2 (W.D. Tex. Feb. 5, 2019) (finding the incorporation of “the JAMS Streamlined Arbitration Rules & Procedures, which provide that: Jurisdictional and arbitrability disputes . . . shall be submitted to and ruled on by the Arbitrator,” demonstrates an intent to delegate the issue of arbitrability), with Michael v. Opportunity Fin., LLC, 2022 WL 14049645, at *3-*4 (W.D. Tex. Oct. 24, 2022), report and recommendation adopted, 2023 WL 3035394 (W.D. Tex. Jan. 11, 2023) (the court found that the parties did not delegate arbitrability to the arbitrator due to the inclusion of the following sentences in the arbitration agreement: “However, it DOES NOT include claims related to the validity, enforceability, coverage or scope of this Clause. Those claims shall be determined by a court.”).
While the Policy does not explicitly incorporate any rules such as the ones discussed above, the relevant sentence here, “The Arbitration panel shall have authority and jurisdiction to resolve disputes, if any, regarding whether the matters before them are properly arbitrable,” evinces intent similar to that found by the Broussard Court and is in stark contrast to the invalid delegation clause in Opportunity Fin. (Doc. 1-1 at 102) (emphasis added); see Klebba, 2019 WL 453364, at *2; Opportunity Fin., LLC, 2022 WL 14049645, at *3-*4. Both the Expedited Procedures of the JAMS Comprehensive Arbitration Rules and Procedures and the JAMS Streamlined Arbitration Rules & Procedures provide that the arbitrator is to decide issues of jurisdiction and arbitrability. Broussard, 2022 WL 2057488, at *4; Klebba, 2019 WL 453364, at *2. The relevant sentence stated above demonstrates a similar intent as it expressly delegates the issues of jurisdiction and arbitrability to the arbitrator. Additionally, this Court has already held this exact sentence to constitute a valid delegation clause in another case filed against Defendant. See Report and Recommendation, Odessa Ventures, LLC v. Colony Ins. Co., 7:23-cv-00028-DC-RCG (Doc. 18), report and recommendation adopted, (Doc. 19); see also Colony Ins. Co. v. Emerald Valley Villas Homeowners Assoc., 2021 WL 8014528, at * 2 (N.D. Tex. 2021).
Thus, because there is clear and unmistakable evidence that the Parties agreed to arbitrate arbitrability as illustrated by a valid and enforceable delegation clause, the Court RECOMMENDS that Defendant's Motion to Compel Arbitration be GRANTED. (Doc. 7).
IV. Recommendation
Based on the foregoing discussion, the Court RECOMMENDS Defendant Colony Insurance Company's Motion to Compel Arbitration be GRANTED. (Doc. 7). However, instead of dismissing this case, the Court RECOMMENDS it be ADMINISTRATIVELY CLOSED pending conclusion of the arbitration proceedings.
Instructions for Service and Notice of Right to Appeal/Object
In the event that a party has not been served by the Clerk with this Report and Recommendation electronically, pursuant to the CM/ECF procedures of this District, the Clerk is ORDERED to mail such party a copy of this Report and Recommendation by certified mail. Pursuant to 28 U.S.C. § 636(b)(1), any party who desires to object to this report must serve and file written objections within fourteen (14) days after being served with a copy. A party filing objections must specifically identify those findings, conclusions, or recommendations to which objections are being made; the District Judge need not consider frivolous, conclusive, or general objections. Such party shall file the objections with the Clerk of the Court and serve the objections on all other parties. A party's failure to file such objections to the proposed findings, conclusions, and recommendations contained in this report shall bar the party from a de novo determination by the District Judge. Additionally, a party's failure to file written objections to the proposed findings, conclusions, and recommendations contained in this report within fourteen (14) days after being served with a copy shall bar that party, except upon grounds of plain error, from attacking on appeal the unobjected-to proposed factual findings and legal conclusions accepted by the District Judge. Douglass v. United Servs. Auto. Ass'n, 79 F.3d 1415, 1428-29 (5th Cir. 1996).