Opinion
MO:23-CV-028-DC-RCG
06-02-2023
ODESSA VENTURES, LLC, Plaintiff, v. COLONY INSURANCE COMPANY, Defendant.
REPORT AND RECOMMENDATION OF THE U.S. MAGISTRATE JUDGE
RONALD C. GRIFFIN, UNITED STATES MAGISTRATE JUDGE
BEFORE THE COURT is Defendant Colony Insurance Company's Motion to Compel Arbitration and to Dismiss or, in the Alternative, to Stay (Doc. 9) and Plaintiff Odessa Ventures, LLC'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. 15). This case is before the undersigned 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 undersigned RECOMMENDS that Defendant's Motion to Compel Arbitration be GRANTED. (Doc. 9).
I. Background
Odessa Ventures, LLC (“Plaintiff”) filed this lawsuit on February 14, 2023, 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). Plaintiff alleges that Defendant “failed and refused to fully indemnify [] Plaintiff” pursuant to a commercial property insurance policy (“the Policy”) following damage to the property sustained during severe winter weather. Id. at 2.
According to Plaintiff's Complaint, it purchased the Policy, which ran from August 25, 2020, until August 26, 2021, from Defendant in 2020 to provide coverage for water damage to two of Plaintiff's properties located in Odessa, Texas. Id. at 3. The Policy states, in relevant part, the following:
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 102).
On or about February 15, 2021, both of Plaintiff's properties sustained water damage. (Doc. 1 at 3). Plaintiff then provided Defendant with timely notice of its claim and “Defendant began to adjust the claim and made partial payments.” Id. at 4. However, Plaintiff claims that Defendant's payments did not cover Plaintiff's total losses and that Defendant wrongfully refused to fully indemnify Plaintiff. Id.
On March 17, 2023, Defendant filed the instant motion. (Doc. 9). Then, after the Court granted Plaintiff's requested extensions of its deadline to respond, Plaintiff filed its Response and Cross Motion on April 14, 2023. (Doc. 15). Defendant filed its Reply on April 21, 2023. (Doc. 16). On April 28, 2023, Plaintiff filed its Reply as to its Cross Motion. (Doc. 17). As such, this matter is now ready for disposition.
II. Legal Standard
The Federal Arbitration Act (“FAA”) “reflect[s] both a ‘liberal federal policy favoring arbitration' and the ‘fundamental principle that arbitration is a matter of contract.'” AT&T Mobility LLC v. Concepcion, 563 U.S. 333, 339 (2011) (citations omitted). When deciding a motion to compel arbitration, courts in the Fifth Circuit use a two-step analysis under the FAA. Mendoza v. Fred Haas Motors, Ltd., 825 Fed.Appx. 200, 202 (5th Cir. 2020) (per curiam). First, the court must determine whether an arbitration agreement exists between the parties. Second, the court must determine whether the particular “claim is covered by the arbitration agreement.” Id. (quoting Kubala v. Supreme Prod. Servs., Inc., 830 F.3d 199, 201 (5th Cir. 2016)). Because “the question of ‘[w]ho is actually bound by an arbitration agreement is [ultimately] a function of the intent of the parties, as expressed in the terms of the agreement,” determining the scope of an agreement “is one of contract interpretation.” Halliburton Energy Servs., Inc. v. Ironshore Specialty Ins. Co., 921 F.3d 522, 531-32 (5th Cir. 2019) (quoting Bridas S.A.P.I.C. v. Gov't of Turkm., 345 F.3d 347, 355, 358 (5th Cir. 2003)). Therefore, state contract law applies. Morrison v. Amway Corp., 517 F.3d 248, 254 (5th Cir. 2008). Importantly, “[i]f the [] court finds that a valid agreement to arbitrate exists and that the claims asserted fall within that agreement, it is required to compel arbitration.” Halliburton Energy, 921 F.3d at 531.
III. Discussion
Defendant argues that the Policy requires the parties be compelled to arbitration since all of Plaintiff's causes of action are within the scope of the Policy's arbitration provision. (Doc. 9 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 “because Defendant was engaged in bad faith conduct and unclean hands by delaying the arbitration process to a point where Plaintiff was left with no choice but to seek this Court's intervention” and therefore waived its right to arbitration. (Doc. 15 at 6). Further, Plaintiff's cross-motion moves 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.
A. Waiver of Right to Arbitrate
Although the parties do not dispute this matter, the Court notes that “the Fifth Circuit has considered litigation-conduct 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. at 7 (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's Response, “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,” resulting in a seven-month delay. (Doc. 15 at 6-8).
“The [FAA] permits a party to file a motion to compel arbitration based on ‘the alleged failure, neglect, or refusal of another to arbitrate under a written agreement for arbitration.'” Rojas, 2020 WL 13442036, at *1 (quoting 9 U.S.C. § 4). But “[a] party may waive their right to compel arbitration ‘by substantially invoking the judicial process to the other party's detriment or prejudice.'” Id. (quoting Perry Homes v. Cull, 258 S.W.3d 580, 589-90 (Tex. 2008)). Despite this possibility, “[t]here is a strong presumption against finding a waiver of arbitration, and the party claiming that the right to arbitrate has been waived bears a heavy burden.” Republic Ins. Co. v. PAICO Receivables, LLC, 383 F.3d 341, 344 (5th Cir. 2004) (citing Subway Equip. Leasing Corp. v. Forte, 169 F.3d 324, 326 (5th Cir. 1999)). Further, when deciding whether a party has waived its right to arbitration, the courts are to make such a determination based on the totality of the circumstances. Rojas, 2020 WL 13442036, at *1. In summation, to show that a party has waived its right to arbitration, the party claiming the waiver must demonstrate two things: 1) the party that allegedly waived its right to arbitration substantially invoked the judicial process; and 2) the party claiming waiver was prejudiced.
First, “[t]o invoke the judicial process ‘[t]he 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.'” Republic Ins. Co., 383 F.3d at 344 (quoting Subway, 169 F.3d at 329). Moreover, “a party only invokes the judicial process to the extent it litigates a specific claim it subsequently seeks to arbitrate.” Id. For example, the Fifth Circuit found a party waived its right to arbitration when it participated in extensive discovery, filed multiple motions, including motions to dismiss and for summary judgment, answered the complaint, and received multiple extensions all without asserting the right to arbitrate, which also resulted in a seventeen-month delay. See Price v. Drexel Burnham Lambert, Inc., 791 F.2d 1156, 1162 (5th Cir. 1986). Conversely, due in part to the party's timely assertion of the right to arbitrate, the Fifth Circuit held “that arbitration was not waived even though the parties had conducted full discovery and had a bench trial on the merits . . . when the party seeking arbitration asserted that right in its initial answer and filed a motion to compel arbitration six months later when only a minimal amount of discovery had occurred.” Republic Ins. Co., 383 F.3d at 347 (citing Cargill Ferrous Int'l v. SEA PHOENIX MV, 325 F.3d 695, 700-01 (5th Cir. 2003)).
Second, “[p]rejudice in the context of arbitration waiver refers to delay, expense, and damage to a party's legal position.” Fernandez v. Sierra Plastics, Inc., EP-20-CV-00290-DB-ATB, 2021 WL 1050047, at *9 (W.D. Tex. Mar. 16, 2021) (quoting Nicholas v. KBR, Inc., 565 F.3d 904, 910 (5th Cir. 2009), report and recommendation adopted, 2021 WL 2767299 (W.D. Tex. Apr. 6, 2021)). “[W]hen only a minimal amount of discovery has been conducted, which may also be useful for the purpose of arbitration, the court should not ordinarily infer waiver based upon prejudice to the party opposing the motion to stay litigation.” Walker v. J.C. Bradford & Co., 938 F.2d 575, 578 (5th Cir. 1991) (quoting Tenneco Resins, Inc. v. Davy Int'l, AG, 770 F.2d 416, 421 (5th Cir. 1985)).
Lastly, because the determination of waiver is one made on a case-by-case basis, courts may consider several factors as set out in Perry Homes v. Cull, including: “whether the movant was plaintiff (who chose to file in court) or defendant (who merely responded); how long the movant delayed before seeking arbitration; whether the movant knew of the arbitration clause all along; how much pretrial activity related to the merits rather than arbitrability or jurisdiction; how much time and expense has been incurred in litigation; whether the movant sought or opposed arbitration earlier in the case; whether the movant filed affirmative claims or dispositive motions; what discovery would be unavailable in arbitration; whether activity in court would be duplicated in arbitration; and when the case was to be tried.” Fernandez, 2021 WL 1050047, at *8 (citing 258 S.W.3d 580, 591 (Tex. 2008)).
1. Substantial Invocation of the Judicial Process
According to Plaintiff's exhibits attached to its Response, Innovative Risk Management (“IRM”), on behalf of Defendant, demanded on or about December 29, 2023, that the parties arbitrate the matter. (Doc. 15-1 at 2). Then, following some confusion between Plaintiff and IRM as to who would act as Plaintiff's arbitrator, IRM informed Plaintiff that it was unsure as to who would act as Defendant's arbitrator, which further delayed the proceedings until approximately September 2022. Id. In late October 2022, IRM allegedly informed Plaintiff as to who would act as Defendant's arbitrator. Id. at 2-3 (citing Doc. 15-2 at 2-3).
The Court finds Plaintiff failed to show that Defendant “substantially invoke[d] the judicial process,” Rojas, 2020 WL 13442036, at *1, as Defendant has not “engage[d] in some overt act in court that evinces a desire to resolve the arbitrable dispute through litigation rather than arbitration'” Republic Ins. Co., 383 F.3d at 344 (emphasis added). Plaintiff filed the instant action on February 14, 2023 (Doc. 1) and served Defendant on February 24, 2023 (Doc. 8). Defendant then promptly filed the instant motion seeking to compel Plaintiff to arbitration on March 17, 2023. (Doc. 9). Defendant did not file an answer or request any extensions prior to filing the instant motion. Plaintiff has presented no evidence showing that Defendant engaged in any relevant litigation activity whatsoever other than filing its Motion to Compel Arbitration. In other words, there has been little to no pretrial activity and Plaintiff has failed to show Defendant substantially invoked the judicial process.
2. Prejudice
Plaintiff asserts that “[t]he inaction of Defendant has resulted in a detriment to the Plaintiff in several ways: delay, time, strategy, resources and expenses.” (Doc. 15 at 8). As stated above, the Court finds there has been minimal pretrial activity and that Defendant has not substantially invoked the judicial process. Further, Defendant has timely asserted its right to arbitration. Therefore, Plaintiff cannot show that it suffered prejudice in the form of delay, expense, or damage related to the judicial process.
* * *
Thus, the undersigned RECOMMENDS that the Court find that Defendant has not waived its right to arbitrate.
B. The Arbitrability of Arbitration
As stated above, there is no dispute as to whether an arbitration agreement exists between the parties. (Doc. 15 at 10). Thus, the Court must determine whether Plaintiff's claims are subject to the arbitration agreement. Mendoza, 825 Fed.Appx. at 202 (quoting Kubala, 830 F.3d at 201). It is important to note that, once a court finds that a valid arbitration agreement exists, “[b]oth Texas policy and federal policy favor arbitration” and courts must “resolve any doubts about an arbitration agreement's scope in favor of arbitration.” Henry v. Cash Biz, LP, 551 S.W.3d 111, 115 (Tex. 2018) (quoting In re FirstMerit Bank, 52 S.W.3d 749, 753 (Tex. 2001)).
However, “[t]he analysis changes when the parties include a delegation clause giving the arbitrator primary authority to rule whether a specific claim is subject to arbitration.” Mendoza, 825 Fed.Appx. 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. 9 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. 15 at 10). Hence, only Plaintiff's breach of contract claim is subject to arbitration. Id.
To reiterate, The Policy states, in relevant part, the following:
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 102). Defendant also claims that the following sentence in the third paragraph of the arbitration agreement 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. 15 at 12).
Although the exact language used in the Policy may not be overly complex, the Court finds that the sentence in the third paragraph of the Policy 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,” indicates similar intent as that found by the Broussard Court. (Doc. 1-1 at 102) (emphasis added); see Klebba, 2019 WL 453364, at *2. 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. Thus, because there is clear and unmistakable evidence that the parties agreed to arbitrate arbitrability as illustrated by the valid and enforceable delegation clause, the undersigned RECOMMENDS that Defendant's Motion to Compel Arbitration be GRANTED. (Doc. 9); see Kubala, 830 F.3d at 202.
IV. Recommendation
For the foregoing reasons, it is RECOMMENDED that Defendant Colony Insurance Company's Motion to Compel Arbitration be GRANTED. (Doc. 9). 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 Services Auto. Ass'n, 79 F.3d 1415, 1428-29 (5th Cir. 1996).