Opinion
No. 3-04-CV-2126-L.
May 17, 2005
FINDINGS AND RECOMMENDATION OF THE UNITED STATES MAGISTRATE JUDGE
Defendant Texas Health Resources Credit Unit ("THR") has filed a motion to stay and to compel arbitration. For the reasons stated herein, the motion should be granted.
I.
In September 2003, Apache ATM Fund, LLC ("Apache"), a wholly-owned subsidiary of Renegade Technology Group, Inc. ("Renegade"), entered into an Asset Purchase Agreement with Cash USA, Inc. ("Cash") to acquire certain ATM terminals and leases in the North Texas area. (Plf. Orig. Compl. at 4, ¶ 6 Exh. 1). As part of that transaction, Renegade entered into a one-year contract with Cash and its affiliate, Dallas ATM Management Services ("DAMS"), to service the ATM machines. ( Id. at 4, ¶ 7 Exh. 2). The service agreement permits Cash and DAMS to retain possession of some of the ATM machines purchased by Apache. When Renegade declined to renew the service contract or enter into another agreement with Cash and DAMS, a dispute arose between the parties. ( Id. at 5, ¶¶ 9-11). Renegade and Apache complain that Cash and DAMS refuse to relinquish custody of the ATM machines, overcharged for their services, and did not own all the property covered by the Asset Purchase Agreement. ( Id. at 5-6, ¶¶ 11-13, 16). On September 30, 2004, Renegade and Apache sued Cash, DAMS, and their shareholders, officers, and directors in federal district court for breach of contract, fraud, negligent misrepresentation, conversion, and breach of fiduciary duty.
Plaintiffs allege that the individual shareholders, officers, and directors "organized and operated Cash USA and DAMS as a sham to perpetrate a fraud and as mere tools and business conduits for evading their own legal obligations." (Plf. Orig. Compl. at 4, ¶ 4).
THR supplied money for the ATM machines serviced by Cash and DAMS. Under the terms of an ATM Cash Services Agreement, Renegade was required to "keep [THR] fully informed of the location and operations of each ATM" and "maintain on a current basis for each subject ATM . . . customary and adequate insurance coverage[.]" (Def. App. at 5, § 3.7 9, § 7.3). The agreement also contains an arbitration clause which provides:
Any controversy or claim arising out of or relating to this Agreement, or a breach of this Agreement, shall, at the request of either party, be determined by binding arbitration in accordance with the rules of the American Arbitration Association, with venue in Dallas, Texas. Judgment on the award entered by the arbitrator(s) may be entered in any court having jurisdiction.
( Id. at 13, § 10, 12). In March 2004, an ATM machine owned by Renegade was stolen from the XO Club in Dallas, Texas. ( Id. at 17, ¶ 7). The machine was not insured and Renegade did not inform THR of the theft until two months later. ( Id. at 17, ¶¶ 8-9). On October 15, 2004, THR, through its insurance carrier, sued Renegade in Texas state court to recover $24,480 in losses resulting from the theft. ( Id. at 15-21). Renegade and Apache responded by joining THR as a defendant in the federal court action. In their amended complaint filed on December 29, 2004, plaintiffs allege, inter alia, that THR failed to maintain an accurate accounting of vault cash, charged interest and other fees for money that was never deposited in the ATM terminals, and did not monitor the machines for fraudulent activity. (Plf. First Am. Supp. Compl. at 2, ¶ 4). On January 18, 2005, THR answered the amended complaint and filed a compulsory counterclaim against Renegade to recover more than $300,000 in cash advances, fees, and charges for the ATM machines. (Def. Ans. Countercl. at 4, ¶¶ 15-17). This pleading makes clear that the answer and counterclaim are filed "subject to Defendant THR's right to compel arbitration, as will be separately set forth in a Motion to Stay and Compel Arbitration." ( Id. at 1-2, ¶ 1).
THR now moves to stay the federal litigation and compel arbitration of all claims asserted by and against Renegade. The motion has been fully briefed by the parties and is ripe for determination.
THR seeks to compel arbitration under both the Federal Arbitration Act, 9 U.S.C. § 3, and the Texas arbitration statute, Tex. Civ. Prac. Rem. Code § 171.001, et seq. In its response, Renegade tacitly concedes that federal law applies.
II.
The Federal Arbitration Act ("FAA") provides, in pertinent part:
If any suit or proceeding be brought in any of the courts of the United States upon any issue referable to arbitration under an agreement in writing for such arbitration, the court in which such suit is pending, upon being satisfied that the issue involved in such suit or proceeding is referable to arbitration under such an agreement, shall on application of one of the parties stay the trial of the action until such arbitration has been had in accordance with the terms of the agreement, providing the applicant for the stay is not in default in proceeding with such arbitration.9 U.S.C. § 3. The language of this section is mandatory. Where the court finds that the parties agreed to arbitrate a dispute, its role is limited to enforcing that agreement. See AT T Technologies, Inc. v. Communications Workers of America, 475 U.S. 643, 649-50, 106 S.Ct. 1415, 1419, 89 L.Ed.2d 648 (1986).
A.
The decision whether to enforce an arbitration clause involves a two-step inquiry. First, the court must determine whether the parties agreed to arbitrate the dispute. Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614, 626, 105 S.Ct. 3346, 3353, 87 L.Ed.2d 444 (1985); R.M. Perez Associates, Inc. v. Welch, 960 F.2d 534, 538 (5th Cir. 1992). The court then must consider whether any statute or policy renders the claims non-arbitrable. Mitsubishi Motors, 105 S.Ct. at 3355; R.M. Perez, 960 F.2d at 538. Renegade does not challenge the existence of a valid agreement to arbitrate. Nor does it offer any reason why the arbitration agreement should not be enforced as a matter of law or public policy. Instead, Renegade argues that THR waived its right to compel arbitration by filing a counterclaim and by waiting more than three months to file this motion.
B.
A party may waive its right to arbitration by "substantially invok[ing] the judicial process to the detriment or prejudice of the other party." Williams v. Cigna Financial Advisors, Inc., 56 F.3d 656, 661 (5th Cir. 1995), quoting Miller Brewing Co. v. Fort Worth Distributing Co., Inc., 781 F.2d 494, 497 (5th Cir. 1986). There is a strong presumption against finding such a waiver and any doubts thereof must be resolved in favor of arbitration. Republic Insurance Co. v. PAICO Receivables, LLC, 383 F.3d 341, 344 (5th Cir. 2004); see also Subway Equipment Leasing Corp. v. Forte, 169 F.3d 324, 326 (5th Cir. 1999). To 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." Forte, 169 F.3d at 329. Prejudice refers to "the inherent unfairness — in terms of delay, expense, or damage to a party's legal position — that occurs when the party's opponent forces it to litigate an issue and later seeks to arbitrate that same issue." Id. at 327, quoting Doctor's Associates v. Distajo, 107 F.3d 126, 134 (2d Cir.), cert. denied, 118 S.Ct. 365 (1997). Among the factors relevant to determining prejudice are: (1) the time and expense incurred by the party opposing arbitration, (2) the extent of delay before asserting the right to arbitrate, and (3) the extent of pretrial activity relating to arbitrable claims. See Republic Insurance, 383 F.3d at 346, citing Price v. Drexel Burnham Lambert, Inc., 791 F.2d 1156, 1159 and 1162 (5th Cir. 1986).
THR filed an answer and counterclaim in this case "subject to [its] right to compel arbitration." ( See Def. Ans. Countercl. at 1-2, ¶ 1 4). On March 10, 2005, less than two months after this conditional pleading was filed, THR moved to compel arbitration of all claims brought by and against Renegade. At no time has THR taken any action which "evinces a desire to resolve the arbitrable dispute through litigation rather than arbitration." Forte, 169 F.3d at 330. THR has not engaged in extensive discovery, filed a dispositive motion, or otherwise substantially invoked the judicial process. See Tenneco Resins, Inc. v. Davy International, AG, 770 F.2d 416, 420 (5th Cir. 1985) (arbitration not waived where right was asserted in original answer and parties engaged in only minimal discovery before motion to compel was filed). Although the parties have exchanged initial disclosures and the court has issued a scheduling order, such routine litigation activity does not constitute substantial proceedings. See Cargill Ferrous International v. Sea Phoenix MV, 325 F.3d 695, 700-01 (5th Cir. 2003) (entry of routine scheduling orders and other activity not involving judicial decisions do not constitute substantial proceedings); Walker v. J.C. Bradford Co., 938 F.2d 575, 578 (5th Cir. 1991) (same). Compare Republic Insurance, 383 F.3d at 345 (party seeking to compel arbitration had substantially invoked judicial process by conducting full-fledged discovery, amending its complaint, and filing motion for summary judgment). Nor is a two-month delay in filing a motion to compel arbitration so significant as to constitute a waiver. See, e.g., Cargill, 325 F.3d at 700-01 (six-month delay in filing motion to compel did not constitute waiver); Walker, 938 F.2d at 578 (no waiver for 13-month delay). Finally, despite its claim that arbitration will result in additional fees and costs and risk inconsistent judgments, Renegade has failed to adduce any evidence of prejudice. Walker, 938 F.2d at 578) ("generalized protestations" about the costs of delay held insufficient to overcome the strong presumption in favor of arbitration).
To the extent Renegade argues that THR substantially invoked the judicial process by filing suit in Texas state court, such an argument is without merit. "[A] party only invokes the judicial process to the extent it litigates a specific claim it subsequently seeks to arbitrate." Forte, 169 F.3d at 328. Here, Renegade acknowledges that the subject matter of the state court action is unrelated to the federal litigation. ( See Plf. Resp. Br. at 2). Therefore, THR did not waive its right to arbitration by filing suit on a different claim in state court.
The court rejects Renegade's waiver argument and determines that the arbitration provision should be enforced as written. Consequently, all claims by and between Renegade and THR are subject to arbitration.
C.
The Federal Arbitration Act requires a court to stay all further judicial proceedings between the parties once it determines that the issue involved in the suit is referable to arbitration. See 9 U.S.C. § 3. Although a stay is mandatory, the Fifth Circuit has held that the FAA "was not intended to limit dismissal of a case in the proper circumstances." Fedmet Corp. v. M/V Buyalyk, 194 F.3d 674, 678 (5th Cir. 1999), quoting Alford v. Dean Witter Reynolds, Inc., 975 F.2d 1161, 1164 (5th Cir. 1992). A district court is not precluded from dismissing an action where all issues are properly subject to arbitration. Id.; Alford, 975 F.2d at 1164. Such is the case with respect to the claims by and between Renegade and THR. The court therefore determines that these claims should be dismissed rather than stayed. See Albertson's v. PDG, Inc., 2002 WL 31298862 at *4 (N.D. Tex. Oct. 8, 2002) (dismissing third-party complaint in favor of arbitration rather than staying proceedings).
RECOMMENDATION
THR's motion to compel arbitration should be granted. All claims by and between Renegade and THR should be dismissed in favor of arbitration.A copy of this report and recommendation shall be sent to all counsel of record. Any party may file written objections to the recommendation by May 31, 2005. The failure to file written objections shall bar the aggrieved party from appealing the factual findings and legal conclusions of the magistrate judge that are accepted or adopted by the district court, except upon grounds of plain error. See Douglass v. United Services Automobile Association, 79 F.3d 1415, 1417 (5th Cir. 1996).