Dr. Marc Ellman, Individually, and D/B/A Southwest Eye Institute, Vista Surgery Center, LLC, and AURA Development, LLC v. JC General Contractors and Jose M. Chavez

• Court: Court of Appeals of Texas
• Decided: October 23, 2013
• Docket: 08-12-00029-CV
• Status: Published

Opinion

COURT OF APPEALS EIGHTH DISTRICT OF TEXAS EL PASO, TEXAS

§ DR. MARC ELLMAN, INDIVIDUALLY AND D/B/A SOUTHWEST EYE § INSTITUTE, VISTA SURGERY No. 08-12-00029-CV CENTER, LLC, AND AURA § DEVELOPMENT, LLC, Appeal from § Appellants, County Court at Law No. 6 § v. of El Paso County, Texas § JC GENERAL CONTRACTORS, AND (TC # 2009-508) JOSE M. CHAVEZ, §

Appellee. §

OPINION

Appellants, Dr. Marc Ellman, individually and d/b/a Southwest Eye Institute, Vista

Surgery Center, LLC, and Aura Development, LLC, appeal the trial court’s denial of their

motion to compel arbitration. For the reasons that follow, we affirm.

FACTUAL SUMMARY

On November 9, 2006, JC General Contractors1 entered into an agreement with Marc

Ellman, M.D.2 for the construction of a shell building along with the surrounding improvements

1 Jose M. Chavez is president of JC General Contractors, Inc. The opinion will refer to JC General Contractors and Chavez collectively as JC. 2 Dr. Ellman is the manager of Aura Development. for an ophthalmology clinic and surgical center in El Paso, Texas at a total price of $1,529,603

(the “Shell Contract”). A little over one week later, JC signed a Standard Form Agreement

between the owner and design builder and provided it to Dr. Ellman. The Standard Form

Agreement contains an arbitration clause requiring Aura Development and JC to arbitrate any

disputes according to the clause requirements. Construction began and disputes eventually arose

regarding payment and completion of construction.

On January 23, 2009, JC filed its original petition against Appellants alleging theft,

conversion, fraud, breach of contract, and defamation. A few days later, Appellants answered

the suit, raising special exceptions and affirmative defenses, and counterclaimed for breach of

contract, fraud, breach of warranty, and declaratory judgment. From the time the suit was filed

until February 2010, the parties engaged in substantial and extensive discovery and the court set

the case for trial on July 12, 2010. It is undisputed that both parties initiated discovery during

this period. On June 7, 2010, the parties filed a joint motion for continuance on the ground they

would not be ready for trial because they needed to conduct additional discovery, including

depositions and production of records from third parties, and because the trial court had ordered

the parties to attend mediation. The trial court granted the joint motion for continuance. For the

next eight months, the parties engaged in additional discovery. In February 2011, the trial court

entered an order setting the case for jury trial on January 23, 2012 and for pretrial conference on

December 14, 2011. The order required the parties to bring to the pretrial conference their list of

witnesses and designated experts, list of exhibits, stipulation of medical records if applicable, and

a proposed charge. On February 18, 2011, the trial court also ordered the parties to mediation.

The record reflects that the parties continued to engage in discovery from March 4, 2011 through

-2- November of 2011. On September 23, 2011, JC filed its lists of trial fact witnesses and expert

witnesses as required by the scheduling order.

On August 18, 2011, Appellants took the deposition of JC’s chief financial officer. They

deposed Jose Chavez, president of JC General Contractors, on September 16, 2011. On

October 11, 2011, thirty-five months after filing suit and approximately three and a half months

before the January 23, 2012 trial setting, Appellants sent JC a letter asserting their demand for

arbitration. JC refused because arbitration had not been requested within a reasonable time as

required by the arbitration agreement. Appellants deposed two of JC’s former employees on

November 2, 2011 and two of its current employees on November 3. Approximately one week

later, on November 9, Appellants filed a motion to compel discovery and a motion to compel

arbitration. They also filed a motion for continuance of the January 23, 2012 trial setting. In the

motion for continuance, Appellants stated: “Since this matter was previously continued, the

parties have conducted extensive discovery.” [Emphasis added]. JC opposed arbitration on the

ground that Appellants had waived their right to arbitrate by substantially invoking the judicial

process. Following a hearing conducted on December 16, 2011, the trial court denied the motion

to compel arbitration.

WAIVER OF ARBITRATION

In their sole issue, Appellants contend that the trial court erred by finding they waived

their right to arbitration.

Applicable Law

A party seeking to compel arbitration must (1) establish the existence of a valid

arbitration agreement; and (2) show that the claims asserted are within the scope of the

agreement. See In re AdvancePCS Health L.P., 172 S.W.3d 603, 605 (Tex. 2005); Inland Sea,

-3- Inc. v. Castro, --- S.W.3d ---, 2012 WL 1715242 at *2 (Tex.App.--El Paso 2012, pet. denied). If

these two showings are made, then the burden shifts to the party resisting arbitration to present a

valid defense to the agreement, and absent evidence supporting such a defense, the trial court

must compel arbitration. See In re AdvancePCS, 172 S.W.3d at 607.

A party waives a right to arbitration by substantially invoking the judicial process to the

other party’s detriment or prejudice. Perry Homes v. Cull, 258 S.W.3d 580, 589-90 (Tex. 2008).

Prejudice within the context of waiver relates to the inherent unfairness resulting from a party’s

attempt to have it both ways by switching between litigation and arbitration to their own

advantage. Perry Homes, 258 S.W.3d at 597. Thus, 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., citing

Republic Insurance Company v. PAICO Receivables, LLC, 383 F.3d 341, 346 (5th Cir. 2004).

JC had the burden to establish that Appellants substantially invoked the judicial process to JC’s

prejudice. Due to the strong presumption against waiver of arbitration, this hurdle is a high one.

Id., at 590.

Whether a party has waived arbitration must be decided on a case-by-case basis, based

upon an examination of the totality of the circumstances. See id., at 591; Baty v. Bowen, ---

S.W.3d ---, 2013 WL 2253584 at *4 (Tex.App.--Houston [14th Dist.] 2013, no pet.h.). In

making this determination, courts consider a wide variety of factors including:

• whether the party who pursued arbitration was the plaintiff or the defendant;

• how long the party who pursued arbitration delayed before seeking arbitration;

• when the party who pursued arbitration learned of the arbitration clause’s existence;

• how much the pretrial activity related to the merits rather than arbitrability or jurisdiction;

-4- • how much time and expense has been incurred in litigation;

• whether the party who pursued arbitration sought or opposed arbitration earlier in the case;

• whether the party who pursued arbitration filed affirmative claims or dispositive motions;

• how much discovery has been conducted and who initiated the discovery;

• whether the discovery sought would be useful in arbitration;

• what discovery would be unavailable in arbitration;

• whether activity in court would be duplicated in arbitration;

• when the case was to be tried; and

• whether the party who pursued arbitration sought judgment on the merits.

Baty, --- S.W.3d ---, 2013 WL 2253584 at *4-5, citing Perry Homes, 258 S.W.3d at 591-92.

Standard of Review

We review a ruling denying a motion to compel arbitration for an abuse of discretion.

Perry Homes, 258 S.W.3d at 602. Under this standard, we defer to the trial court’s factual

determinations if they are supported by the evidence and review its legal determinations de novo.

Brainard v. State, 12 S.W.3d 6, 30 (Tex.1999), disapproved on other grounds by Martin v.

Amerman, 133 S.W.3d 262 (Tex. 2004). Whether a party has waived arbitration by litigation

conduct is a question of law, which we review de novo. See Perry Homes, 258 S.W.3d at 598; In

re ReadyOne Industries, Inc., 294 S.W.3d 764, 772 (Tex.App.--El Paso 2009, orig. proceeding).

Did Appellants Substantially Invoke the Judicial Process?

The parties do not dispute the validity and existence of the arbitration clause within the

Standard Form Agreement or that the issues disputed are within the scope of the agreement as

-5- initially required in order to compel arbitration. The issue is whether JC established its waiver

defense.

An examination of the Perry Homes factors demonstrates that Appellants substantially

invoked the judicial process. Appellants are the defendants in the trial court, but they have also

raised affirmative claims for relief by virtue of their counterclaim. Perhaps the most striking of

these factors is that Appellants waited almost three years after the suit was filed and two and a

half months before the trial date to demand arbitration. Appellants do not dispute they had

knowledge of the arbitration clause. As signatories to the Standard Form Agreement, knowledge

of the terms of the contractual agreement, including the arbitration clause, is imputed to Dr.

Ellman and Aura Development. See In re ReadyOne Industries, 294 S.W.3d at 769. The record

also reflects that discovery went to the merits of the case, rather than arbitrability or standing. In

a motion for continuance filed a few days after they filed their motion to compel arbitration,

Appellants asserted the following: “Since this matter was previously continued, the parties have

conducted extensive discovery.” [Emphasis added]. They also concede in their brief on appeal

that Appellants and JC were initiators of the discovery but assert that JC conducted the bulk of it.

The record certainly supports Appellants’ assertion that JC initiated more discovery than

Appellants, but it also shows that Appellants initiated more than a minimal amount of discovery.

Appellants do not dispute that they have made 155 requests for production, multiple requests for

disclosure, and thirty interrogatories. The record also reveals that Appellants took at least six

depositions, including four which were taken only one week before Appellants filed their motion

to compel and a mere two and one-half months before the trial date. Appellants suggest in their

brief that they did not move for arbitration on the eve of trial, but the Supreme Court has

emphasized that “the eve of trial” is not limited to the evening before trial. Perry Homes, 258

-6- S.W.3d at 596; see Com-Tech Associates v. Computer Associates International, Inc., 938 F.2d

1574, 1576-77 (2d Cir. 1991)(citing Perry Homes and finding waiver where the movant

requested arbitration four months before the trial date). Finally, the record shows that Appellants

filed a motion for partial summary judgment on several of JC’s claims, but Appellants argue this

should not be considered as evidence of waiver because it occurred after Appellants filed their

motion to compel arbitration. See In re ReadyOne Industries, Inc., 294 S.W.3d 764, 772

(Tex.App.--El Paso 2009, orig. proceeding)(refusing to find waiver by engaging in discovery

after the demand for arbitration had been made).

Appellants cite three cases in support of the argument they did not substantially invoke

the judicial process. Each of these cases is factually distinguishable. The Fifth Circuit found no

waiver in Walker v. J.C. Bradford & Company, 938 F.2d 575, 578 (5th Cir. 1991) where the

defendant engaged in minimal discovery, attended a pretrial conference, and moved to transfer

the case during the thirteen-month period before filing a motion to compel arbitration.

Appellants, in contrast, waited almost three years to invoke their right to compel arbitration after

engaging in extensive discovery that went to the merits of the case.

In Tenneco Resins, Inc. v. Davy International, 770 F.2d 416, 420-21 (5th Cir. 1985) the

court found no waiver where the defendant had filed an answer, interrogatories, and a request for

document production, moved for a protective order, and agreed to a joint motion for a

continuance requesting an extension of the discovery period. The defendant waited eight months

before moving to compel arbitration. Unlike the facts in the instant case, the defendant there

filed a demand for arbitration in its answer, continuously asserted its desire for arbitration

throughout the discovery process, and only engaged in a minimal amount of discovery. Tenneco

Resins, 770 F.2d at 420-21.

-7- Finally, in General Guaranty Insurance Company v. New Orleans General Agency, Inc.,

427 F.2d 924, 928-29 (5th Cir. 1970), the court found no waiver of the right to arbitrate where

the moving party filed an answer and counterclaims, attempted to implead third parties, and

allowed the taking of two depositions over a ten-month period before demanding arbitration. In

this case, Appellants had knowledge of the arbitration provision before suit was instituted and

they engaged in extensive discovery for almost three years before asserting their right to

arbitrate.

We conclude that Appellants substantially invoked the judicial process. The only

remaining question is whether JC showed that Appellants’ tardy invocation of the right to

arbitrate operated to its detriment.

Prejudice

Substantially invoking the judicial process does not waive a party’s arbitration rights

unless the opposing party proves that it suffered prejudice as a result. Perry Homes, 258 S.W.3d

at 593. A demand for arbitration puts a party on notice that arbitration may be forthcoming, and

therefore, affords that party the opportunity to avoid compromising its position with respect to

arbitrable and nonarbitrable claims. Perry Homes, 258 S.W.3d at 600, citing Republic Insurance

Company v. PAICO Receivables, LLC, 383 F.3d 341, 346 (5th Cir.2004). In contrast, where a

party fails to demand arbitration and in the meantime engages in pretrial activity inconsistent

with an intent to arbitrate, the party later opposing a motion to compel arbitration may more

easily show that its position has been compromised or prejudiced. Id.

The discovery initiated by JC does not provide a basis for finding prejudice. As the

Supreme Court explained in Perry Homes, a party who requests lots of discovery is not

prejudiced by getting it and taking it to arbitration in the same way as a party who is required to

-8- produce lots of discovery outside the stricter discovery limits in arbitration. Perry Homes, 258

S.W.3d at 600. Here, Appellants did not just respond to discovery. They actively initiated

discovery on the merits and continued to do so until they filed their motion to compel arbitration

in November 2011. In fact, Appellants took four depositions after they sent the letter to JC

demanding arbitration and just days before they filed their motion to compel arbitration in the

trial court. Appellants concede that substantial discovery on the merits has occurred, but they

assert prejudice is not shown because there is no evidence of how much the discovery cost. A

party opposing arbitration is not always required to prove the cost of the extensive discovery in

order to prove prejudice. See Perry Homes, 258 S.W.3d at 599-600 (rejecting dissent’s view that

prejudice was not proven due to absence of evidence regarding how much the extensive

discovery cost). Appellants also waited to make their demand for arbitration until after JC

revealed its trial strategy through the filing of its trial fact and expert witness lists. This case

presents prejudice in the form of considerable delay, expense, and damage to JC’s legal position.

Based on the totality of the circumstances, we conclude that Appellants waived the right to

arbitrate by substantially invoking the judicial process to the detriment of JC. It is unnecessary

to address JC’s alternative argument that the trial court properly overruled the motion to compel

arbitration because Appellants failed to file the request for arbitration within a reasonable time as

required by the arbitration provision. We therefore overrule Appellants’ sole issue and affirm

the trial court’s order denying the motion to compel arbitration.

October 23, 2013 ANN CRAWFORD McCLURE, Chief Justice

Before McClure, C.J., Rodriguez, and Larsen, JJ. Larsen, J. (Senior Judge), sitting by assignment

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