Dallas Appeals Court Refuses to Compel Arbitration Using Equitable Estoppel

The Fifth District Appeals Court in Dallas has refused to compel arbitration using the doctrine of equitable estoppel.  In VSR Fin. Servs., Inc. v. McLendon, No. 05–12–01016–CV, (Tex. App. – Dallas, Aug. 14, 2013), McLendon received investment advice from Chapman Hext & Co. (“Chapman”) regarding a number of business ventures.  After receiving the investment advice, McLendon purchased notes using VSR Financial Services (“VSR”) as a broker.  Later, McLendon opened an individual brokerage account with VSR.  When the account was opened, McLendon signed a form that outlined the parties’ relationship but did not contain an agreement to arbitrate.  He did, however, sign an application form for an “Advantage Account SM Agreement” that contained an arbitration provision.  Neither that form nor another form incorporated by reference was countersigned by another party or mentioned VSR.  About one month later, McLendon purchased a number of notes for DBSI through VSR.

Six months later, McLendon opened another investment account with VSR as managing partner of Tri–State Theatres (“Tri–State”).  He signed a new account form that was countersigned by a representative for Chapman.  The form did not contain an agreement to arbitrate and no contract that outlined the parties’ relationship was signed by either VSR or Tri-State.  In addition, McLendon signed an application form for an “Advantage Account SM Agreement” on behalf of Tri-State that contained an arbitration provision and incorporated additional terms and conditions by reference.  After the Tri-States account was opened, McLendon transferred the notes from his individual investment account to that of Tri-States.  Later, DBSI filed for bankruptcy protection.

McLendon and Tri-States filed a lawsuit against VSR “for negligence and violations of [the] Texas securities law” and Chapman “for breach of fiduciary duty, negligence, negligent representation, fraud, breach of contract, and civil conspiracy.”  VSR and Chapman (collectively “Appellants”) each filed a motion to compel the dispute to arbitration.  After their motions were denied, they both filed an interlocutory appeal with Texas’ Fifth District Appeals Court.

First, the Dallas court reviewed whether the trial court erroneously excluded a signed affidavit from evidence.  The court held that the trial court did not commit error by excluding the evidence because it was conclusory and went to the affiant’s “understanding” of the situation rather than his actual legal knowledge.  The court stated, “we cannot conclude the trial court abused its discretion in sustaining the objections to Charles Chapman’s affidavit and striking the objected-to portions of that affidavit.”

Next, the appeals court addressed VSR’s claim that the dispute was subject to arbitration based upon the fact that a valid agreement to arbitrate existed between McLendon and Chapman.  According to the court,

The only brokerage account documents in the record that reference VSR by name are the two VSR New Account Forms. The VSR New Account Forms signed by McLendon, individually and on behalf of Tri–State, and Charles Chapman as a “Registered Rep,” do not contain an arbitration provision and do not incorporate by reference any other document. The Agreements, signed by McLendon, individually and on behalf of Tri–State, and the Terms and Conditions incorporated by reference into the Agreements, contain the arbitration provision at issue. The arbitration provision encompasses disputes between the account owner and the “Introducing Firm, Clearing Agent, and any Sub–Advisor (and/or any other agent).” The Agreements do not identify the party or parties with which appellees are to arbitrate claims other than in terms of the “Introducing Firm,” “Clearing Agent,” and “any Sub–Advisor (and/or any other agent).” The Terms and Conditions contain the account owner’s acknowledgment of understandings between the account owner and “your Introducing Firm (‘Introducing Firm’) and First Clearing Corporation, LLC (‘Clearing Agent’, ‘Broker’) in opening the your Advantage Account.” The Terms and Conditions state the terms “ ‘we’, ‘us’, ‘our’ and ‘ours’ refer to Introducing Firm and Clearing Agent.” While the Terms and Conditions identify First Clearing Corporation, LLC as the “Clearing Agent, Broker” for the accounts, the term “Introducing Firm” is never defined and an Introducing Firm is not identified by name.

Because VSR failed to demonstrate that it was the “Introducing Firm” described in the agreement, the appeals court held no valid arbitration agreement existed and the trial court did not abuse its discretion when it denied VSR’s motion to compel arbitration.

After that, the Dallas court dismissed Chapman’s argument that the trial court committed error by denying Chapman’s motion to compel arbitration by stating,

On this record, there is no evidence the Chapman appellants were parties to or had the right to enforce the arbitration provision of the Agreements as agents of the “Introducing Firm.” See In re Oakwood Mobile Homes, 987 S.W.2d at 573 (burden of showing one’s right to enforce an arbitration agreement, as with the overall burden of establishing arbitration agreement’s existence, is generally evidentiary). We are unable to conclude the trial court should have determined that the Chapman appellants were parties to or had the right to enforce the arbitration provisions.

The appeals court next disagreed with Chapman’s position that McLendon should have been compelled to arbitrate based on the doctrine of direct benefits estoppel.  The court stated,

Here, appellees do not have to rely on the terms of the Agreements and Terms and Conditions, including the arbitration provision, in asserting their claims against the Chapman appellants. The Chapman appellants do not explain what, if any, “direct benefit” appellees are seeking from the Agreements containing the arbitration provision. Appellees’ claims against the Chapman appellants, while referencing “forms and agreements entered into with VSR,” do not seek a benefit from or to enforce provisions or obligations set forth in the “forms and agreements.” Thus, appellees’ claims “stand independently” of the Agreements. See In re Kellogg Brown & Root, Inc., 166 S.W.3d at 739–40; In re Merrill Lynch, Pierce, Fenner & Smith, Inc., 195 S.W.3d at 816. In this case, appellees are not seeking to enforce provisions of the Agreements, while evading arbitration with the non-signatory Chapman appellants. See In re James E. Bashaw & Co., 305 S.W.3d at 54.

Finally, the court addressed Chapman’s argument that “because appellees as signatories to the Agreements sued VSR, a purported signatory to the Agreements, and the Chapman appellants, non-signatories to the Agreements, based on substantially interdependent and concerted misconduct by VSR and the Chapman appellants, the non-signatory Chapman appellants may enforce the arbitration provision of the Agreements against appellees.”  According to the Third District,

As with the Chapman appellants’ first issue, this contention is dependent on there being a valid and enforceable arbitration agreement between appellees and VSR. As discussed above regarding VSR’s first issue and the Chapman appellants’ first issue, we have concluded VSR failed to establish the existence of a valid and enforceable arbitration agreement between it and appellees. Therefore, because VSR has not established it was a party to a valid and enforceable arbitration agreement, application of the equitable estoppel theory of “substantially interdependent and concerted misconduct” is not warranted here; appellees, as signatories to the Agreements, have not raised allegations of substantially interdependent and concerted misconduct by the non-signatory Chapman appellants and a signatory to the Agreements.

Further, appellees do not allege the Chapman appellants engaged in “substantially interdependent and concerted misconduct” with VSR. Appellees allege the Chapman appellants conspired together to induce appellees to make the DBSI investment.

Ultimately, the Dallas Appeals Court affirmed the trial court’s decision to deny Appellants’ motion to compel arbitration.