In Re: Weekley Homes LP

"[W]hen a nonparty consistently and knowingly insists that others treat it as a party, it cannot later 'turn[] its back on the portions of the contract, such as an arbitration clause, that it finds distasteful.' A nonparty cannot both have his contract and defeat it too."

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Click here for the full text of this decision FACTS:Vernon Forsting contracted with Weekley Homes LP for construction of a 4,000- square-foot home at a purchase price of $240,000. At the time, Forsting was a 78-year-old widower with an assortment of health problems. His intention in purchasing such a large home was to live with his daughter, Von Bargen (his only child), and her husband and three sons. Shortly after closing, Forsting transferred the home to the Forsting Family Trust, a revocable trust established 10 years earlier whose sole beneficiary was Von Bargen. At his deposition, Forsting testified that the only reason he signed the purchase agreement individually rather than as trustee was because he “forgot to put [the home] in the trust.” Forsting and Von Bargen served as the only trustees of the trust, the purpose of which was to transfer Forsting’s property to Von Bargen after his death. According to the plaintiffs’ pleadings, numerous problems arose with the home after completion. Unsatisfied with the home and Weekley’s efforts to repair it, Forsting, Von Bargen and the trust filed suit against Weekley in December 2002. Forsting and the trust asserted claims for negligence, breach of contract, statutory violations and breach of warranty. Von Bargen sued only for personal injuries, alleging Weekley’s negligent repairs caused her to develop asthma. Weekley moved to compel arbitration of all claims under the Federal Arbitration Act. The trial court concluded the FAA applied, and granted the motion as to all claims by Forsting and the trust. But the trial court refused to compel arbitration of Von Bargen’s claim because she did not sign the purchase agreement. After the 5th U.S. Circuit Court of Appeals denied Weekley’s request for such relief, Weekley filed a similar request in this court. HOLDING:The trial court abused its discretion in failing to compel arbitration. The court conditionally grants the writ of mandamus and orders the trial court to vacate that part of its order denying Weekley’s motion, and to enter a new order compelling arbitration of Von Bargen”s claim. A nonparty may be compelled to arbitrate “if it seeks, through the claim, to derive a direct benefit from the contract containing the arbitration provisions.” This rule is consistent with federal law of direct-benefits estoppel. Under both Texas and federal law, whether a claim seeks a direct benefit from a contract containing an arbitration clause turns on the substance of the claim, not artful pleading. Claims must be brought on the contract (and arbitrated) if liability arises solely from the contract or must be determined by reference to it. On the other hand, claims can be brought in tort (and in court) if liability arises from general obligations imposed by law. Nonparties face a choice when they may plead in either contract or tort, but pleading the former invokes an arbitration clause broad enough to cover both. If they pursue a claim “on the contract,” then they must pursue all claims-tort and contract-in arbitration. Conversely, if they choose not to sue “on the contract,” they may pursue the tort claims in court, but the contract claims will thereby likely be waived under the election-of-remedies doctrine. Given these options, it is not clear at this point that nonparties will always choose to forfeit potentially viable contract claims solely to avoid arbitration. In some cases, a nonparty may be compelled to arbitrate if it deliberately seeks and obtains substantial benefits from the contract itself. Here, Von Bargen has not merely resided in the home. Claiming the authority of the purchase agreement, she directed how Weekley should construct many of its features, repeatedly demanded extensive repairs to “our home,” personally requested and received financial reimbursement for expenses “I incurred” while those repairs were made, and conducted settlement negotiations with Weekley (apparently never consummated) about moving the family to a new home. Having obtained these substantial actions from Weekley by demanding compliance with provisions of the contract, Von Bargen cannot equitably object to the arbitration clause attached to them. In addition to these benefits, Forsting and the trust have sued Weekley on claims which are explicitly based on the contract. Under Texas law, a suit involving a trust generally must be brought by or against the trustee, and can be binding on the beneficiaries whether they join it or not. Although Von Bargen did not purport to sue as either trustee or beneficiary, she was both, and any recovery will inure to her direct benefit as the sole beneficiary and equitable titleholder of the home. As one Texas court has noted, if a trustee’s agreement to arbitrate can be avoided by simply having the beneficiaries bring suit, “the strong state policy favoring arbitration would be effectively thwarted.” “[W]e do not understand direct-benefits estoppel to create liability for noncontracting parties that does not otherwise exist. As Von Bargen and Weekley had no contract between them, estoppel alone cannot grant either a right to sue for breach. Nor do we understand the doctrine to apply when the benefits alleged are insubstantial or indirect. But once Von Bargen deliberately sought substantial and direct benefits from the contract, and Weekley agreed to comply, equity prevents her from avoiding the arbitration clause that was part of that agreement.” The court agrees with the federal courts that when a nonparty consistently and knowingly insists that others treat it as a party, it cannot later turn its back on the portions of the contract, such as an arbitration clause, that it finds distasteful. A nonparty cannot both have his contract and defeat it too. OPINION:Scott Brister, J., delivered the court’s opinion. Willett, J., did not participate.

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