1:20-cv-01247
W.D. Tex.May 14, 2021Background
- Noble Capital (manager) and US Capital (general partner) formed a limited partnership fund (US Capital/Noble Capital Texas Real Estate Income Fund LP) after feeder funds contributed $25M; the LPA and MASA contained JAMS arbitration clauses in San Francisco.
- Plaintiffs initiated JAMS arbitration in Jan 2019 alleging breach, fraud, conversion, and fiduciary claims; an emergency arbitrator found Plaintiffs likely to prevail on breach and fraud and issued interim relief (freezes, accounting, and restrictions on use of partnership capital).
- A JAMS merits panel later issued a partial award continuing freezes and certain accounting/audit directives; the Fund (through US Capital) moved in arbitration to require payment of JAMS fees or terminate the arbitration, claiming the Fund could not pay.
- The JAMS panel terminated the arbitration for nonpayment of fees after no party advanced the required deposits; the Fund/US Capital removed the remaining ~$500,000 from Fund accounts; arbitration was closed and Plaintiffs subsequently sued in state court (then removed to federal court).
- US Capital moved to compel arbitration and stay proceedings under the FAA §3, or alternatively to dismiss or transfer; the magistrate judge recommended denying the motion because the arbitration "had been had" and US Capital/the Fund defaulted by refusing to pay fees, so no mandatory stay or compulsion was required.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether this case must be compelled to arbitration and stayed under FAA §3 | Arbitration was terminated by JAMS; court cannot send case to a non-existent arbitration | LPA/MASA require arbitration in San Francisco; court must compel and stay under §3 | Denied — JAMS terminated arbitration for nonpayment; because the arbitration "has been had" and Fund/US Capital defaulted by not paying fees, §3 stay/compel is not required |
| Whether arbitration clauses are unenforceable for fraud in the inducement | Noble says the arbitration clauses were procured by US Capital's fraud | US Capital contends clauses are valid and enforceable | Not decided on the merits — court denied compel under §3 and therefore did not resolve the fraud-in-inducement defense |
| Rule 12 dismissal and Rule 19 joinder arguments (failure to join the Fund; Rule 9(b) fraud pleading) | Plaintiffs say Fund is controlled by US Capital and Complaint pleads fraud with particularity | US Capital seeks dismissal under 12(b)(1),(3),(6),(7) and argues fraud not pled with specificity; Fund is a required party | Denied — US Capital failed to show Fund is a necessary party; Complaint satisfies Rule 9(b) notice pleading standards |
| Motion to transfer venue under 28 U.S.C. §1404(a) | Plaintiffs favor Texas forum; agreements set arbitration in California, not a forum-selection clause for litigation | US Capital invokes forum-selection/forum-convenience for California transfer | Denied — US Capital did not meet its burden to show transfer is clearly more convenient or in the interest of justice |
Key Cases Cited
- Tillman v. Tillman, 825 F.3d 1069 (9th Cir. 2016) (arbitration terminated for nonpayment can satisfy §3's "has been had" language)
- Pre-Paid Legal Servs., Inc. v. Cahill, 786 F.3d 1287 (10th Cir. 2015) (failure to pay arbitration fees can terminate proceedings so court need not stay under §3)
- Freeman v. SmartPay Leasing, LLC, [citation="771 F. App'x 926"] (11th Cir. 2019) (district court within discretion to lift stay where arbitration terminated for unpaid fees)
- Alford v. Dean Witter Reynolds, Inc., 975 F.2d 1161 (5th Cir. 1992) (Section 3 stay requirement when claims are referable to arbitration)
- Folse v. Richard Wolf Med. Instruments Corp., 56 F.3d 603 (5th Cir. 1995) (right to arbitrate is waivable; default in arbitration can waive stay right)
- In re Volkswagen of Am., Inc., 545 F.3d 304 (5th Cir. 2008) (standards and burden for §1404(a) transfer)
- Northrop Grumman Ship Sys., Inc. v. Ministry of Def. of the Republic of Venez., 575 F.3d 491 (5th Cir. 2009) (arbitration termination can render arbitration-enforcement issues moot)