S.C. Maxwell Family Partnership, Ltd v. Thomas Kent and Nancy Kent
01-15-00245-CV
| Tex. App. | May 4, 2015Background
- Plaintiffs (Thomas and Nancy Kent) sued for a declaratory judgment that a Partnership Agreement creating AAA Self Storage–Brenham is valid and that they are 50% partners.
- Defendant (S.C. Maxwell Family Partnership, Ltd.) repeatedly argued the Partnership Agreement was invalid (initially on agent capacity grounds) and moved to transfer venue or compel arbitration based on an arbitration clause in that Agreement.
- Trial court denied Defendant’s motion to transfer venue and later denied the motion to compel arbitration; appeals and writ petitions by Defendant were denied by this Court and the Texas Supreme Court at earlier stages.
- Defendant later amended pleadings to both assert the Agreement is valid for some purposes and simultaneously raise affirmative defenses (fraud/fraudulent inducement and failure/lack of consideration) attacking formation and existence of the Agreement.
- Plaintiffs argue Defendant cannot invoke the arbitration clause while disputing the very existence/formation of the underlying contract; trial court must resolve existence/formation issues first.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether a party may compel arbitration when it disputes the very existence/formation of the contract containing the arbitration clause | Kent: If Defendant disputes the contract’s existence or essential formation elements, a court (not arbitrator) must decide; Defendant cannot invoke arbitration | Maxwell: Arbitration clause is separable and enforceable even though Defendant challenges the Agreement | Held: Court refused to compel arbitration because Defendant attacks the very existence/formation (consideration/capacity/fraud) of the Agreement; court must decide formation first |
| Whether the separability/“gateway” doctrine requires arbitration of threshold validity issues here | Kent: Separability does not apply where the very existence of the contract is disputed | Maxwell: The arbitration clause is separable and governs threshold questions | Held: Separability inapplicable where the party contends no agreement ever existed; court must resolve existence |
| Whether alleged fraud/fraudulent inducement (as pled) should send the dispute to arbitration | Kent: Defendant’s fraud pleadings are conclusory and intended to circumvent prior rulings; but even if valid, failure of consideration still requires court decision | Maxwell: Fraud/fraudulent inducement justify arbitration of threshold issues | Held: Even if fraud were adequately raised, Defendant also asserts lack of consideration, an essential formation element for court determination, so arbitration was improper |
| Whether failure/lack of consideration compels arbitration | Kent: Lack of consideration attacks formation and is for the court to decide | Maxwell: (implicit) arbitration clause controls regardless | Held: Lack of consideration is a challenge to formation; court must decide, not arbitrator |
Key Cases Cited
- Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395 (separability doctrine established)
- Will–Drill Res., Inc. v. Samson Res. Co., 352 F.3d 211 (5th Cir. 2003) (where existence of agreement is challenged, courts must decide first)
- American Med. Tech., Inc. v. Miller, 149 S.W.3d 265 (Tex. App. Houston 2004) (separability does not apply when very existence of contract is disputed)
- In re Morgan Stanley & Co., Inc., 293 S.W.3d 182 (Tex. 2009) (courts decide existence challenges before arbitration)
- In re FirstMerit Bank, N.A., 52 S.W.3d 749 (Tex. 2001) (distinguishing arbitrability and contractual validity issues)
- Nazareth Hall Nursing Ctr. v. Melendez, 372 S.W.3d 301 (Tex. App. El Paso 2012) (existence challenges are for courts)
- Texas Gas Util. Co. v. Barrett, 460 S.W.2d 409 (Tex. 1970) (consideration is essential to contract formation)