BOSSCORP, Inc, Fred M. Tresca, HBC Investments LLC, Whitley Partners, Ltd., A. Duncan Gray, M. Richard Warner, Nils Johansson, Albert R. Dowden, Henry Chang, Prince Zachariah, Morgan Interests LLC, Ltd., Boss Enterprises Group, LLC v. Donegal, Inc., Kestrel Capital L.P. and Continental Energy Services LLC, Barrett L. Webster, Patrick J. Kelly, and Stephen M. Schuster

Affirmed in part and Reversed and Remanded in part and Opinion filed April 17,
2012.

In The

Fourteenth Court of Appeals
___________________

NO. 14-11-00439-CV
___________________

BOSSCORP, INC., FRED M. TRESCA, HBC INVESTMENTS LLC, WHITLEY
PARTNERS, LTD., A. DUNCAN GRAY, M. RICHARD WARNER, NILS
JOHANSSON, ALBERT R. DOWDEN, HENRY L. CHANG, PRINCE
ZACHARIAH, MORGAN INTERESTS LLC, KEVIN O. KAMMERER, ROBERT
M. ANDERSON, AND BOSS ENTERPRISES GROUP LLC, Appellants

V.

DONEGAL, INC., KESTREL CAPITAL L.P., CONTINENTAL ENERGY
SERVICES LLC, BARRETT L. WEBSTER, PATRICK J. KELLY, AND
STEPHEN M. SCHUSTER Appellees

On Appeal from the 127th District Court
Harris County, Texas
Trial Court Cause No. 2011-04459

OPINION

This is an appeal from a grant of a motion to stay arbitration. Appellants,
members1 of a Delaware limited liability company, initiated the arbitration proceeding

1
Appellant BossCorp, Inc. formerly managed both companies but has never been a member of
either.
against appellees—majority members of a subsidiary Delaware LLC—in relation to a
dispute over the ownership and control of the two companies. In granting the stay
requested by appellees, the trial court found that the dispute “includes no arbitrable issues.”
We hold that under Delaware law, which applies to the agreements in this case, the court
properly exercised its jurisdiction to decide the scope of arbitrability of the issues, but erred
in granting the stay of arbitration with regard to appellees Kestrel Capital L.P. (“Kestrel”),
and Continental Energy Services LLC (“CES”). The trial court did not err in granting the
motion to stay arbitration with regard to appellee Donegal, Inc. (“Donegal”).
Accordingly, we affirm in part and reverse in part, with instructions that Kestrel and CES
proceed to arbitration of this dispute with appellants.

I. FACTUAL AND PROCEDURAL BACKGROUND

In 2004, George Boss formed MBCorp LLC, a Delaware limited liability company,
to participate in investments in energy infrastructure services companies. The next year,
MBCorp formed CES as an MBCorp subsidiary for the same purpose. MBCorp was the
sole member of, and held 100% of the ownership interest in, CES; MBCorp held no other
assets. Appellant BossCorp Inc. (“BossCorp”), a Delaware corporation, managed both
MBCorp and CES and received a management fee based on CES’s revenues. All
appellants other than BossCorp held ownership interests, either directly or through
affiliates, in MBCorp.

In 2009, Boss, as Chief Executive Officer of CES, entered into an agreement (“the
Restructuring Agreement”) with Donegal and Kestrel to restructure and recapitalize CES.2
Donegal and Kestrel had previously obligated themselves as guarantors of a $7 million
Bridge Loan made to CES by Amegy Bank. Under the terms of the Restructuring
Agreement, Donegal and Kestrel promised to convert these debt obligations into equity by

2
Appellees refer to this agreement as a “nonbinding Letter of Intent.” For ease of analysis, we
adopt appellants’ terminology in referring to a Restructuring Agreement. However, our opinion should
not be construed as deciding the status of the agreement to the extent that is an issue in the underlying suit.
2
funding their portions of the Bridge Loan.3 In return for their promise to fund the loan,
Donegal and Kestrel received Series A Preferred Membership Interests equivalent to 90%
of the total equity ownership of CES. Additionally, Donegal and Kestrel assumed
business and operational control over CES and MBCorp through the replacement of the
existing CES Board of Directors and MBCorp Board of Managers with Donegal and
Kestrel’s designated representatives—appellees Stephen M. Schuster, Patrick J. Kelly, and
Barrett L. Webster. BossCorp was removed as Manager of CES and MBCorp and
replaced in that role by the new Board of Directors. To effect these changes in control and
equity ownership, MBCorp, in reliance on Donegal and Kestrel’s promise to fund their
guaranty obligations of the Bridge Loan, agreed to the Restructuring Agreement and
relinquished 90% of its ownership of CES, and BossCorp ceded control to Donegal and
Kestrel.

Later, Donegal and Kestrel reneged on their agreement to fund the Bridge Loan, and
appellants formed a plan to restore their own control of, and ownership interests in, CES.
In January 2011, appellants notified appellees of a meeting to take place two weeks later,
during which the removal of CES’s new managers would be considered. On the eve of the
meeting, Schuster represented to appellants that the Board had merged the two LLCs,
effectively dissolving MBCorp into the surviving CES. This merger purported to leave
appellants with ownership interests in CES, but in proportionally smaller shares than they
had held in MBCorp.

In response to the claimed merger and changes to their ownership positions,
appellants 4 filed an action for injunctive and declaratory relief in the trial court.
Appellants asserted claims against appellees for breach of contract, fraud in the

3
Donegal was responsible for $4,000,000 of the loan and Kestrel was responsible for $2,000,000.
The remaining $1,000,000 was to be converted to equity by investment from other existing members of
MBCorp.
4
BossCorp was not one of the original petitioners. It was joined on February 14, 2011, one day
before the other petitioners nonsuited and filed a Demand for Arbitration with the American Arbitration
Association, leaving BossCorp and (briefly) Boss Enterprises as plaintiffs.
3
inducement, and fraud in a stock transaction based on their failure to fund the Bridge Loan
and attempt to merge MBCorp into CES without appellants’ approval. Regarding CES,
appellants claimed a breach of the LLC’s formation agreement in CES’s failure to insist
upon performance of the Restructuring Agreement by Donegal and Kestrel.

On January 24, 2011, the trial court granted a temporary restraining order
prohibiting appellees from taking any further action to complete the merger or any further
action that would affect the existence of MBCorp or CES or the ownership interests of any
of the companies’ members. After the order expired and appellants failed to pay the bond
required to secure an extension, all appellants other than BossCorp5 nonsuited their claims
and, along with Boss, filed a Demand for Arbitration with the American Arbitration
Association. Appellants invoked identical arbitration clauses in the two Delaware LLC
agreements, which read as follows:

Section 12.1 Arbitration
Except for ancillary measures in aid of arbitration and for proceedings to
obtain provisional remedies and interim relief, including injunctive relief,
any controversy, dispute, claim arising out of, in connection with, or relating
to this Agreement, or the breach, termination, or validity thereof or of any
transaction completed hereby (any such controversy, dispute, or claim being
referred to as a “Dispute”) shall be finally settled by arbitration, conducted
expeditiously in accordance with the Commercial Arbitration Rules then in
force (the “AAA Rules”) of the American Arbitration Association (the
“AAA”).
A week later, Donegal, Kestrel, and CES filed a third party petition against Boss6
and the nonsuited plantiffs and counterclaims against BossCorp, requesting that the trial
court stay the arbitration proceeding. After a hearing, the trial court granted appellees’
request to stay the arbitration, and appellants challenge that decision on appeal.7

5
Boss Enterprises initially failed to nonsuit, but it joined in the Demand for Arbitration and was
later omitted in BossCorp’s amended petition for tort damages.
6
Although Boss was subject to the order staying arbitration, he did not join in this appeal.
7
Schuster, Kelly, and Webster joined in appellees’ amended petition three days after the
4
 II. ISSUES PRESENTED
In their first two issues, appellants argue that the trial court erred in deciding that
there were no arbitrable issues and in granting appellees’ request to stay arbitration of the
parties’ dispute concerning the CES and MBCorp LLC agreements. In their third issue,
appellants contend that the trial court erred in failing to allow the arbitrator to decide the
scope of the arbitration clauses in the first instance. Because resolving the latter issue
would potentially render the first two questions moot, we first address whether the trial
court had jurisdiction to decide the arbitrability of the agreement and only then consider
whether the trial court correctly granted appellees’ motion to stay arbitration.8

III. GOVERNING LAW
The Federal Arbitration Act (“FAA”) preempts state law that would otherwise
render arbitration agreements unenforceable in a contract involving interstate commerce.
9 U.S.C. § 2 (West 2008); Southland Corp. v. Keating, 465 U.S. 1, 10–11, 104 S Ct. 852,
858, 79 L. Ed. 2d 1 (1984); In re Olshan Found. Repair Co., LLC, 328 S.W.3d 883, 888
(Tex. 2010). The parties in this case do not dispute that the two Delaware LLC
agreements involve interstate commerce.9 Under the FAA, courts should apply ordinary
state-law principles governing the formation of contracts when determining issues of
substantive arbitrability. First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938, 944, 115

trial court granted the Motion to Stay. Thus, they were not subject to that order, have not filed
briefs on appeal, and no error is alleged with respect to them. Therefore, although they joined the
other appellees in filing the Notice of Appeal in this case, they are not properly considered parties
to this appeal. See Showbiz Multimedia, LLC v. Mountain States Mortg. Ctrs., Inc., 303 S.W.3d
769, 771 n.3 (Tex. App.—Houston [1st Dist.] 2009, no pet.) (appellee must be party to trial court’s
final judgment and someone against whom appellant raises issues or points of error in appellant’s
brief) (citing Gray v. Allen, 41 S.W.3d 330, 331 n.2 (Tex. App.—Fort Worth 2001, no pet.)).
8
The second issue—whether the trial court correctly determined that there are no arbitrable
issues—is subsidiary to the question of whether the trial court correctly granted the Motion to Stay on that
basis.
9
Appellees insist that the basis of appellants’ claim is not the Delaware LLC agreements but the
Restructuring Agreement, which contains no arbitration clause and should be subject to a normal contract
law analysis. However, the issue on appeal is whether the trial court correctly stayed arbitration on the
LLC agreements, so we must look to the FAA as the law governing that question.
5
S. Ct. 1920, 1924, 131 L. Ed. 2d 985 (1995). As noted, the two Delaware LLC
agreements provide that they should be “construed and enforced in accordance with and
governed by the laws of the State of Delaware.” The arbitration clauses contained in those
agreements specify that any actual arbitration is to be conducted in accordance with the
Commercial Arbitration Rules of the American Arbitration Association (“the AAA
Rules”), but the arbitration agreements themselves are expressly governed by Delaware
law.

The Delaware Supreme Court has confirmed that “arbitration is a matter of contract
and a party cannot be required to submit to arbitration any dispute which he has not agreed
so to submit.” James & Jackson, LLC v. Willie Gary, LLC, 906 A.2d 76, 78 (Del. 2006).
A Delaware LLC is bound by the arbitration provisions of its own governance and
operation agreement, even where the LLC did not itself execute the agreement. Elf
Atochem N. Am., Inc. v. Jaffari, 727 A.2d 286, 287 (Del. 1999). Delaware arbitration law
mirrors federal policy in presuming the validity of arbitration agreements and resolving
doubts about the scope of arbitrable issues in favor of arbitration. See Moses H. Cone
Mem’l Hosp. v. Mercury Const. Corp., 460 U.S. 1, 24-25, 103 S. Ct. 927, 941, 74 L. Ed. 2d
765 (1983) (explaining federal law and policy); Willie Gary 906 A.2d at 78 (explaining
Delaware law).

The question of whether parties have agreed to arbitrate their disputes is to be
decided by the court, unless there is clear and unmistakable evidence that the parties
delegated that question to the arbitrator instead. First Options, 514 U.S. at 944–45, 115 S.
Ct. at 1924. Federal law refers gateway matters such as (1) whether the parties are bound
by a given arbitration clause and (2) whether a certain dispute is within the arbitration
agreement to the court in order to “avoid the risk of forcing parties to arbitrate a matter they
may well not have agreed to arbitrate.” Howsam v. Dean Witter Reynolds, Inc., 537 U.S.
79, 83–84, 123 S. Ct. 588, 591–92, 154 L. Ed. 2d 491 (2002).

6
 The Delaware Supreme Court has adopted the majority federal view that a reference
to the AAA Rules in an arbitration agreement serves as the type of clear and unmistakable
evidence that the parties agreed to submit the question of the arbitrability of a particular
dispute to the arbitrator. Willie Gary, 906 A.2d at 80. However, the court limited this
interpretation to arbitration clauses that broadly refer all disputes to arbitration under the
referenced rules. Id. Where an arbitration agreement specifically reserves carve-outs for
judicial remedies, something more than reference to the AAA Rules is needed to establish
that the parties intended to arbitrate the arbitrability of their dispute. Id. at 81.

Whether the court or the arbitrator decides the question of substantive arbitrability,
Delaware law strongly favors arbitration. See Elf, 727 A.2d at 295. An arbitration
clause, though, only covers claims that touch on the legal rights contained in the underlying
contract or agreement within which the clause is found. See Parfi Holding AB v. Mirror
Image Internet, Inc., 817 A.2d 149, 159–60 (Del. 2002) (holding that a fiduciary duty
claim was not covered by an arbitration provision in a stock underwriting agreement).
Where an arbitration clause is broad in scope, courts will defer to it where a claim touches
on any issues of contract rights or contract performance. Id. at 155.

IV. STANDARD OF REVIEW

We review a trial court’s grant of a motion to stay arbitration under an
abuse-of-discretion standard. See McReynolds v. Elston, 222 S.W.3d 731, 739 (Tex.
App.—Houston [14th Dist.] 2007, no pet.) (so holding on appeal of order denying motion
to compel arbitration under TAA); see also Garcia v. Huerta, 340 S.W.3d 864, 868–69
(Tex. App.—San Antonio 2011, pet. filed) (so holding on appeal of order denying motion
to compel arbitration under FAA); Sidley Austin Brown & Wood, LLP v. J.A. Green, 327
S.W.3d 859, 863 (Tex. App.—Dallas 2010, no pet.) (same); SEB, Inc. v. Campbell, No.
03-10-00375-CV, 2011 WL 749292, at *2 (Tex. App.—Austin Mar, 2, 2011, no pet.)
(mem. op.) (same). Under this standard, we defer to the trial court’s factual
determinations if they are supported by evidence, but we review the trial court’s legal
7
determinations de novo. In re Labatt Food Service, L.P., 279 S.W.3d 640, 643 (Tex.
2009). Determining whether a claim falls within the scope of an arbitration agreement
involves the trial court’s legal interpretation of the agreement, and we review such
interpretations de novo. McReynolds, 222 S.W.3d at 740.

V. ANALYSIS
A. Jurisdiction of the Trial Court to Rule on the Scope of Arbitration

Appellants contend that the trial court erred in not allowing the arbitrator to
determine the scope of the arbitration clauses in the first instance. The arbitration clause
at issue here, reproduced above, expressly incorporates the rules of the American
Arbitration Association (the “AAA”) which state that the arbitrator “shall have the power
to rule on his or her own jurisdiction, including any objections with respect to the
existence, scope or validity of the arbitration agreement.” Appellants argue that this
reference to the AAA Rules constitutes a clear and unmistakable intent to delegate the
question of arbitrability to the arbitrator, as Delaware law requires under Willie Gary10 and
other cases.

However, the arbitration agreements in this case refer disputes to arbitration under
the AAA Rules with a significant exception for “ancillary measures in aid of arbitration
and for proceedings to obtain provisional remedies and interim relief, including injunctive
relief.” Appellants contend that this exception does not defeat the parties’ purported
intent to refer arbitrability to the arbitrator, relying on several cases in the Delaware Court
of Chancery after Willie Gary. See McLaughlin v. McCann, 942 A.2d 616, 626 (Del. Ch.
2008) (holding that a narrow exception for judicial recourse in an arbitration clause that
otherwise referred disputes to arbitration under the AAA Rules is not always enough to
overcome the heavy presumption that the parties agreed to let the arbitrator decide
arbitrability); Julian v. Julian, No. 4137-VCP, 2009 WL 2937121, at *7 (Del. Ch. Sept. 9,
2009) (mem op.) (holding that, when there is a broad arbitration clause and reference to the
10
906 A.2d at 80.
8
AAA Rules, a “colorable basis” for arbitration is enough to send the question of
substantive arbitrability to the arbitrator). We disagree that those cases control.

Where an arbitration agreement contains carve-outs and exceptions providing
judicial remedies for disputes, something more than mere reference to the AAA Rules for
the conduct of the arbitration is needed to show that the parties clearly and unmistakably
intended to delegate arbitrability to the arbitrator instead of the court. Willie Gary, 906
A.2d at 80–81. In this case, not only are there exceptions to the arbitration clause in the
relevant LLC agreements, but the parties’ dispute over arbitrability specifically falls within
those carve-outs. The third-party petition by appellees that forms the basis of this
interlocutory appeal requested two forms of relief: (1) “An order staying arbitration
proceedings initiated by third-party defendants concerning the above-described dispute,”
and (2) “A Declaration that the above-described dispute between the parties includes no
arbitrable issue and prohibiting third-party defendants . . . from proceeding with their
efforts to have any of the above-described disputes between the parties submitted to
arbitration.” The petition thus sought provisional, interim judicial remedies to enjoin
appellants from proceeding in arbitration. This type of action is reserved for the court by
the express language of the arbitration agreements.

The Court of Chancery cases cited by appellants are distinguishable. The clause
here is far broader in referring disputes to arbitration than the clause in McLaughlin
discussed above. Julian is equally dissimilar to the present case, as we need not consider
the “colorable basis” for arbitration when the clause we are dealing with is not sufficiently
broad to send all disputes to arbitration on its face. The carve-out in the arbitration clause
here is substantial, and furthermore the action in the trial court is precisely the kind of
judicial remedy explicitly reserved for determination in the court.

Accordingly, we disagree that the trial court erred in not allowing the arbitrator to
determine the scope of arbitration in the first instance. We overrule appellants’ third
issue.
9
B. Grant of the Stay of Arbitration

In their first two issues, appellants argue that the trial court erred in determining that
the underlying dispute raised no arbitrable issues and in granting the stay requested by
appellees. Appellants contend that the Restructuring Agreement does not disaffirm the
arbitration clauses in the LLC agreements, that appellants have standing to invoke
arbitration under those LLC agreements, and that appellees are bound to arbitrate by
contract or estopped from avoiding arbitration. We agree in part and hold that the claims
against Kestrel and CES are arbitrable while those against Donegal are not.

Appellants are correct to point out that nothing in the Restructuring Agreement
negates the arbitration clauses in the LLC agreements, or even addresses the issue of
dispute resolution at all. Further, the claims made by appellants in Plaintiffs’ First
Amended Original Petition are based on both the purported merger of MBCorp into CES
and the failure of Donegal and Kestrel to perform their obligations under the Restructuring
Agreement. The merger claims plainly relate to the CES LLC agreement, which contains
the arbitration clause. The demand for rescission of the Restructuring Agreement would
change the ownership of shares by the parties under the CES LLC agreement, and so this
claim falls within the broad scope of the arbitration clauses as well. See Parfi, 817 A.2d
149 at 154 (claims that touch on the legal rights covered by the underlying agreement are
covered by the agreement’s arbitration provision).

Appellees argue in response that arbitration is required only if the plaintiffs’ claims
primarily arise under the agreement containing the arbitration clause. Appellees argue
that the claims here primarily arise under the Restructuring Agreement, which contains no
arbitration clause. They base this argument on the Delaware Court of Chancery case
Towerhill Wealth Management, LLC v. Bander Family Partnership, LP, No. 3830-VCS,
2008 WL 4615865, at *3 (Del. Ch. Oct. 9, 2009). However, the facts of this case are
distinguishable from those of Towerhill, as that case involved different agreements with
conflicting dispute resolution provisions. Id. The choice between conflicting provisions
10
that faced the court in Towerhill is one that the trial court here did not have to make, and so
determining which agreement the dispute “arises primarily from” is not necessary here.
See id. (implementing the arbitration clause of the agreement which the dispute arises
primarily from in the face of various dispute resolution clauses in different contracts). We
hold that Parfi and not Towerhill controls in this case.

Appellees also contend that arbitration is not proper here because no single
arbitration agreement reflects the assent of all parties to this litigation. Appellees note that
only the CES and MBCorp LLC agreements, and not the Restructuring Agreement, contain
clauses referring disputes to arbitration. Donegal argues that it has never been a member
of either MBCorp or CES and therefore is not a signatory to any agreement containing an
arbitration clause. We agree with Donegal’s contention. As Donegal was never a
member of either LLC and was not a party to the LLC agreements, Donegal was not a party
to any agreement to arbitrate disputes relating to those agreements. 11 The trial court,
therefore, correctly granted the stay with regard to Donegal.

Appellants nonetheless argue that Donegal should be estopped from avoiding
arbitration because they allege concerted wrongdoing by Donegal and other defendants in
the underlying case. Appellants cite Douzinas v. American Bureau of Shipping, Inc., 888
A.2d 1146, 1153 (Del. Ch. 2006), for the principle that such estoppel is often warranted
“when the signatory to the contract containing an arbitration clause raises allegations of
substantially interdependent and concerted misconduct by both the nonsignatory and one
or more of the signatories to the contract.” However, appellants fail to explain that the
Court of Chancery in Douzinas used this language to support the effort of a non-signatory
to compel signatories to arbitrate disputes under an estoppel theory. Id. The situation in
the present case is precisely the opposite, where appellants have tried to compel Donegal, a

11
Appellants cite some evidence that Donegal was in fact an MBCorp member–it was referred to
as one in the Restructuring Agreemement, and Schuster was affiliated with both MBCorp and
Donegal—but the evidence is tenuous and mixed. As this is a question of fact, we defer to the trial court’s
determination.
11
non-signatory to the arbitration agreements, to arbitrate. Douzinas does not support this
result, and we are convinced that Delaware law does not require Donegal to submit
disputes to arbitration when it has not agreed to do so. See Kuroda v. SPJS Holdings,
L.L.C., No. 4030-CC, 2010 WL 4880659, at *7 (Del. Ch. Nov. 30, 2010) (mem. op.)
(“[T]his not a case compelling a signatory to arbitrate with a nonsignatory—this is an issue
of whether nonsignatories can be compelled to arbitrate under an equitable estoppel theory
where no parties to the litigation are parties to the Consulting Agreement. I am aware of
no case where this Court has required arbitration in similar circumstances.”).

The trial court erred, however, in granting appellee’s motion to stay the arbitration
as to Kestrel. Kestrel was not originally, but is now, a member of CES, and part of
appellants’ suit in the underlying cause of action seeks rescission of the Restructuring
Agreement that made Kestrel a member of CES. 12 Rescission would thus affect
membership and ownership interests in CES, a remedy which is inherently linked to the
rights, duties, and obligations in the LLC agreement. As the dispute between appellants
and Kestrel touches on the LLC agreement, which contains the arbitration clause,
appellants can invoke the requirement to arbitrate this issue. See Parfi, 817 A.2d at 155.

The trial court similarly erred with respect to CES. Appellants brought the
underlying suit against CES to enforce CES’s duty to insist upon performance of the
Restructuring Agreement by Donegal and Kestrel. This cause of action was only
available to appellants, as members of CES, by virtue of the CES LLC agreement. Thus,
the cause of action against CES depends for its existence upon the CES LLC agreement,
which contains the arbitration agreement clause. See Parfi, 817 A.2d at 155 (explaining
that if a claim depends for its existence upon the agreement containing the arbitration
clause, the claim is subject to arbitration). Under Elf, a Delaware LLC is bound by the

12
Although Donegal was also a party to the Restructuring Agreement, it was not made a member
of CES.
12
arbitration provisions of its own founding agreement. Elf, 727 A.2d at 287, 293. For
these reasons, appellants can require CES to arbitrate this dispute.

Accordingly, the trial court erred in determining that this dispute raised no
arbitrable issues. The merger claims and claims for rescission of the Restructuring
Agreement relate to the LLC agreements, which contain a clause referring disputes to
arbitration. The trial court erred in granting the stay of arbitration regarding Kestrel and
CES. Because Donegal was neither a member of either LLC nor a signatory to any other
arbitration agreement, the trial court did not err in granting the stay of arbitration as to
Donegal.

VI. CONCLUSION

The decision of the trial court is affirmed in part and reversed in part. The trial
court did not err in deciding the scope of arbitration in the first instance. We affirm the
grant of the motion to stay arbitration with respect to appellee Donegal. We reverse the
grant of the motion to stay arbitration with regard to appellees Kestrel and CES, with
instructions that Kestrel and CES proceed to arbitration.

/s/ Tracy Christopher
Justice

Panel consists of Chief Justice Hedges and Justices Christopher and McCally.

13