in Re: Daniel Caballero, Fox Tree & Landscape Nursery, Inc., Monika Page, Bizmatch, Inc., Bizmatch Business Solutions, Inc., and Bizmatch Commercial Brokerage, Llc

COURT OF APPEALS
THIRTEENTH DISTRICT OF TEXAS
CORPUS CHRISTI - EDINBURG

No. 13-10-00125-CV

DANIEL CABALLERO, FOX TREE & LANDSCAPE
NURSERY, INC., MONIKA PAGE, BIZMATCH, INC.,
BIZMATCH BUSINESS SOLUTIONS, INC., AND
BIZMATCH COMMERCIAL BROKERAGE, LLC, Appellants,

v.

DONNIE B. CONTRERAS AND PICLIDIX, INC., Appellees.

On appeal from the County Court at Law No. 4
of Nueces County, Texas.

No. 13-10-00150-CV

IN RE DAN CABALLERO, FOX TREE & LANDSCAPE NURSERY, INC.,
MONIKA PAGE, BIZMATCH, INC., BIZMATCH BUSINESS SOLUTIONS,
INC., AND BIZMATCH COMMERCIAL BROKERAGE, LLC

On Petition for Writ of Mandamus.

MEMORANDUM OPINION
 Before Justices Yañez, Rodriguez, and Garza
Memorandum Opinion by Justice Rodriguez

By this combined appeal and original proceeding, Daniel Caballero, Fox Tree &

Landscape Nursery, Inc., Monika Page, Bizmatch, Inc., Bizmatch Business Solutions, Inc.,

and Bizmatch Commercial Brokerage, LLC (collectively “appellants”), seek to vacate an

order denying their motion to compel arbitration in a commercial dispute over the sale of

a business. We deny the petition for writ of mandamus, reverse the trial court’s order, and

remand the case for further proceedings consistent with this opinion.

I. BACKGROUND

Fox Tree & Landscape Nursery (“Fox”), owned by Daniel Caballero, owns and

operates nurseries at several different locations in Corpus Christi, Texas. Caballero

decided to sell the land and business at one of these locations, 14209 Northwest

Boulevard, so he retained the services of Bizmatch, Inc. (“Bizmatch”), a business broker,

to locate prospective purchasers for the land and business at that location. Donnie B.

Contreras, the principal and owner of Piclidix, Inc. (“Piclidix”) was working with Bizmatch

to find a suitable investment. Piclidix ultimately purchased the land and business at 14209

Northwest Boulevard from Fox.

Piclidix made a cash down payment of $125,000. The remainder of the purchase

price for the land and business was seller-financed with a wraparound real estate lien note

for $825,000. The transaction included both security and guaranty agreements. As part

of the sale, the parties executed an “Arbitration Agreement” which provides, in part:

TRANSACTION: Sale of land and business located at 14209
Northwest Blvd., Corpus Christi, Texas

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 LEGAL DOCUMENTS: Wraparound Real Estate Lien Note, Wraparound
Deed of Trust, Wraparound Warranty Deed with
Vendor’s Lien, Security Agreement, Guaranty
Agreement, Non-Competition Agreement, Bill of
Sale, UCC-1, Agreement Concerning Legal
Documents and Transaction, Attorney
Disclosure, and Arbitration Agreement.

Seller, Buyer, and Individuals agree that any controversy or claim
arising out of or relating to the Transaction, the Legal Documents, or the
breach thereof shall be settled by binding arbitration in accordance with the
Commercial Arbitration Rules of the American Arbitration Association. Any
controversy or claim subject to this arbitration provision shall be decided by
one arbitrator, and judgment on the award rendered by the arbitrator may be
entered in any court having jurisdiction thereof. Any arbitration proceeding
shall be conducted in the city and state where the real property that is the
subject of this Agreement is located.

Caballero signed the agreement individually and as president of Fox, and Contreras signed

the agreement individually and as president of Piclidix.

After closing, Piclidix occupied the land and ran the business. Alleging that Piclidix

breached its agreements, specifically with regard to its requirement to maintain adequate

inventory on site to secure the purchase, Fox repossessed the property and business.

Piclidix disputed Fox’s allegations and contended that Fox wrongfully seized the property.

The factual circumstances surrounding the alleged breach and repossession are hotly

disputed by the parties.

Contreras and Piclidix brought suit against appellants in County Court Number Four

of Nueces County, Texas for, inter alia, wrongful repossession and theft. Fox subsequently

filed a demand for arbitration with the American Arbitration Association. In county court,

Contreras and Piclidix filed a motion to stay arbitration, and appellants, in turn, filed a

motion to compel arbitration. Following several rounds of amended pleadings, the trial

court held a truncated hearing on the motion to stay and motion to compel. At the hearing,

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the parties presented argument on the merits of their positions, then began discussing the

actual scope of the arbitration hearing itself; that is, whether it was to be a summary

proceeding or a full evidentiary hearing. Following this discussion, the trial court stated:

“Let’s set me up to read these things, to make a ruling . . . . I need to read them and

understand them to make the right decision, all right, then we’ll have a hearing if I overrule

your motions and we’ll go to the evidentiary step.”

At the conclusion of the hearing, the witnesses who had been subpoenaed to

appear and give testimony were released with the understanding that the hearing was

“continuing.”

On March 5, 2010, the trial court issued an order which: (1) denied appellants’

motion to stay or abate court proceeding and compel arbitration; (2) granted appellees’

motion to stay arbitration; and (3) overruled all objections presented by appellants or

appellees to evidence offered by the parties in support of the motions. This appeal and

original proceeding ensued.

Fox and Caballero raise twelve issues. Page and Bizmatch raise those same twelve

issues and one additional issue pertaining to their right to compel arbitration under the

agreement. We have reorganized some of these issues for the purpose of analysis.

II. FEDERAL ARBITRATION ACT OR TEXAS ARBITRATION ACT

The trial court’s order did not specify whether the arbitration agreement in this case

was governed by the Federal Arbitration Act (“FAA”) or the Texas Arbitration Act (“TAA”).

See 9 U.S.C. §§ 1-16 (2009) (FAA); TEX . CIV. PRAC . & REM . CODE ANN . §§ 171.001-.098

(Vernon Supp. 2009) (TAA). Therefore, appellants seek review of the order denying

arbitration both by mandamus and interlocutory appeal. See Jack B. Anglin Co., Inc. v.

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Tipps, 842 S.W.2d 266, 272 (Tex. 1992) (providing that litigants alleging entitlement to

arbitration under the FAA and TAA must pursue parallel proceedings).1 Appellants’ first

and second issues are stated as follows:

As a threshold matter to jurisdiction and proper relief, does the Federal
Arbitration Act (FAA) . . . 9 U.S.C. § 1 et seq., or the Texas General
Arbitration Act (TGAA), Tex. Civ. Prac. & Rem. Code § 171.001 et seq., or
both the FAA and TGAA apply as the substantive law in this case regarding
enforcement of the parties’ written arbitration agreement in this case?

If the FAA and TGAA both apply, is there a conflict between the FAA and the
TGAA warranting FAA preemption of the TGAA?

The FAA applies to transactions that involve interstate commerce. See 9 U.S.C. § 2

(2009). “Commerce” has been broadly defined and encompasses contracts relating to

interstate commerce. See In re Gardner Zemke Co., 978 S.W.2d 624, 626 (Tex. App.–El

Paso 1998, orig. proceeding). As defined by the FAA, “interstate commerce” is not limited

to the interstate shipment of goods, but includes all contracts “relating to” interstate

commerce. In re FirstMerit Bank, 52 S.W.3d 749, 754 (Tex. 2001) (orig. proceeding); Lost

Creek Mun. Util. Dist. v. Travis Indus. Painters, Inc., 827 S.W.2d 103, 105 (Tex.

App.–Austin 1992, writ denied). Interstate commerce is evidenced by, inter alia, the

location of a party’s headquarters in another state, the manufacture of component parts

in a different state, the transportation of goods across state lines, and billings prepared in

another state. TMI, Inc. v. Brooks, 225 S.W.3d 783, 791 (Tex. App.–Houston [14th Dist.]

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Texas Civil Practice & Rem edies Code section 51.016, enacted in 2009, provides for an interlocutory
appeal in a m atter subject to the FAA “under the sam e circum stances that an appeal from a federal district
court’s order or decision would be perm itted by” the FAA. See T EX . C IV . P RAC . & R EM . C OD E A N N . § 51.016
(Vernon Supp. 2009). Section 51.016 does not apply to this case because this case arose prior to its effective
date. See Act of May 27, 2009, 81st Leg., R.S., ch. 820, § 1, 2009 T EX . G EN . L AW S 2061, 2061 (codified at
T EX . C IV . P RAC . & R EM . C OD E A N N . § 51.016).

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2007, pet. denied); Stewart Title Guar. Co. v. Mack, 945 S.W.2d 330, 333 (Tex.

App.–Houston [1st Dist.] 1997, writ dism’d w.o.j.). Further, the word “involving” in the FAA

is construed broadly and is the functional equivalent of “affecting,” signaling Congress’s

intent to exercise its Commerce Clause power to the fullest extent. See Allied-Bruce

Terminix Cos. v. Dobson, 513 U.S. 265, 272-74, 276-78 (1995); Wee Tots Pediatrics, P.A.

v. Morohunfola, 268 S.W.3d 784, 789-790 (Tex. App.–Fort Worth 2008, no pet.). The FAA

does not require a substantial effect on interstate commerce; rather, it merely requires

commerce to be involved or affected. See L & L Kempwood Assocs., L.P. v. Omega

Builders, Inc. (In re L & L Kempwood Assocs., L.P.), 9 S.W.3d 125, 127 (Tex. 1999)

(combined appeal & orig. proceeding) (noting that the FAA “extends to any contract

affecting commerce, as far as the Commerce Clause of the United States Constitution will

reach”).

When, as here, an agreement is silent as to whether the FAA applies, the question

of whether the transaction affects interstate commerce, and thus whether the FAA governs,

is one of fact. TMI, Inc., 225 S.W.3d at 791; In re Educ. Mgmt. Corp., 14 S.W.3d 418, 422

(Tex. App.–Houston [14th Dist.] 2000, orig. proceeding). Appellants contend that

“[b]ecause of the nature of the transaction in this case, the transaction appears to involve

interstate commerce in a sufficient degree to invoke the FAA.” Appellants concede,

however, that the evidence is not “well-developed” in this area because of the trial court’s

“refusal to allow for an evidentiary hearing.”

“Whether the parties contemplated that their transaction would substantially affect

interstate commerce is irrelevant; if the transaction affects interstate commerce ‘in fact,’

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the arbitration provision is governed by the FAA.” In re Educ. Mgmt. Corp., 14 S.W.3d at

423 (quoting Palm Harbor Homes, Inc. v. McCoy, 944 S.W.2d 716, 719 (Tex. App.–Fort

Worth 1997, orig. proceeding) (citing Allied-Bruce, 513 U.S. at 281)). In the instant case,

a review of the pleadings indicates that all parties involved in the suit are Texas residents,

the contract was signed in Texas, and the contract was to be performed in Texas. See,

e.g., TMI, Inc., 225 S.W.3d at 791 (“Here, it is undisputed Trendmaker is a Texas

corporation selling real property located within Texas via purchase agreements executed

solely in Texas. “). There is no evidence in the record indicating that the parties’

transaction in fact affects interstate commerce. See In re Educ. Mgmt. Corp., 14 S.W.3d

at 423. Accordingly, we conclude that the FAA does not apply to this transaction. Because

this dispute is governed by the TAA, we need not address appellants’ issue regarding

preemption. We deny appellants’ petition for writ of mandamus filed pursuant to the FAA

and proceed to address the merits of the interlocutory appeal.

III. VALIDITY AND SCOPE

In their third issue, appellants contend that the trial court abused its discretion in

“failing to enforce summarily the written arbitration agreement . . . because Fox Tree

conclusively established the existence of a valid arbitration agreement, that the claims in

the lawsuit were within its scope, and that Piclidix was refusing to arbitrate.” See TEX . CIV.

PRAC . & REM . CODE ANN . § 171.021 (Vernon 2005).

When reviewing by interlocutory appeal an order denying arbitration under the TAA,

we apply a de novo standard to legal determinations and a “no evidence” standard to

factual determinations. PER Group, L.P. v. Dava Oncology, L.P., 294 S.W.3d 378, 384

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(Tex. App.–Dallas 2009, no pet.); Trammell v. Galaxy Ranch Sch., L.P. (In re Trammell),

246 S.W.3d 815, 820 (Tex. App.–Dallas 2008, no pet.); TMI, Inc., 225 S.W.3d at 791. In

reviewing the trial court’s factual determinations, we must credit favorable evidence if a

reasonable fact-finder could and disregard contrary evidence unless a reasonable

fact-finder could not. PER Group, L.P., 294 S.W.3d at 384; Trammell, 246 S.W.3d at 820

(citing Kroger Tex. Ltd. v. Suberu, 216 S.W.3d 788, 793 (Tex. 2006); City of Keller v.

Wilson, 168 S.W.3d 802, 807 (Tex. 2005)); TMI, Inc., 225 S.W.3d at 791. However, when

the facts relevant to the arbitration issue are not disputed, we are presented only with

issues of law and we review the trial court’s order de novo. PER Group, L.P., 294 S.W.3d

at 384; Trammell, 246 S.W.3d at 820.

A party attempting to compel arbitration must first establish that the dispute in

question falls within the scope of a valid arbitration agreement. J.M. Davidson, Inc. v.

Webster, 128 S.W.3d 223, 227 (Tex. 2003); TMI, Inc., 225 S.W.3d at 791; Cappadonna

Elec. Mgmt. v. Cameron County, 180 S.W.3d 364, 370 (Tex. App.–Corpus Christi 2005,

orig. proceeding). A court may not order arbitration in the absence of such an agreement.

Cappadonna, 180 S.W.3d at 370 (citing Freis v. Canales, 877 S.W.2d 283, 284 (Tex.

1994)). The parties’ agreement to arbitrate must be clear. Mohamed v. Auto Nation USA

Corp., 89 S.W.3d 830, 835 (Tex. App.–Houston [1st Dist.] 2002, no pet.) (combined appeal

& orig. proceeding). If the party opposing arbitration denies the existence of an agreement

to arbitrate, that issue is determined “summarily” by the court as a matter of law. TEX . CIV.

PRAC . & REM . CODE ANN . § 171.021(b); J.M. Davidson, Inc., 128 S.W.3d at 227. If the

movant establishes that an arbitration agreement governs the dispute, the burden then

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shifts to the party opposing arbitration to establish a defense to the arbitration agreement.

McReynolds v. Elston, 222 S.W.3d 731, 739 (Tex. App.–Houston [14th Dist.] 2007, no

pet.).

Courts may not order parties to arbitrate unless they have agreed to do so. See

Freis, 877 S.W.2d at 284 (“While courts may enforce agreements to arbitrate disputes,

arbitration cannot be ordered in the absence of such an agreement.”); Belmont

Constructors, Inc. v. Lyondell Petrochemical Co., 896 S.W.2d 352, 356-57 (Tex.

App.–Houston [1st Dist.] 1995, no writ) (combined appeal & orig. proceeding). Therefore,

despite strong presumptions that favor arbitration, a valid agreement to arbitrate remains

a settled, threshold requirement to obtaining relief, whether under the TAA or the FAA.

See In re Kellogg Brown & Root, Inc., 166 S.W.3d 732, 737-38 (Tex. 2005) (orig.

proceeding) (analyzing the FAA); J.M. Davidson, Inc., 128 S.W.3d at 227 (analyzing the

TAA).

Ordinary contract principles are applied to the determination of whether there is a

valid agreement to arbitrate. J.M. Davidson, Inc., 128 S.W.3d at 227; see In re Bunzl

U.S.A., Inc., 155 S.W.3d 202, 209 (Tex. App.–El Paso 2004, orig. proceeding). In

determining the scope of the arbitration agreement, we focus on the petition’s factual

allegations rather than the legal causes of action asserted. See In re FirstMerit Bank, N.A.,

52 S.W.3d at 754 (decided under FAA); PER Group, L.P., 294 S.W.3d at 386 (decided

under TAA). Courts resolve any doubts about an arbitration agreement’s scope in favor

of arbitration. TMI, Inc., 225 S.W.3d at 791 (applying TAA). When parties agree to

arbitrate and the agreement encompasses the claims asserted, the trial court must compel

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arbitration and stay litigation pending arbitration. See TEX . CIV. PRAC . & REM . CODE ANN .

§ 171.021(b); Meyer v. WMCO-GP, LLC, 211 S.W.3d 302, 305 (Tex. 2006); PER Group,

L.P., 294 S.W.3d at 384.

In reviewing the text of the arbitration agreement and considering that the parties

signed it and the accompanying documents, we conclude that appellants have established

a valid agreement to arbitrate. See In re Kellogg Brown & Root, Inc., 166 S.W.3d at 737;

Bates v. MTH Homes-Tex., L.P., 177 S.W.3d 419, 422 (Tex. App.–Houston [1st Dist.]

2005, no pet.). The agreement requires arbitration between the two companies and their

principals and applies to “any controversy or claim arising out of or relating to the

Transaction, the Legal Documents, or the breach thereof.” We further conclude that the

claims at issue in this lawsuit fall within the scope of the agreement. See In re First Tex.

Homes, Inc., 120 S.W.3d 868, 870 (Tex. 2003) (orig. proceeding) (per curiam) (examining

the scope of an arbitration agreement that applied to “all disputes between [them] . . .

arising out of this Agreement or other action performed . . . by [First Texas]”); see also

Emerald Tex. Inc. v. Peel, 920 S.W.2d 398, 403 (Tex. App.–Houston [1st Dist.] 1996, no

writ) (“If . . . the [arbitration] clause is broad, arbitration should not be denied unless it can

be said with positive assurance that the particular dispute is not covered.”).

Although we have concluded that the arbitration agreement was valid and the claims

at issue were within the scope of the arbitration agreement, we may not sustain appellants’

third issue in its entirety because we have not yet considered appellees’ defenses to the

arbitration agreement. See J.M. Davidson, Inc., 128 S.W.3d at 227 (stating that if the trial

court finds a valid agreement, the burden shifts to the party opposing arbitration to raise

10
an affirmative defense to enforcing arbitration); In re H.E. Butt Grocery Co., 17 S.W.3d

360, 367 (Tex. App.–Houston [14th Dist.] 2000, orig. proceeding); City of Alamo v. Garcia,

878 S.W.2d 664, 665 (Tex. App.–Corpus Christi 1994, no writ).

IV. EVIDENTIARY HEARING

In their eleventh issue, appellants contend that the trial court abused its discretion

in refusing to provide for an evidentiary hearing when:

Piclidix had not established its entitlement to relief conclusively under any of
[its] defenses, and it had promised an evidentiary hearing to Fox Tree if it
overruled its objections to Piclidix’s summary evidence in opposition to Fox
Tree’s motion to compel arbitration and in support of Piclidix’s motion to stay
arbitration.

Texas Civil Practice and Remedies Code section 171.021 allows trial courts to

“summarily determine” the issue of whether to compel a party to arbitrate its claims. TEX .

CIV. PRAC . & REM . CODE ANN . § 171.021 (Vernon 2005); Jack B. Anglin Co., Inc., 842

S.W.2d at 269; see also Petroleum Analyzer Co. LP v. Olstowski, No. 01-09-00076-CV,

2010 Tex. App. LEXIS 5581, at *23-*24 (Tex. App.–Houston [1st Dist.] July 15, 2010, no

pet.) (mem. op. on reh’g). In Anglin, the supreme court defined the proper circumstances

under which a trial court should hold a full evidentiary hearing on a motion to compel

arbitration:

Because the main benefits of arbitration lie in expedited and less expensive
disposition of a dispute, and the legislature has mandated that a motion to
compel arbitration be decided summarily, we think it unlikely that the
legislature intended the issue to be resolved following a full evidentiary
hearing in all cases. We also envision that the hearing at which a motion to
compel arbitration is decided would ordinarily involve application of the terms
of the arbitration agreement to undisputed facts, amenable to proof by
affidavit. With these considerations in mind, we hold that the trial court may
summarily decide whether to compel arbitration on the basis of affidavits,
pleadings, discovery, and stipulations. However, if the material facts

11
 necessary to determine the issue are controverted, by an opposing affidavit
or otherwise admissible evidence, the trial court must conduct an evidentiary
hearing to determine the disputed material facts.

Jack B. Anglin Co., Inc., 842 S.W.2d at 269. The supreme court reaffirmed and reapplied

these principles in 2008. See In re Poly-America, L.P., 262 S.W.3d 337, 354 (Tex. 2008)

(“Because the only facts Luna presented on the motion to compel were uncontroverted

under this standard—Luna’s affidavits accompanying his original petition were neither

contradicted nor challenged in Poly-America’s response—we believe the court of appeals

acted properly in crediting those facts on appeal.”).

One of our sister courts has explained that a motion to compel arbitration should be

treated as “essentially a motion for summary judgment, subject to the same evidentiary

standards.” In re Jebbia, 26 S.W.3d 753, 756-57 (Tex. App.–Houston [14th Dist.] 2000,

orig. proceeding); see also In re Jim Walter Homes, Inc., 207 S.W.3d 888, 896-97 (Tex.

App.–Houston [14th Dist.] 2006, orig. proceeding). The party alleging an arbitration

agreement must present “complete summary proof of his ‘case-in-chief’” that an agreement

to arbitrate requires arbitration of the dispute. In re Jebbia, 26 S.W.3d at 756-57. Once

this is accomplished, the party resisting arbitration may raise an issue of material fact about

his opponent’s proof or present some evidence supporting every element of a defensive

claim that there is no enforceable agreement to arbitrate. See id. Only if a material issue

of fact is raised is an evidentiary hearing necessary. Id.; see Jack B. Anglin Co., Inc., 842

S.W.2d at 269. It is an abuse of discretion to grant or deny arbitration without holding an

evidentiary hearing if there are disputed issues of material fact. See, e.g., In re Wash. Mut.

Fin., L.P., 173 S.W.3d 189 (Tex. App.–Corpus Christi 2005, orig. proceeding) ( holding that

12
the trial court abused its discretion by sustaining a defense to arbitration without holding

an evidentiary hearing to determine disputed issues of material fact); Rogers v. Maida, 126

S.W.3d 643, 646 (Tex. App.–Beaumont 2004, orig. proceeding) (holding that the trial court

erred in not conducting an evidentiary hearing on arbitrability of dispute).

Accordingly, in order to determine whether the trial court was required to hold an

evidentiary hearing on the motion to compel arbitration, we examine the pleadings and the

evidence to determine if appellees have raised any material issues of fact regarding their

defensive issues to arbitration. In this regard, in their fifth issue, appellants argue that the

trial court abused its discretion in “summarily granting Piclidix relief . . . when Piclidix did

not establish conclusively any valid affirmative defense to enforcement of the valid

arbitration agreement between Piclidix and Fox Tree.” Under Texas law, as with any other

contract, agreements to arbitrate are valid unless grounds exist at law or in equity for

revocation of the agreement. In re Poly-America, L.P., 262 S.W.3d at 348. The burden

of proving such a ground—such as fraud, unconscionability or voidness under public

policy—falls on the party opposing the contract. See id.; In re FirstMerit Bank, 52 S.W.3d

at 756.

In their sixth, seventh, eighth, ninth, and tenth issues, appellants address specific

defenses to the arbitration agreement, respectively, unconscionability, fraud, waiver or

estoppel, and “self-help” waiver. We address these alleged defenses in turn. In their sixth

issue, appellants contend there is no evidence of unconscionability, procedural or

substantive, relating to the arbitration agreement at the time that the arbitration agreement

was made so as to warrant a denial of summary enforcement of the arbitration agreement.

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 Arbitration agreements are not inherently unconscionable. In re Palm Harbor

Homes, Inc., 195 S.W.3d 672, 678 (Tex. 2006) (orig. proceeding). “Unconscionable

contracts, however—whether relating to arbitration or not—are unenforceable under Texas

law.” In re Poly-America, L.P., 262 S.W.3d at 348-49. The Texas Arbitration Act

specifically acknowledges this defense and provides that a court may not enforce an

arbitration agreement “if the court finds the agreement was unconscionable at the time the

agreement was made.” TEX . CIV. PRAC . & REM . CODE ANN . § 171.022 (Vernon 2005); see

In re Palm Harbor Homes, Inc., 195 S.W.3d at 677; In re Weeks Marine, Inc., 242 S.W.3d

849, 860-61 (Tex. App.–Houston [14th Dist.] 2007, orig. proceeding).

According to the Texas Supreme Court, “[u]nconscionability is to be determined in

light of a variety of factors, which aim to prevent oppression and unfair surprise; in general,

a contract will be found unconscionable if it is grossly one-sided.” See In re Palm Harbor

Homes, Inc., 195 S.W.3d at 677 (citing DAN B. DOBBS , 2 LAW OF REMEDIES 703, 706 (2d ed.

1993), RESTATEMENT (SECOND ) OF CONTRACTS § 208, cmt. a (1979) (“The determination

that a contract or term is or is not unconscionable is made in the light of its setting,

purpose, and effect. Relevant factors include weaknesses in the contracting process like

those involved in more specific rules as to contractual capacity, fraud, and other

invalidating causes; the policy also overlaps with rules which render particular bargains or

terms unenforceable on grounds of public policy.”)). In considering an arbitration clause,

allegations of unconscionability “must specifically relate to the [arbitration clause] itself, not

the contract as a whole, if [unconscionability is] to defeat arbitration.” In re FirstMerit Bank,

N.A., 52 S.W.3d at 756.

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 Unconscionability may be either procedural or substantive in nature. See id.

Generally speaking, procedural unconscionability refers to the circumstances surrounding

the adoption of the arbitration provision, and substantive unconscionability concerns the

fairness of the arbitration provision itself. Id.; In re Halliburton Co., 80 S.W.3d 566, 571

(Tex. 2002) (orig. proceeding). More specifically, procedural unconscionability relates to

the making or inducement of the contract, focusing on the facts surrounding the bargaining

process. TMI, Inc., 225 S.W.3d at 792; see Abdel Hakim Labidi v. Sydow, 287 S.W.3d

922, 927 (Tex. App.–Houston [14th Dist.] 2009, no pet.) (stating that the success or failure

of an argument regarding procedural unconscionability is dependent upon the existence

of facts which allegedly illustrate unconscionability). The test for substantive

unconscionability is whether, “given the parties’ general commercial background and the

commercial needs of the particular trade or case, the clause involved is so one-sided that

it is unconscionable under the circumstances existing when the parties made the contract.”

In re FirstMerit Bank, 52 S.W.3d at 757; see In re Palm Harbor Homes, Inc., 195 S.W.3d

at 678.

The party asserting unconscionability bears the burden of proof. In re Turner Bros.

Trucking Co., 8 S.W.3d 370, 376-77 (Tex. App.–Texarkana 1999, orig. proceeding).

Whether a contract is contrary to public policy or unconscionable at the time it is formed

is a question of law. In re Poly-America, L.P., 262 S.W.3d at 348-49; Hoover Slovacek

LLP v. Walton, 206 S.W.3d 557, 562 (Tex. 2006). Because a trial court has no discretion

to determine what the law is or apply the law incorrectly, its clear failure to properly analyze

or apply the law of unconscionability constitutes an abuse of discretion. In re Poly-

15
America, L.P., 262 S.W.3d at 349; Walker v. Packer, 827 S.W.2d 833, 840 (Tex. 1992);

In re Green Tree Servicing LLC, 275 S.W.3d 592, 602-603 (Tex. App.–Texarkana 2008,

orig. proceeding).

Appellees raise numerous grounds which they assert render the arbitration

agreement unconscionable. Appellees contend that the arbitration agreement was

unconscionable because Caballero personally and physically repossessed the property

when Contreras was one day late on a monthly payment, when the note allowed for a five-

day “grace” period, instead of instituting arbitration because of the alleged breach;

however, appellees are instead allegedly limited in their remedies to arbitration. Cf. In re

Palm Harbor Homes, Inc., 195 S.W.3d at 677 (stating that an arbitration agreement may

be illusory if a party can unilaterally avoid the agreement to arbitrate). Appellees contend

that the arbitration agreement was unconscionable given the disparity in sophistication

between the parties, the rushed nature of the closing, the timing of the disclosure of

relevant documents to Contreras, and Bizmatch’s alleged representations to Contreras that

it would “take care of him.” See id. (explaining that the test for substantive

unconscionability encompasses the parties’ general commercial background and the

commercial needs of the particular case to determine if the arbitration agreement is so

one-sided that it is unconscionable). Appellees further contend the arbitration agreement

was unconscionable because Caballero entered the agreement under a false name. They

point to news articles indicating that Caballero was an assumed name utilized by an

individual named David Anthony Boen, who had been arrested for tampering with

governmental records and had a criminal history including possession and sale of

marijuana and possession of stolen property. Appellees contend that they would not have

16
entered the arbitration agreement had they known of Caballero’s true identity. Further,

inter alia, appellees contend that the arbitration agreement is unconscionable because of

excessive costs. By affidavit, Contreras testified regarding his ability to pay the costs of

arbitration:

I invested my savings and my initial retirement funds into this new
business venture. From these funds, I invested the initial down payment of
$125,000.00, plus closing expenses, and the initial capital required to open
and operate the business for the first nine to twelve month period, including
the period from closing to June 19th, 2009. This investment in and
capitalization of the Nursery required my using a substantial portion of my
savings and available personal funds. I had anticipated that the operating
business would generate additional sufficient income and funds, with my
initial investments, to adequately capitalize the business during its initial
period of operation. On June 19th, 2009, Dan Caballero and his agents
wrongfully took possession of my business premises, personal property and
inventory, including specifically the real property. . . . The actions by Dan
Caballero and his agents has resulted in destroying my business and its
generation of income. This has resulted in my no-longer being able to
financially defend myself or prosecute Dan Caballero without representation
by my attorneys. I believe that this [adverse] result of Caballero’s actions
was anticipated by Caballero et al[.] and the blatant manner of his taking
over my business and property was done in anticipation of further dissipating
my fragile financial condition.

....

I understand that if I was forced to arbitrate my claim with the
American Arbitration [Association], and my claim against Fox and Caballero
was $1,000,000 to $5,000,000, I would have to pay a filing free of $1,000,
$7,800 proceed fee[,] and $3,250 final fee. I also understand I would have
to pay for one-half of the arbitration fee, which would be $3,000 to $5,000
dollars. I cannot pay this. Fox took my $125,000 payment for the nursery
as well as the nursery and I cannot afford the payment for the arbitration.

Further, according to an affidavit dated February 5, Contreras further testified that:

Attached hereto as Exhibit “1" is an invoice from the American
Arbitration Association for $5,000.00. It is my understanding that this is the
“initial” fee to cover initial matters. The Arbitration is scheduled for
September 7, 2010. I have no funds to pay this invoice, or additional
arbitrator fees. I am currently unemployed. I am currently receiving nominal

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 unemployment benefits but such benefits will be terminated in the near
future. Therefore, I am not able to pay the arbitration fees if I am forced to
arbitration in this matter.

Contreras’s counsel, Kevin W. Grillo, also testified by affidavit, attaching and incorporating

by reference a page of the AAA Commercial Arbitration Rules explaining the applicable

arbitration fees:

To the extent Donnie Contreras’ claim . . . was made as a claim in [an] AAA
proceeding, the claim of $1,000,000 to $5,000,000 would require Donnie
Contreras to pay an initial filing fee of $1,000, a proceed fee of $7,800 and
a final fee of $3,250. In addition, the AAA selected arbitrator charges
$1,750.00 per day. According to AAA rules, Contreras would have to pay ½
of the arbitration fees, which for 3-5 . . . days would be $2,625.00 to
$4,375.00.

Both the United States and Texas Supreme Court have recognized that the

existence of large arbitration costs could preclude litigants from effectively vindicating their

rights in an arbitral forum. Green Tree Fin. Corp. v. Randolph, 531 U.S. 79, 90 (2000); In

re FirstMerit Bank, N.A., 52 S.W.3d at 756. While neither court specified how detailed the

showing of prohibitive expense must be, the party opposing arbitration must prove the

likelihood of incurring such costs and produce some specific information substantiating the

alleged costs. Green Tree Fin. Corp., 531 U.S. at 90; In re Odyssey Healthcare, Inc., 310

S.W.3d 419, 422 (Tex. 2010) (orig. proceeding) (per curiam); In re FirstMerit Bank, N.A.,

52 S.W.3d at 756; see In re December Nine Co., 225 S.W.3d 693, 702 (Tex. App.–El Paso

2006, orig. proceeding). Specifically, the party opposing arbitration must produce

evidence regarding the exact costs of arbitration, show that the costs are excessive, and

show that they are not speculative in nature:

Here, the de los Santoses testified, in two sworn affidavits, that the AAA
charged a minimum $ 2,000 filing fee and a $ 250/day/party hearing fee,
along with several other unspecified fees, for hearings before a

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 three-member panel. But we need not decide whether these costs would be
excessive. As in Green Tree, the de los Santoses provided no evidence that
the AAA would actually conduct the arbitration or charge the specified fees.
The Arbitration Addendum does not state that the AAA will conduct the
arbitration, and it makes no mention of arbitration costs. We also note that
the most recent AAA commercial arbitration rules provide that “the AAA may,
in the event of extreme hardship on the part of any party, defer or reduce the
administrative fees.” Moreover, in the event the de los Santoses do not avail
themselves of FirstMerit Bank’s choice of arbitrators, the FAA permits the
trial court to choose an alternate set of arbitrators. The de los Santoses also
complain that the requirement of three arbitrators is inherently costly. But
again, without any specific information on what the costs will be, this
requirement is not evidence of unconscionability. Finally, in agreeing to the
Addendum, Pete and Janie de los Santos agreed “that arbitration is a less
expensive method of dispute resolution that decreases servicing costs of this
loan . . . .” Because the record contains no specific evidence that the de los
Santoses will actually be charged excessive arbitration fees, we conclude
that there is legally insufficient evidence that the plaintiffs would be denied
access to arbitration based on excessive costs.

In re FirstMerit Bank, N.A., 52 S.W.3d at 756-57; see In re U.S. Home Corp., 236 S.W.3d

761, 764 (Tex. 2007) (orig. proceeding) (“[T]he plaintiffs presented no evidence other than

a schedule of the American Arbitration Association’s usual fees. This is not enough”).

Lawson v. Archer, 267 S.W.3d 376, 384-85 (Tex. App.–Houston [14th Dist.] 2008, no pet.)

(holding that “the record contains no evidence from which we may conclude that allocating

the costs of arbitration renders the arbitration provision substantively unconscionable”);

TMI, Inc., 225 S.W.3d at 795-96 (denying arbitration where the claimants had not initiated

arbitration, the arbitration provision did not limit the claimants’ remedies or provide for fee

splitting, the claimants had not presented specific evidence regarding their inability to afford

arbitration other than conclusory statements, and the case presented “no public policies

countervailing the fact that Texas law strongly favors arbitration”); Olshan Found. Repair

Co. v. Ayala, 180 S.W.3d 212, 214-16, & n.4 (Tex. App.–San Antonio 2005, pet. denied)

(determining that the trial court properly denied arbitration where the arbitration costs were

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almost three times the amount of the original contract at issue, and the claimants’ share

of the arbitration costs was over twenty-five percent of the family’s annual gross income).

In short, to avoid arbitration based on the unconscionability of excessive costs, the party

opposing arbitration must show that his ability to pursue his claim in the arbitral forum

hinges upon his payment of the estimated costs. In re Poly-America, L.P., 262 S.W.3d at

349.2

While we do not conclude that appellees have established unconscionability, we are

mindful of the Texas Supreme Court's admonition that a “contract is unenforceable if,

‘given the parties’ general commercial background and the commercial needs of the

particular trade or case, the clause involved is so one-sided that it is unconscionable under

the circumstances existing when the parties made the contract.’” Id. at 348 (quoting In re

FirstMerit Bank, 52 S.W.3d at 757, and citing In re Halliburton Co., 80 S.W.3d 566, 571

(Tex. 2002)); see also Olshan Foundation Repair, 180 S.W.3d at 214 (when reviewing “the

trial court's decision concerning the unconscionability of an arbitration agreement . . . we

defer to the trial court's factual determinations”). Applying this guideline in the context of

the standard of review as discussed by the In re Jebbia and In re Jim Walter Homes

2
In the em ployer-em ployee context, the Texas Suprem e has further concluded that there is “nothing
that would prevent arbitrators from fairly adjusting . . . em ployee cost provisions when necessary to allow full
vindication of statutory rights in the arbitral forum .” In re Poly-America, L.P., 262 S.W .3d 337, 356-57 (Tex.
2008). According to the suprem e court, an “arbitrator is better situated to assess whether the cost provision
in this case will hinder effective vindication of [the claim ant’s] statutory rights and, if so, to m odify the contract’s
term s accordingly.” Id.; see In re Odyssey Healthcare, Inc., 310 S.W .3d 419, 422-23 (Tex. 2010). W e
assum e, without deciding, that such an argum ent is applicable in the context of arbitration other than between
an em ployer and em ployee. W hile arbitrators are capable of considering the unconscionability of arbitral
costs, deferring this issue to an arbitrator assum es, as a m atter of circular logic, that the m atter should be
arbitrated. Instead, it would appear preferable that the issue that large arbitration costs could preclude litigants
from effectively vindicating their rights in an arbitral forum should be subm itted to, and decided by, the courts
as a gateway m atter. Moreover, deferring the decision as to the alleged excessiveness and unconscionability
of the costs of arbitration to an arbitrator in a future proceeding, where the arbitrator m ight, or m ight not, adjust
the costs, is speculative and fails to ensure that a claim ant is not giving up substantive rights in an arbitral
forum .

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decisions, we conclude that appellees have raised an issue of material fact regarding

unconscionability based on the foregoing matters. Accordingly, the trial court erred in

failing to hold an evidentiary hearing on the arbitrability of the instant dispute. We sustain

appellants’ eleventh issue and overrule their sixth issue. Because we have reached this

conclusion, we need not address appellees’ other alleged defenses to the arbitration

agreement, such as fraud, although we note that these other defenses may also require

further evidentiary hearing. See TEX . R. APP. P. 47.1. We also need not address

Bizmatch’s additional issue on appeal. See id.

V. CONCLUSION

Because the material facts necessary to determine the validity of the arbitration

agreement were controverted by affidavit and other admissible evidence, the trial court was

required to conduct an evidentiary hearing on the motion to compel arbitration. See Jack

B. Anglin Co., Inc., 842 S.W.2d at 269; see also In re Whitfield, 115 S.W.3d 753, 755 (Tex.

App.–Beaumont 2003, orig. proceeding).

The petition for writ of mandamus in cause number 13-10-00150-CV is DENIED.

In cause number 13-10-00125-CV, the order of the trial court is REVERSED and the cause

is REMANDED. The trial court is instructed to conduct an evidentiary hearing consistent

with this opinion. See Jack B. Anglin Co., 842 S.W.2d at 269.

NELDA V. RODRIGUEZ
Justice

Delivered and filed the 31st
day of August, 2010.

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