S.C. Maxwell Family Partnership, Ltd v. Thomas Kent and Nancy Kent

ACCEPTED
01-15-00245-CV
FIRST COURT OF APPEALS
HOUSTON, TEXAS
5/4/2015 12:33:29 PM
CHRISTOPHER PRINE
CLERK

CASE NO. 01-15-00245-CV

FILED IN
1st COURT OF APPEALS
IN THE FIRST COURT OF APPEALS HOUSTON, TEXAS
HOUSTON, TEXAS 5/4/2015 12:33:29 PM
CHRISTOPHER A. PRINE
Clerk
S.C. MAXWELL FAMILY PARTNERSHIP, LTD
Appellant

v.

THOMAS KENT AND NANCY KENT
Appellees

Brief of Appellee

THE GERKE LAW FIRM, PLLC
M. Chad Gerke
Texas Bar No. 24027390
2000 South Market St., Suite 300
Brenham, Texas 77833
Tel. (979) 530-0930
Fax. (888) 832-0527
Email: chad@gerkelaw.com

ATTORNEY FOR APPELLEES,
THOMAS KENT AND NANCY
KENT

ORAL ARGUMENT REQUESTED
 Identity of Parties and Counsel

Appellant/Defendant

S.C. MAXWELL FAMILY PARTNERSHIP, LTD

Counsel for Appellant
William R. Pemberton
WILLIAM R. PEMBERTON, P.C.
P.O. BOX 1112
Crockett, Texas 75835
Tel. (936) 544-4111
Fax. (936)544-5023
Email: bill@pembertontriallaw.net

Appellees/Plaintiffs
THOMAS KENT
NANCY KENT

Counsel for Appellees

M. Chad Gerke
GERKE LAW FIRM, PLLC
2000 South Market St., Suite 300
Brenham, Texas 77833
Tel. (979) 530-0930
Fax. (888) 832-0527
Email: chad@gerkelaw.com

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 Table of Contents

Identity of Parties and Counsel……………………………………………...………i

Table of Contents…………………………………………………...……………...ii

Index of Authorities…………………………………………………...…………..iii

Statement Regarding References to Parties and the Record..………………….….iv

Statement Regarding Oral Argument……………………………………………...iv

Statement of the Case………………………………………………………………v

Issue Presented…………………………………………………………………….vi

Whether Defendant can seek to enforce an arbitration clause
when Defendant disputes the validity, formation and existence
of the underlying agreement in question.

I. INTRODUCTION AND STATEMENT OF FACTS……………………….1

II. SUMMARY OF THE ARGUMENT……………………………………..…3

III. ARGUMENT………………………………………………………………..4

Defendant cannot seek to enforce arbitration agreement while
denying the validity or existence of formation of the Partnership
Agreement.

IV. PRAYER…………………………………………………………………...10

Certifications……………………………………………………………………...11

Appendix

ii
 Index of Authorities
Cases

American Med. Tech., Inc. v. Miller. 149 S.W.3d 265
(Tex. App.—Houston [14th Dist.] 2004, no pet.)…………………………..…....6-7

In re FirstMerit Bank, N.A., 52 S.W.3d 749, 753 (Tex. 2001)…………………….9

In re Morgan Stanley & Co., Inc., 293 S.W.3d 182 (Tex. 2009)………………..…9

Nazareth Hall Nursing Ctr. v. Melendez,
372 S.W.3d 301, 306 (Tex. App.—El Paso 2012, no pet.)………………………...9

Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S.395 (1967)…………....5

Texas Cityview Care Ctr., L.P. v. Fryer, 227 S.W.3d 345
(Tex. App.—Fort Worth, 2007, pet dism’d)………………………………….....….6

Texas Gas Util. Co. v. Barrett, 460 S.W.2d 409 (Tex. 1970)……………...………9

Will–Drill Res., Inc. v. Samson Res. Co., 352 F.3d 211, 214 (5th Cir. 2003…....6, 9

iii
 Statement Regarding References to the Parties and the Record

In this Brief, Plaintiffs-Appellees Thomas Kent and Nancy Kent will be
referred to as the “Kents” or “Plaintiffs.” Defendant-Appellant S.C. Maxwell
Family Partnership, Ltd., will be referred to as the “Defendant” or the “Appellant.”
All references to the court’s record denote page numbers and are to be cited
as CRXX. Only one exhibit was not included as part of the trial court’s record and
is included with this brief for illustrative purposes in the Appendix.

Statement Regarding Oral Argument

Appellees believe oral argument is not necessary because this appeal
involves the straightforward application of settled law to undisputed facts, and oral
argument would not significantly aid the Court’s decisional process. If the Court
believes oral argument would help it to resolve the appeal, however, Appellees
request the opportunity to present their side.

iv
 Statement of the Case

Nature of the Case Plaintiffs filed a declaratory judgment action seeking
the trial court to rule that the Partnership Agreement
underlying this case is valid and Plaintiffs are 50%
partners in AAA Self Storage-Brenham. (CR2-40).
Defendant filed a Motion to Transfer Venue based on
the arbitration clause contained in the Partnership
Agreement. (CR90-94). The trial court’s denial of
this motion was appealed to this Court by writ of
mandamus. (CR111-12). This Court denied the
Defendant’s writ of mandamus and, subsequently, the
Texas Supreme Court denied Defendant’s mandamus
as well. (CR114, 238-39). Defendant had asserted
that there was no valid contract based on the capacity
of its agent. Defendant amended its pleadings and
now disputes the validity, existence and
enforceability of the Partnership Agreement based on
claims of fraud or fraudulent inducement and failure
of consideration or lack of consideration. (CR248-
51). Defendant filed a Motion to Stay Proceedings
and Compel Arbitration. (CR270-74).

Trial Court 335th Judicial District Court of Washington County,
Texas, Hon. Carson Campbell

Course of Proceedings The trial court denied Defendant’s Motion to Compel
& Dispositions Below Arbitration and to Abate Proceedings. (CR294-95).
Defendant filed this interlocutory appeal from the
denial of its motion to compel arbitration and abate,
Case No. 01-15-00245-CV. (CR296).

v
 Issue Presented

Whether Defendant can seek to enforce an arbitration clause
when Defendant disputes the validity, formation and existence
of the underlying agreement in question.

vi
I. INTRODUCTION & STATEMENT OF FACTS

On March 10, 2014, Plaintiffs received a letter from Defendant’s counsel.

(CR38-40). In the letter, the Defendant “contends the AAA Self Storage-Brenham

partnership agreement is not valid” due to the actions of James H. Edwards who

when executing the Agreement was “purporting to act as agent and attorney in

fact” for the general partner of Defendant. (CR38).

Plaintiffs then filed a declaratory judgment action wherein they argued that

Plaintiffs and Defendant entered into a partnership agreement, which pertains to

land in Washington County and a business operation known as AAA Self Storage-

Brenham (referred to as “Partnership Agreement”). (CR2-4). In this matter,

Plaintiffs simply seek a declaratory judgment action in this matter that the

Partnership Agreement is indeed a valid contract and Plaintiffs are 50% partners in

AAA Self Storage-Brenham. (CR2-4). Plaintiffs have only filed this action based

on Defendant’s claims the Partnership Agreement is not valid.

Defendant filed a Motion to Transfer Venue to Angelina County, arguing

venue was mandatory under TEX. CIV. PRAC. & REM. CODE section 171.096.

(CR41-60). At the trial and appellate levels, Plaintiffs argued that Defendant’s

motion to transfer venue was not mandatory because Defendant was precluded

from arguing the arbitration provision in the agreement was somehow enforceable,

when Defendant alleged there was no valid agreement. (CR90-94). On May 6,

1
2014, the trial court denied Defendant’s Motion to Transfer Venue. (CR111).

On June 3, 2014, Defendant filed a Petition for Writ of Mandamus with this

Court, challenging the trial court’s ruling on the Motion to Transfer Venue.

(CR112). Defendant’s Petition for Writ of Mandamus made the same argument

that it did in the trial court; that, although Defendant contends there was no

Partnership Agreement, it was somehow allowed to exercise the arbitration

provision in the same agreement. The issues were briefed by the parties to this

Court. On October 2, 2014, this Court issued an Order denying Defendant’s

Petition for Writ of Mandamus. (CR114). Defendant appealed the ruling of this

Court; on December 19, 2014, the Texas Supreme Court denied Defendant’s

Petition for Writ of Mandamus. (CR243).

Defendant has now attempted to amend its pleadings, arguments and

defenses in this case, contending that it asserts there is a valid Partnership

Agreement. (CR248-69). However, through the reformulations of its defenses to

the contract, now Defendant is, in actuality, questioning the validity and the

grounds of formation of the Agreement claiming that the “partnership agreement

was executed as a result of fraud and fraudulent inducement and that there was a

failure of consideration or lack of consideration for the agreement.” (CR248-69).

No facts, pleadings, or evidence have been proffered, nor were arguments asserted,

for how these affirmative defenses apply to this case. Defendant again is seeking

2
the protections of the arbitration clause, while controverting its own position by

asserting that there was never a valid agreement underlying this action because of

its alleged affirmative defenses.

II. SUMMARY OF ARGUMENT

Like the trial court’s order denying Defendant’s Motion to Transfer Venue,

this Court’s denial of the Defendant’s Writ of Mandamus, and the Texas Supreme

Court’s denial of the Writ of Mandamus, the trial court properly denied the

Defendant’s Motion to Compel Arbitration in this case because Defendant is

seeking to attack the very existence of the underlying agreement. Further, the

record and pleadings in no way support Defendant’s claim that it is merely

attacking the validity or enforcement of the contract due to a true fraud or

fraudulent inducement claim.

Should this Court find enough support that Defendant has genuinely and

sufficiently raised the affirmative defense of fraud or fraudulent inducement so that

arbitration would be proper, the Defendant’s arguments still fail because it has also

raised the affirmative defense of failure of consideration or lack of consideration.

Consideration is an essential element of contract formation, and without a

determination made by the trial court that the Partnership Agreement is valid—i.e.,

with sufficient consideration—the trial court did not err in denying Defendant’s

motion to compel arbitration in this case.

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III. ARGUMENT

Defendant cannot seek to enforce arbitration agreement while
denying the validity or existence of formation of the Partnership
Agreement.

Defendant’s argument for maintaining that the trial court erred in denying its

motion to compel arbitration fails for the same factual and legal reasons that this

Court denied its writ of mandamus for transfer of venue. Specifically, Defendant’s

argument fails because Defendant seeks to compel arbitration, but simultaneously

challenges the validity and existence of the underlying Partnership Agreement. All

of the case law and statutes cited by Defendant are asserted by contending that the

arbitration provision must apply, even if there is no determination made whether

there is a valid or existing agreement underlying the arbitration clause under these

circumstances.

In Defendant’s Motion to Transfer Venue, Defendant alleged “the

Agreement to Arbitrate is separable from the entire Partnership Agreement, and it

is enforceable in spite of attacks on the validity of the Partnership Agreement as a

whole.” (CR90-94). Because that argument has already failed at the trial court

and every appellate level, in its Motion to Compel Arbitration, its Amended

Answer and its Appellate Brief, Defendant now seeks to enforce an arbitration

provision of a Partnership Agreement between Plaintiffs and Defendant, while at

the same time Defendant alleges the same Partnership Agreement to be invalid

4
under presumably different theories. (CR61-87; 270-92).

Even in the venue context, Defendant could not seem to decide if the

Partnership Agreement itself was valid within its own filings. Although the

Motion to Transfer Venue and the Motion to Stay Litigation both claimed that the

contract was invalid, Defendant tried to sidestep this argument in a letter addressed

to the trial court, dated April 29, 2014. (See Appendix, Record #1 at p.4-5)1. In

the letter, Defendant claims that it is not denying the existence of a contract or the

existence of a power of attorney but then continues to question the signor’s power

to bind the principal. (See Id. at p.5). Now, in Defendant’s most recent filings and

appearances, Defendant asserts that the signor of the document had the authority

and capacity to sign the Partnership Agreement. Defendant cannot constantly

vacillate on this point again and again, as it is the crux of the matter.

1. The separability doctrine does not apply in this case.

The “separability doctrine” provides that arbitration clauses can be

“separable” from contracts in which they are contained. Prima Paint Corp. v.

Flood & Conklin Mfg. Co., 388 U.S.395 (1967). Fifth Circuit case law examining

this doctrine has held that while a defense to a contract or alleging a contract is

voidable is subject to this doctrine, an attack on “the ‘very existence of a contract’

1
The letter was sent to the trial court by Defendant, but was not included as a part of the Court Record.
Since it is only being used for illustrative purposes of Defendant’s continued equivocation on its
argument of the Partnership Agreement’s validity or existence, Plaintiffs have attached it hereto.
5
containing the relevant arbitration agreement is called into question, the court has

the authority and responsibility to decide the matter.” American Med. Tech., Inc. v.

Miller. 149 S.W.3d 265 (Tex. App.—Houston [14th Dist.] 2004, no pet.)

(discussing Will–Drill Res., Inc. v. Samson Res. Co., 352 F.3d 211, 214 (5th Cir.

2003)).

Although the cases cited by both parties often apply federal arbitration law,

analysis is applicable to Texas’ arbitration law. Indeed, in determining whether an

arbitration agreement is valid under the Federal Arbitration Act or the

Texas General Arbitration Act, courts generally apply ordinary state law principles

of contract formation. Texas Cityview Care Ctr., L.P. v. Fryer, 227 S.W.3d 345,

351 (Tex. App.—Fort Worth, 2007, pet dism’d).

In American Med. Tech., Inc. v. Miller, the Fourteenth Court of Appeals

addressed the separability issue in the face of a party’s challenge to the validity of

the underlying contract. 149 S.W.3d 265 (Tex. App. – Houston [14th Dist.] 2004,

no pet.). In American Medical Technology, a former employee brought suit against

an employer for breach of an employment contract and the defendant-employer

sought to enforce an arbitration provision in the employment agreement. Id. at 268-

70. The employer had sent the employee a letter stating the employment

agreement was not executed by an officer with authority, and therefore, the

agreement was neither valid nor enforceable. Id.

6
 The Court held the separability doctrine did not apply when the very

existence of the underlying contract was called into question. Id. at 272. Because

the parties never reached an agreement to arbitrate, the separability doctrine did not

apply. Id. 273.

“When the very existence of an agreement is disputed, a court, not an

arbitrator, must decide at the outset whether an agreement was reached, applying

state-law principles of contract.” Id. “The rule, simply, is this: If a party claims a

valid agreement to arbitrate never existed, the trial court must resolve the issue,

regardless of which party brought the issue to the court’s attention.” Id. at 274.

Defendant seeks to enforce an arbitration provision of a contract it alleges to

be invalid. As held in American Med. Tech., when the very existence of a valid

agreement is disputed, a court must decide whether an agreement was reached at

the outset. As stated by the court in American Med. Tech., a party may not “ratify

a contract and subsequently seek to avoid the contract.” Id. at 271. In the matter at

hand, Defendant seeks to ratify an arbitration provision from an agreement it

alleges to be invalid. Therefore, because Defendant’s defenses seek to avoid the

Partnership Agreement, the validity and the existence of the necessary contract

formation element of consideration is a question for the trial court.

2. Defendant has only raised the issue of fraud and fraudulent
inducement to confuse the issues in this case.

Defendant now asserts that the contract is “valid” but is also invalid because
7
of fraud or fraudulent inducement. No facts have been asserted as to how, who, or

why this affirmative defense applies. One could presume that the Defendant is

hoping to reframe the original capacity and lack of authority argument that

precipitated this declaratory action in the first place, without providing any basis of

facts in its Answer and Amended Answer or any subsequent motions, hearings, or

appellate briefs in support thereof.

Based on the entirety of Defendant’s allegations and raised affirmative

defenses, the Defendant contends this matter does not involve what was originally

a valid and enforceable agreement that resulted in a cancelled or repudiated

contract. Instead, this matter involves an allegation by the Defendant that the

contract between the parties, when executed by Defendant’s purported agent, was

invalid and unenforceable based on a number of theories.

3. Defendant’s defense of failure or lack of consideration attacks the
very existence and formation of the underlying agreement.

Even if this Court finds that Defendant has sufficiently pled an affirmative

defense of fraud or fraudulent inducement, the trial court did not err in denying

Defendant’s Motion to Compel Arbitration. By asserting the defense of failure of

consideration or lack of consideration, Defendant has squarely placed the

determination of the existence of a contract in the capable hands of the trial court

and not an arbitrator.

“In general, when the validity of a contract containing the arbitration
8
agreement is challenged, the issue is for the arbitrator as long as the agreement is

valid. In contrast, when the very existence of an arbitration agreement is

challenged as opposed to its continued validity or enforcement, it is a matter for the

court.” Nazareth Hall Nursing Ctr. v. Melendez, 372 S.W.3d 301, 306 (Tex.

App.—El Paso 2012, no pet.) (citing In re FirstMerit Bank, N.A., 52 S.W.3d 749,

753 (Tex. 2001) and In re Morgan Stanley, 293 S.W.3d 182, 189 (Tex. 2009)).

Quoting the Fifth Circuit, the Texas Supreme Court explained the rationale

of how to rule on contract formation determinations at the trial court level:

[W]here the very existence of an agreement is
challenged, ordering arbitration could result in an
arbitrator deciding that no agreement was ever formed.
Such an outcome would be a statement that the arbitrator
never had any authority to decide the issue. A
presumption that a signed document represents an
agreement could lead to this untenable result. We
therefore conclude that where a party attacks the very
existence of an agreement, as opposed to its continued
validity or enforcement, the courts must first resolve that
dispute.

In re Morgan Stanley, 293 S.W.3d at 189 (quoting Will-Drill Res., Inc. v. Samson

Res., Co., 352 F.3d 211, 219 (5th Cir. 2003)).

Obviously, consideration supporting the contract is an essential element to

any enforceable contract. See Texas Gas Util. Co. v. Barrett, 460 S.W.2d 409, 412

(Tex. 1970); Nazareth Hall, 372 S.W.3d at 305.

In its most recent pleadings and motions, Defendant is asserting an

9
affirmative defense of insufficient consideration. Therefore, because Defendant is

challenging an essential element of an enforceable contract it is up to the trial court

to make such a determination, and not the arbitrator. Because Defendant has

attacked the very existence of the underlying Partnership Agreement in this action,

it cannot then seek to avail itself to the arbitration clause contained therein.

Accordingly, the trial court did not err in denying Defendant’s Motion to Compel

Arbitration in this case.

IV. PRAYER

For these reasons, Appellees Thomas Kent and Nancy Kent respectfully

request that this Court affirm the trial court’s order and deny Appellant’s appeal.

Appellees also ask for such other and further relief to which the Appellee may be

justly entitled.

Respectfully submitted,

THE GERKE LAW FIRM, PLLC

By: /s/ M. Chad Gerke
______________________________
M. Chad Gerke
Texas Bar No. 24027390
2000 South Market St., Suite 300
Brenham, Texas 77833
Tel. (979) 530-0930
Fax. (888) 832-0527
Email: chad@gerkelaw.com
Attorney for Appellees, Plaintiffs,
Thomas Kent and Nancy Kent
10
 CERTIFICATE OF SERVICE

I certify that on May 4, 2015 a true and correct copy of Appellee’s Response
was served by certified letter to William R. Pemberton at P.O. Box 1112, Crockett,
Texas 75835.

/s/ M. Chad Gerke

M. Chad Gerke

CERTIFICATE OF COMPLIANCE

This brief complies with the length limitations of TEX. R. APP. P. 9.4(i)(3)
because this brief consists of 2,168 words, excluding the parts of the brief
exempted by TEX. R. APP. P. 9.4(i)(1).

11
 Appendix

Record

1. Letter to Judge Campbell from W. Pemberton, dated April 29, 2014

12
 Appendix

Record

1. Letter to Judge Campbell from W. Pemberton, dated April 29, 2014

12
Record 1