in Re Palm Harbor Homes, Inc. and Palm Harbor Homes I, L.P. D/B/A Plam Harbor Village

Palm Harbor Draft 1 30-03

Opinion issued December 31, 2003

In The

Court of Appeals

For The

First District of Texas

No. 01-02-00370-CV

IN RE PALM HARBOR HOMES, INC. AND PALM HARBOR HOMES I,

L.P. D/B/A PALM HARBOR VILLAGE, Relators

Original Proceeding on Petition for Writ of Mandamus

O P I N I O N

This is an original proceeding for a writ of mandamus. Relators Palm

Harbor Homes, Inc. (“Palm Harbor Homes”) and Palm Harbor Homes 1, L.P.

d/b/a Palm Harbor Village (“Palm Harbor Village”), initiated this original action in

April 2002, seeking a writ of mandamus to compel the Hon. J. Ray Gayle, then

Judge of the 239th District Court in Brazoria County, to rescind an order dated

December 4, 2001, denying Relators’ Plea in Abatement and Motion to Compel

Arbitration, and to compel the Real Parties in Interest Raymond Ripple and wife

Crystal Parnell Ripple (the “Ripples”) to submit the dispute to binding arbitration

before the American Arbitration Association. On February 6, 2003, after the

retirement of J. Ray Gayle as Judge of the 239th District Court, this Court abated

the proceeding to allow Relators to resubmit their motion to the Hon. Sherry

Sebesta, who had succeeded Judge Gayle as Judge of the 239th District Court of

Brazoria County. On March 6, 2003, at a hearing before Judge Sebesta, Relators

presented their Second Motion to Compel Arbitration, which the court denied by

order dated March 29, 2003. On April 1, 2003, Relators filed an amended petition

in this Court on April 1, 2003, seeking a writ of mandamus to compel Judge

Sebesta to rescind her order of March 28, 2003 and to compel arbitration.

The Principal Action

In the underlying action, the Ripples seek judgment for monetary damages

and other relief, alleging breach of contract, breach of warranty, and statutory

violations of the Residential Construction Liability Act in connection with a retail

sales transaction in which the Ripples had purchased a mobile home from Palm

Harbor Village (the “Retailer”), which had been manufactured by Palm Harbor

Homes (the “Manufacturer”). In the course of that sales transaction, the Ripples

and the Retailer signed several documents, including a document entitled

“Arbitration Provision for Texas” (hereinafter Palm Harbor No. 1”), which is dated

October 1, 1998. Thereafter, the Ripples continued to meet with the Retailer to

discuss the progress of the construction work and the purchase of the manufactured

home. After the Manufacturer completed construction of the home in November

1998, the Ripples signed a second arbitration agreement (“Palm Harbor No. 2”),

which is dated December 17, 1998. The terms of both documents (together

referred to as the “Palm Harbor Agreement”) will be outlined below.

In January 1999, the mobile home was constructed on the Ripples’ property.

After a series of complaints to the Retailer regarding the quality and construction

of the home, the Ripples in November 2000 submitted claims to both the Retailer

and the Manufacturer based on the provisions of the Residential Construction

Liability Act. In May 2001, the Ripples initiated the underlying action, alleging

damages for breaches of warranty and contract, including statutory liability under

the Residential Construction Liability Act.

The Parties’ Contentions

Relators contend the face of the record demonstrates a clear abuse of

discretion by the trial court in denying their motion to compel arbitration. In

essence, they argue that the record conclusively establishes the existence of a valid

agreement to arbitrate under the Federal Arbitration Act, and that the Ripples did

not offer proof in support of their affirmative defenses of lack of consideration and

unconscionability.

The Ripples contend that: (1) the Relators failed to meet their threshold

burden of establishing the existence of a valid arbitration agreement, and (2) the

court did not abuse its discretion, under the circumstances surrounding the

transaction, in ruling that the provision in the Palm Harbor Agreement, which

purports to give the Manufacturer an absolute and unconditional right to

unilaterally “opt-out” of the agreement to arbitrate, renders the entire agreement

unconscionable and unenforceable.

Standard of Review

Mandamus is an extraordinary remedy that will issue only to correct a clear

abuse of discretion or the violation of a legal duty when there is no adequate

remedy at law. In re Masonite Corp ., 997 S.W.2d 194, 197 (Tex. 1999). In

determining whether there has been a clear abuse of discretion justifying

mandamus relief, the reviewing court must consider whether the trial court's ruling

was one compelled by the facts and circumstances or was arbitrary, unreasonable,

or reached without reference to any guiding rules or principles. Johnson v. Fourth

Court of Appeals , 700 S.W.2d 917, 918 (Tex. 1985); Downer v. Aquamarine

Operators, Inc. , 701 S.W.2d 238, 241-42 (Tex. 1985).

A trial court’s failure to apply the Federal Arbitration Act to the facts of the

dispute constitutes an abuse of discretion for which there is no adequate remedy at

law . Jack V. Anglin Co., Inc. v. Tipps , 842 S.W.2d 266, 272 (Tex. 1992). Thus,

the erroneous denial of a party’s motion to compel arbitration under that Act leaves

the movant with no adequate remedy at law, and under such circumstances the

movant is entitled to a writ of mandamus . In re First Merit Bank N.A., 52 S.W.3d

749, 753 (Tex. 2001); see also Walker v. Packer , 827 S.W.2d 833, 839 (Tex.

1992); In re Conseco Fin. Servicing Corp., 19 S.W.3d 562, 568 (Tex. App.—Waco

2000, orig. proceeding); In re Monsanto Co. , 998 S.W.2d 917, 921-22 (Tex.

App.—Waco 1999, orig. proceeding).

Applying these standards to the record in this case, we must seek to

determine whether the trial court = s ruling constitutes a clear abuse of discretion, i.e.

whether the court could have rendered only one proper decision on the facts and

applicable law and failed to reach that decision. Southwest Tex. Pathology Assoc.

v. Roosth, 27 S.W.3d 204, 207 (Tex. App.—San Antonio 2000, no pet.); Hardin

Constr. Group v. Strictly Painting, 945 S.W.2d 308, 312 (Tex. App.—San Antonio

1997, no writ).

Relators’ Burden of Proof

A party seeking a writ of mandamus to compel arbitration under the Federal

Arbitration Act must first establish the existence of a valid agreement to arbitrate

and show that the claims in dispute are within the scope of the agreement. In re

First Merit Bank , 52 S.W.3d at 753 . Once the movant proves the existence of a

valid agreement to arbitrate, both state and federal policy favors arbitration and any

doubts about the scope of the agreement must be resolved in favor of arbitration .

Id. at 753 . However, we may not simply assume the parties agreed to arbitrate; the

burden is on the Relators to prove by “clear and unmistakable evidence” the

existence of a valid and enforceable contract to arbitrate. First Options v. Kaplan,

Inc., 514 U.S. 938, 944 (1995).

Policy Considerations

It is only after the establishment of a valid and enforceable agreement to

arbitrate that state and federal policies favor arbitration become applicable . EEOC

v. Waffle House, Inc., 534 U.S. 279, 294 (2002); Fleetwood Enterpr., Inc. v.

Gaskamp , 280 F.3d 1069 , 1074 (5th Cir. 2002). The purpose of the Federal

Arbitration Act is “to make arbitration agreements as enforceable as other

contracts, but not more so.” Prima Paint Corp. v. Flood & Conklin Mfg. Co. , 388

U.S. 395 , 404 n.12 (1967); see also Mitsubishi Motors Corp. v. Soler Chrysler

Plymouth, 473 U.S. 614, 625-26 (1985); Waffle House , 534 U.S. at 294 .

Accordingly, we must determine, as a matter of contract interpretation,

whether the Relators met their burden of proving the existence of a valid and

enforceable contract to arbitrate. Labor Ready Central III v. Gonzales , 64 SW.3d

519, 521-22 (Tex. App.—Corpus Christi 2001, no writ). Because the trial court

concluded that Relators did not meet their burden of proof, we must uphold that

court’s ruling unless the record conclusively requires a contrary result. See Pepe

Int’l Dev. Co. v. Garcia, 915 S.W.2d 925, 929 (Tex. App.—Houston [1st Dist.]

1996, no writ).

The Palm Harbor Agreement

The Relators rely upon the provisions of two documents (Palm Harbor No. 1

and No. 2) to support their contention that the Ripples entered into a valid and

enforceable agreement to arbitrate. Palm Harbor No. 1 is a one-page printed form

dated October 1, 1998. It bears a heading, including address and telephone

numbers, entitled “Palm Harbor Village.” It is signed by the Ripples, as

“Purchaser,” and by a representative of Palm Harbor Village, as “Retailer.” The

document recites that the parties to the “Retail Installment Contract or Cash Sales

Contract” agree that:

any and all controversies and claims arising out of or relating to said

contracts or to the negotiation, purchase, financing, installation,

ownership, occupancy, habitation, manufacture, warranties (express or

implied), repair, or sale/disposition of the “home” which is subject to

said contracts, will be settled solely by means of final and binding

arbitration before a three-judge panel of the American Arbitration

Association.

1. The arbitration provision will inure to the benefit of

the manufacturer of the home as fully as if the

manufacturer was a signatory to said contracts;

2. The arbitration provision also will inure to the benefit

of any lender or mortgagee (or assigns) who provide

financing for the purchase of the home at the sole

discretion of that lender or mortgagee, and

3. Nothing in this contract requires a lender or mortgagee

to invoke this Arbitration Provision, and the lender or

mortgagee may do so only if they agree to final and

binding determination by the arbitration process.

Palm Harbor No. 2 is also a one-page printed form headed “Palm Harbor

Village.” It is entitled “ARBITRATION AGREEMENT” and is signed by the

Ripples, as “purchaser.” Under a signature line designated for the retailer, “Palm

Harbor Village,” are the initials of some unidentified person. The document recites

that it is “executed contemporaneously with and as additional consideration for” an

installment or sales contract for the purchase of a manufactured home as described

in said contract. It also recites that the agreement is to inure to the benefit of the

“manufacturer of the Home and of the lender or mortgagee, if any, which provides

the financing for the purchase of the Home, their successors and assigns.” The

document then sets forth the “opt-out” provision in issue here, which states the

following:

The manufacturer, the lender, or mortgagee may elect not to initiate

and be bound by the arbitration by giving the notice; each, in its sole

discretion, may opt out of and elect not to be bound by the arbitration

by giving written notice of the election to all parties within twenty (20)

days after receipt of the Notice from another party.

(Emphasis added.)

Applicable Contract Law

In deciding whether a valid agreement to arbitrate exists, under either the

Federal Arbitration Act or the Texas Arbitration Statute, we must apply applicable

state contract law. Labor Ready Central , 64 S.W.3d 519 , 524 n.2; see also First

Options of Chicago, Inc. v. Kaplan, 514 U.S. 938 (1995); JM Davidson, Inc. v.

Webster , 49 S.W. 3d 507, 512 (Tex. App.—Corpus Christi 2001, pet. filed); Tenet

Healthcare Ltd. v. Cooper , 960 S.W.2d 386, 387-88 (Tex. App.—Houston [14th

Dist.] 1998, pet. dism’d w.o.j.). Thus, we must look to the contract law of the

State of Texas to determine that issue in this case.

Both documents before us involve the same parties and relate to the same

transaction; therefore, we will read their provisions together in ascertaining the

parties’ intent. Fort Worth Indep. Sch. Dist. v. City of Fort Worth , 22 S.W.3d 831,

840 (Tex. 2000); The Courage Co., L.G.C. v. The Chemshare Corp. , 93 S.W.3d

323, 332-33 (Tex. App.—Houston [14th Dist.] 2002, no pet.). Because the second

document does not specify whether and to what extent it is intended to operate in

discharge or substitution of the first document, we shall interpret the two

documents together, and in the event of any inconsistency between the two

documents, the provisions of the Palm Harbor Agreement, being the later of the

two, will prevail. Id. at 333-34 .

Mutuality of Obligations

Under Texas law, a binding contract must be based on a valuable

consideration. The consideration need not always be in the form of identical

promises. For example, a contract may be based on one party’s agreement to pay a

sum of money in return for the other party’s promise to perform a certain task. In

such a circumstance, the first party’s payment constitutes an independent

consideration for the second party’s promissory obligation. See Johnson v.

Breckenridge-Stephens Title Co., 257 S.W. 223, 225 (Tex. 1924) (citing, inter alia,

East Line Ry. Co. v. Scott , 10 S.W. 99 (Tex. 1888)).

However, if the parties have entered into a bilateral contract, where their

promises constitute the only consideration for the agreement, the contract is invalid

unless their mutual obligations are “mutual and binding.” Labor Ready Central v.

Gonzalez, 64 S.W.3d 519, 522-23 (Tex. App.—Corpus Christi 2001, no pet.); see

also Sterling Computer Sys. of Texas, Inc. v. Texas Pipe Bending Co., 507 S.W.2d

282, 282-83 (Tex. App.—Houston [14th Dist] 1974, writ ref’d) (bilateral contract

lacking mutuality of obligation is unenforceable). This well-established principle

of law is applicable to agreements to arbitrate as well as to other contracts. See In

re Tenet Healthcare, Ltd., 84 S.W.3d 760, 766 (Tex. App.—Houston [1st Dist.]

2002, no pet.) (mutual promises waiving right to litigate will constitute valid

consideration for agreement to arbitrate, provided neither party can unilaterally

rescind); see also Tenet Healthcare Ltd. v. Cooper, 960 S.W.2d 386, 388 (Tex.

App.—Houston [14th Dist.] 1997, pet. dism’d w.o.j.); In re Jebbia, 26 S.W.3d 753,

758 (Tex. App.—Houston [14th Dist.] 2000, orig. proceeding); In re Alamo

Lumber Co., 23 S.W.3d 577, 579-80 (Tex. App.—San Antonio 2000, orig.

proceeding); but see and compare In re Jobe Concrete Prods., Inc. v. Court of

Appeals of Tex., Eighth Dist. , No. 08-02-00175-CV, 2003 WL 21757512 (Tex.

App.—El Paso Jul. 31, 2003, orig proceeding).

The Appellate Record

Applying Texas contract law, we next must determine whether the trial court

abused its discretion in ruling that the “opt-out provision” in the Palm Harbor

Agreement rendered the agreement to arbitrate unenforceable for want of

consideration. In making this determination, we must review the documents in

light of the record before us and seek to determine whether there is any evidence of

an independent consideration being received by the Ripples in return for their

giving the opt-out right to the Manufacturer. In our review, we will consider only

the evidence and inferences therefrom that tend to support the trial court = s ruling,

and we must disregard all evidence and inferences to the contrary. Certain

Underwriters at Lloyd’s of London, 950 S.W.2d 375, 377 (Tex. App.—Tyler

1996), writ dism’d w.o.j. , 988 S.W.2d 731 (Tex. 1998).

The documents in the record before us consist of: (1) Relators’ verified

petition for mandamus, (2) the Ripples’ verified response, and (3) authenticated

copies of certain pleadings and exhibits attached to the Relators’ petition. The trial

court’s original order denying Relators’ motion to compel arbitration recites that

the court heard evidence on the motion, but the Relators deny that the court

conducted an evidentiary hearing. The Ripples do not specifically contradict the

Relators’ assertion that no evidence was heard by the court. The Ripples argue,

however, that inasmuch as the Relators failed to bring forward a complete record

of the proceedings, this Court must presume any omitted evidence supports the

trial court’s ruling. See Fort Bend County v. Texas Parks & Wildlife Com’n, 818

S.W.2d 898, 900 (Tex. App.—Austin 1991, no writ); Polanco v. Pan American

University , 818 S.W. 2d 97, 99 (Tex. App.—Corpus Christi 1991, no writ).

We need not decide whether this presumption applies here, because the

documents relied upon by Relators do not suggest, much less conclusively prove,

that the Ripples received an independent consideration for giving the opt-out right

to the Manufacturer. Based on our examination of the record, we conclude that the

trial court did not abuse its discretion in ruling Relators failed to meet their burden

of showing the Ripples received an independent consideration for giving the

unilateral right to rescind to the Manufacturer. Compare Emerald Texas, Inc. v.

Peel, 920 S.W.2d 398, 402 (Tex. App.—Houston [1st Dist.] 1996, no writ) (where

record affirmatively showed the existence of a valuable consideration moving to

the purchaser).

The “Opt-Out” Provision and Mutuality

Under Texas law, an “opt out” provision purporting to give one party the

unilateral right to avoid their contractual obligations renders the contract invalid

for want of mutuality. Sterling Computer, 507 S.W.2d at 282 ; In re Tenet

Healthcare, Ltd., 84 S.W.3d at 766 ; Labor Ready Central, 64 S.W.3d at 519 ;

compare Lawrence v. Comprehensive Bus. Servs. Co., 833 F.2d 1159, 1162, 1164

(5th Cir. 1987) (recognizing rule but holding provision did not render contract

invalid simply because it gave one party right to seek injunctive relief in certain

limited circumstances).

In this case, the Palm Harbor opt out provision is absolute and unlimited. It

purports to give the Manufacturer, as a third-party beneficiary of the contract, the

unconditional right to unilaterally “opt out” of the agreement to arbitrate whenever

and for whatever reason (or for no reason) it might decide would be in its best

interest. Under Texas law, such an unlimited right to rescind a bilateral contract

renders the contract void for want of mutuality. See Sterling Computer , 507

S.W.2d at 282 . Thus, we hold that the trial court did not abuse its discretion in

ruling that the opt-out provision in the Palm Harbor Agreement rendered that

agreement invalid and unenforceable.

Issues Relating to Unconscionability

We next review the record to determine whether the trial court clearly abused

its discretion in deciding that it would be unconscionable, under the circumstances

of the case, to compel the Ripples to arbitrate their claims against the Relators. In

making this determination, we must bear in mind that it was the Ripples’ burden to

prove their contention that the Palm Harbor Agreement was unconscionable under

the circumstances existing at the time of its execution. 9 U.S.C.A. 2; Doctor’s

Assocs., Inc. v. Casarotto, 517 U.S. 681, 686 (1996); In re Oakwood Mobile

Homes, 987 S.W.2d 571, 573 (Tex. 1999); Emerald Texas , 920 S.W2d at 398 .

We must also bear in mind that this Court is empowered to review the trial

court’s rulings on issues of both "procedural" and "substantive" unconscionability.

In re Halliburton Co. and Brown & Root Energy Servs. , 80 S.W.3d 566, 572 (Tex.

2002). Thus, in considering whether the trial court’s ruling may be upheld on the

basis of procedura l unconscionability, we must ascertain whether the record

reflects such a disparity in the parties’ respective bargaining power that the trial

court could reasonably have decided that the Ripples, as the weaker party in the

transaction, had no reasonable opportunity to negotiate an alternative to the opt-out

provision. We must also seek to ascertain whether the trial court’s ruling may be

sustained on the basis of substantive unconscionability, i.e. whether the opt-out

provision in the Palm Harbor Agreement makes it so one-sided that it would be

unconscionable to enforce the agreement under the circumstances existing at the

time of its execution. In re First Merit Bank, 52 S.W.3d at 757 (citing Tex. Bus.

& Com. Code Ann. ' 2.302 cmt. 1).

The Opt-Out Provision and Unconscionability

We have not found any Texas case involving the issue of unconscionability

in which the court considered an opt-out provision containing language as broad

and unlimited as that contained in the Palm Harbor Agreement. The Texas

Supreme Court did consider a somewhat similar provision in an arbitration

agreement that allowed a lending bank the right to seek judicial relief for the

limited purpose of protecting its loan and security interest. In re First Merit Bank,

52 S.W.3d at 754 . Because the agreement permitted the lending bank to seek

judicial relief only for a limited purpose and obligated the bank to arbitrate all

other claims, the Court determined that the agreement to arbitrate was not

unconscionable. Id . at 757.

We have found several decisions from courts in other states that have

addressed the issue of whether an unlimited opt-out provision, such as that

contained in the Palm Harbor Agreement, will render contract unconscionable.

Arnold v. United Co. Lending Corp., 511 S.E.2d 854, 859 (W. Va. 1998)

(arbitration provision in consumer loan transaction waiving consumer’s right to

judicial redress but preserving the lender’s right, held unconscionable, void, and

unenforceable as matter of law); Iwen v. U.S. West Direct, 977 P.2d 989, 996

(Mont. 1999) (advertising contract drawn by telecommunications company, which

required advertiser, the weaker bargaining party, to submit all claims to arbitration

and gave company the right to seek judicial relief, held unconscionable because it

lacked mutuality of remedy and contained terms that were unreasonably favorable

to the drafter); Ramirez v. Circuit City Stores, 90 Cal. Rptr. 916 , 920 (2000)

(holding employment contract provision requiring the weaker party [the employee]

to arbitrate claims, while allowing the stronger party [the employer] to seek redress

through the courts, is presumptively unconscionable). We find the rationale of

these decisions to be persuasive in deciding the issue at hand.

In this case, the trial court could reasonably have inferred from all the

circumstances reflected in the record that the Ripples were at a commercial

disadvantage in their contractual negotiations with the Relators, and that, because

of the disparity in their bargaining power, the Ripples were not afforded any

meaningful opportunity to negotiate a fair and mutually binding opt-out provision.

Thus, we conclude that the trial court acted within its judicial discretion in ruling

that it would be unconscionable, under the circumstances existing at the time of the

execution of the Palm Harbor Agreement, to compel the Ripples to arbitrate their

claims against the Relators.

Claim of Equitable Estoppel

The Relators further assert that “if it is determined that the manufacturer is

somehow not compelled to arbitrate due to the ‘opt-out’ in the Second Arbitration

Agreement, the order compelling arbitration should still include the Manufacturer.”

In support of this assertion, Relators suggest that the claims asserted by the Ripples

against the Manufacturer are “inherently inseparable” from the claims asserted

against the Retailer and are based on the “same operative facts.” Thus, the

Relators argue that even though the Manufacturer is not a signatory to the

arbitration agreement, the Ripples are equitably “estopped from seeking to avoid

arbitration.” In support of this contention, Relators cite In re Educ. Mgmt. Corp. ,

14 S.W.3d 418, 424-25 (Tex. App.—Houston [14th Dist.] 2000, orig. proceeding);

Valero Energy Corp. v. Teco Pipeline Co. , 2 S.W.3d 576 (Tex. App.—Houston

[14th Dist] 1999, no pet.); In re Koch Indus., Inc. , 49 S.W.3d 439 (Tex. App.—San

Antonio 2001, orig. proceeding); In re Nasr, 50 S.W.3d 23 (Tex. App—Beaumont

2001, orig. proceeding); In re Rangel , 45 S.W.3d 783 (Tex. App.—Waco 2001,

orig. proceeding); In re MacGregor, No. 01-02-01246-CV, 2003 WL 21545141

(Tex. App.—Houston [1st Dist.] Jul. 10, 2003, orig. proceeding); Carlin v. 3V,

Inc., 928 S.W.2d 291 (Tex. App.—Houston [14th Dist.] 1996, no writ); and

Grigson v. Creative Artists Agency, L.L.C., 210 F.3d 524 (5th Cir. 2000).

We do not find any of these cases to be applicable here. In each of those

cases there was a valid and enforceable agreement to arbitrate. In the instant case,

the trial court determined that the Palm Harbor Agreement is void for want of

consideration and unconscionable as to both Relators. As a designated third-party

beneficiary of that agreement, the Manufacturer stands in the shoes of the

contracting party and is subject to all the provisions of the contract. Nationwide of

Bryan, Inc. v. Dyer, 969 S.W.2d 518, 520 (Tex. App.—Austin 1998, no writ);

Stonewall Ins. Co. v. Modern Exploration, Inc. , 757 S.W.2d 432, 434-35 (Tex.

App.—Dallas 1988, no writ) . Such rights as the Manufacturer might have, as a

third-party beneficiary, to compel arbitration are entirely dependent upon the

existence of a valid and enforceable contract. The trial court has ruled that the

purported contract is invalid and unenforceable as to both Relators, and it did not

abuse its discretion in refusing to compel arbitration on Relator’s claim of

equitable estoppel.

Relators’ Petition for Mandamus is denied.

Frank G. Evans

Justice

Panel consists of Justices Keyes, Hedges,

and Evans .

Justice Hedges, dissenting.

.