in Re Stanford Development Corporation

Opinion issued January 29, 2009

In The

Court of Appeals

For The

First District of Texas

NO. 01-08-00240-CV

STANFORD DEVELOPMENT CORPORATION, Appellant

V.

STANFORD CONDOMINIUM OWNERS ASSOCIATION, Appellee

On Appeal from the 333rd District Court

Harris County, Texas

Trial Court Cause No. 2007-50115

NO. 01-08-00386-CV

IN RE STANFORD DEVELOPMENT CORPORATION, Relator

Original Proceeding on Petition for Writ of Mandamus

O P I N I O N

The issue in this interlocutory appeal (1) is whether a condominium homeowners'

association that brings suit against the condominium developer on behalf of its

homeowners is bound by arbitration agreements in earnest money contracts between

the developer and the individual homeowners. We also consider whether (1)

subsequent purchasers are bound by the arbitration agreements in their predecessors'

earnest money contracts, and (2) the arbitration agreements in the earnest money

contracts were merged into the subsequent deeds. We reverse and remand.

BACKGROUND

This cases arises out of a construction-defect lawsuit brought by the Stanford

Condominium Owners Association ("the Association") against Stanford Development

Corporation ("Stanford"), the builder and developer of the condominium complex.

The Association filed suit against Stanford alleging breach of contract, Deceptive

Trade Practices, breach of warranty, fraud, and negligent design, construction, and

supervision. Stanford moved to compel arbitration based on arbitration clauses in 27

of the 37 homeowners' earnest money contracts, which provide as follows:

All claims for breach of this Contract or otherwise are limited solely to

the specific remedies provide for herein. Buyer and Seller hereby

further agree that any controversy, claim or dispute arising out of or

relating to (a) the Contract, (b) any breach thereof, (c) the sales

transaction reflected in the Contract, (d) the construction of the

residence which is the subject of the Contract and/or (e) any

representations or warranties, express or implied, relating to the

Property and the Unit, shall be decided by binding arbitration in

accordance with the Construction Industry Arbitration Rules of the

American Arbitration Association. All decisions by the arbitrators

shall be final, and any judgment upon the award rendered by the

arbitrators may be confirmed, entered and enforced in any court having

proper jurisdiction. Any action, regardless of form, arising out of the

transactions under this Contract must be brought by Buyer within two

(2) years of the Closing Date, regardless of when the cause of action

accrues or discovery of a claim by Buyer. (Emphasis added).

After a hearing on Stanford's motion to compel arbitration, the trial court

denied Stanford's motion, and this appeal followed.

PROPRIETY OF DENIAL OF MOTION TO COMPEL ARBITRATION

On appeal, Stanford contends the trial court erred in denying its motion to

compel arbitration. Specifically, Stanford contends that the trial court erroneously

concluded that the Association was not bound by the arbitration clauses in the

individual homeowners' contracts.

Standard of Review and Applicable Law

Denial of a motion to compel arbitration generally triggers the abuse-of-discretion standard of review. See In re D. Wilson Constr. Co. , 196 S.W.3d 774, 780

(Tex. 2006). A trial court abuses its discretion when it acts arbitrarily or

unreasonable and without reference to any guiding rules or principles. See In re

Bruce Terminix Co. , 988 S.W.2d 702, 705 (Tex. 1998); Walker v. Packer , 827 S.W.2d

833, 839 (Tex. 1992). Because a trial court has no discretion in determining what the

law is, which law governs, or how to apply the law, we review this category of

discretionary rulings de novo. See In re D. Wilson Constr. Co. , 196 S.W.3d at 781 .

However, when the ruling under review results from the trial court's having resolved

underlying facts, we must defer to the trial court's factual resolutions and any

credibility determinations that may have affected those resolutions, and we may not

substitute our judgment for that of the trial court. See Walker , 827 S.W.2d at 839-40 .

A party seeking to compel arbitration must establish (1) the existence of a

valid, enforceable arbitration agreement and (2) that the claims asserted fall within

the scope of that agreement. Valero Energy Corp. v. Teco Pipeline Co. , 2 S.W.3d

576, 581 (Tex. App.--Houston [14th Dist.] 1999, no pet.) (applying Texas General

Arbitration Act). Because state and federal policies favor arbitration, a presumption

exists favoring agreements to arbitrate, and courts must resolve any doubts about an

arbitration agreement's scope in favor of arbitration. Cf. In re FirstMerit Bank, N.A. ,

52 S.W.3d 749, 753 (Tex. 2001) (discussing arbitration under the FAA).

Are arbitration clauses in homeowners' contracts binding on the Association?

When determining the existence of a valid enforceable arbitration agreement,

we also consider gateway matters such as whether a valid arbitration clause exists and

whether an arbitration clause is binding on a nonparty. In re Weekley Homes, L.P.,

180 S.W.3d 127, 130 (Tex. 2005) (orig. proceeding). Courts may not order parties

to arbitrate unless they have agreed to do so. Belmont Constructors, Inc. v. Lyondell

Petrochem. Co., 896 S.W.2d 352, 356-57 (Tex. App.--Houston [1st Dist.] 1995, no

writ [appeal and orig. proceeding] ). Consequently, despite a presumption favoring

arbitration, a valid agreement to arbitrate remains a threshold requirement. See In re

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

It is undisputed that there is an arbitration agreement between Stanford and 27

of the individual homeowners. The issue is whether the arbitration agreements can

be enforced against the Association, a nonsignatory to the agreements. Courts have

recognized six theories that may bind nonsignatories to arbitration agreements: (1)

incorporation by reference, (2) assumption, (3) agency, (4) alter ego, (5) equitable

estoppel, and (6) third-party beneficiary. Kellogg Brown & Root, 166 S.W.3d at 739 .

Stanford argues that the fifth theory for binding nonsignatories--equitable

estoppel--applies in this case. Specifically, Stanford argues that because the

Association has filed suit based, in part, on the contractual terms found in the

homeowners' earnest money contracts, it is estopped from denying the applicability

of the arbitration provision in the same contract. We agree.

The supreme court has held that "a litigant who sues based on a contract

subjects him or herself to the contract's terms." In re FirstMerit Bank, N.A. , 52

S.W.3d at 755-56 . When the nonsignatory asserts claims identical to the signatories'

contract claims, all must be arbitrated. Id. Additionally, claims must be brought on

the contract and arbitrated if liability arises solely from the contract or must be

determined by reference to it. In re Weekley Homes, L.P. , 180 S.W.3d at 132 . If a

nonsignatory pursues a claim based "on the contract" of another, and the contract

contains an arbitration clause, then the nonsignatory must pursue all claims--tort and

contract--in arbitration. Id.

In this case, the Association alleged in its petition that Stanford "failed to

comply with the express and implied contractual duties which they owed to [the

Association's] Owners. [Stanford] breached [its] contracts." The only contracts

giving rise to any express or implied contractual duties in this case are the earnest

money contracts between Stanford and the individual homeowners. The Association

also alleged that Stanford breached "express and/or implied warranties." The only

express warranties are contained in the individual homeowners' earnest money

contracts. Because the Association has filed suit seeking the benefits of the earnest

money contracts, it cannot deny the applicability of the arbitration agreements in the

same contracts. See FirstMerit Bank , 52 S.W.3d at 755 ; Weekley Homes , 180 S.W.3d

at 134-35 . As stated by the supreme court, "A nonparty cannot both have his contract

and defeat it too." Weekley Homes , 180 S.W.3d at 135 .

In addition to the claims based directly "on the contracts" of the individual

homeowners, the Association also included DTPA claims, fraud, and intentional or

negligent misrepresentation claims, and negligent design, construction, and

supervision claims. However, because the Association chose to allege contract claims

that are subject to arbitration clauses, and because the arbitation clauses in this case

are broad enough to cover both contract and tort claims, the Association must also

arbitrate the intertwined tort claims. See Weekley Homes , 180 S.W.3d at 132 (citing

Jack B. Anglin Co. v. Tipps , 842 S.W.2d 266, 271 (Tex. 1992)). Therefore, we

conclude that equitable estoppel doctrine prevents the Association from denying the

applicability of the arbitration clauses found in its homeowners' earnest money

contracts.

We also conclude that because the Association is suing "on behalf of" the

individual condominium owners, it stands in their shoes and is also bound by any

arbitration provisions that bind them. Section 82.102(4) of the Uniform

Condominium Act provides that a "unit Owners' Association" may "institute, defend,

intervene in, settle, or compromise litigation or administrative proceedings in its own

name on behalf of itself or two or more unit owners on matters affecting the

condominium." Tex. Prop. Code Ann. § 82.102 (4) (Vernon 2007). It its petition,

the Association invokes its authority to bring suit under chapters 81 & 82 of the

Condominium Act and alleges that "[t]he claims which [the Association] makes

hereinafter on behalf of the unit owners is limited to the common areas and elements

for which [the Association] has management responsibility under the condominium

declarations and under law." (Emphasis added). The Association purchased nothing

from Stanford and serves only to represent the interests of the individual

homeowners.

This Court considered an analogous situation in the case of In re Jindal Saw

Ltd. , 264 S.W.3d 755 (Tex. App.--Houston [1st Dist.], orig. proceeding). In Jindal

Saw , the decedant, who was killed on the job, had signed an arbitration agreement

with his employer. Id. at 758 . After his death, the decedent's wife brought a survival

action in her capacity as representative of his estate. Id. at 759-60 . The wife, in her

individual capacity and as next friend for her children, also brought wrongful death

actions. Id. This Court held that the wife was bound to arbitrate the survival action

brought on behalf of the estate because by binding himself to arbitration, the decedent

also bound his estate and claims brought on its behalf by the personal representative.

Id. at 766 . The wife was not, however, bound to arbitrate the wrongful death actions

because those claims were never owned by the decedent or his estate, and he could

not have bound the owner of those claims to arbitrate. Id. at 764-65 .

By analogy, in this case, the individual owners bound themselves to arbitrate

their claims with Stanford. Thus, the Association, when suing on the owners' behalf ,

is also bound to arbitrate, just as the wife, in Jindal Saw , when suing as personal

representative of the decedents's estate, was bound to arbitrate claims brought on

behalf of the estate.

Another jurisdiction has considered the issue more directly. In Satomi Owners

Ass'n. v. Satomi , LLC, 159 P.3d 460 (Wash. Ct. App.), a condominium homeowners

association filed suit against the condominium developer, alleging numerous

construction defects. Id. at 462 . The allegations included breach of express and

implied warranties and violations of the Washington consumer protection act. Id.

The developer moved to compel arbitration pursuant to a warranty addendum that was

attached to each purchaser's original purchase and sales agreement, which relief the

trial court denied. Id. The court of appeals held that "[i]f an association merely

represents its owners/members, its standing is derivative, and it is subject to any

defenses and limitations that may be asserted against them and is without a separate

right to recover." Because the association brought the action "in a representative

capacity, not on its own behalf as a separate juristic entity," it was bound by the

arbitration provisions of its constituent members. Id. at 463 .

We agree with the Satomi court. The Association's pleading clearly alleges

that it is bringing suit on behalf of its constituent owners. The Association does not

own the property that is the subject of the dispute. Each individual homeowner owns

an undivided interest in the common areas that are the subject of this dispute.

Although the Association has standing to bring the suit, its rights are limited to those

possessed by the people it represents. Because the homeowners are bound by

arbitration agreements, and the Association has sued on their behalf, it, too, is bound

by the agreements.

Are subsequent purchasers bound by arbitration clauses?

At the hearing on the motion to compel, the Association also argued that some

of the original homeowners had already sold their condominiums to subsequent

purchasers who did not sign the arbitration agreements. Thus, we must also

determine whether these subsequent purchasers, even though nonsignatories to

earnest money contracts containing the arbitration provisions, are nonetheless

required to arbitrate. We hold that they are.

By filing suit based on obligations set forth in the earnest money contracts, the

subsequent purchasers are seeking to obtain the benefits of those contracts. Thus, the

equitable estoppel principles discussed above should apply to them also. See

FirstMerit Bank , 52 S.W.3d at 755-56 (holding nonsignatory donees of mobile home

bound by arbitration clause found in donors' purchase contract because donees filed

suit based on contract).

The case of Phan v. Addison Spectrum , LP, 244 S.W.3d 892 (Tex.

App--Dallas 2008, no pet.) considered an analogous situation. In Phan , the

homeowners' association filed suit and settled a claim on behalf of its unit owners.

Id. at 896 . One homeowner, Phan, argued that the association did not have standing

to settle her individual claims. Id. at 897 . The court held that, "by virtue of her

ownership of her unit, Phan is a member of [the association], and "[u]nder Texas

Property Code § 82.102, she therefore consented to allow [the association] to bring

and settle the ACA suit in its own name and on her behalf. Id. Phan , thus, stands for

the proposition that individual homeowners are bound by the consequences of a suit

that was brought by their homeowners' association on their behalf and to which they

have consented by virtue of their membership in the association

The subsequent purchasers in this case, by virtue of their membership in the

Association, have consented to allow the Association to bring the present suit on their

behalf. Because the present suit is based on the initial purchasers' earnest money

contracts, the association and all owners who, by virtue of their membership in the

association have consented to allow it to sue on their behalf, are bound by the terms

of those earnest money contracts, including the arbitration provisions.

Did subsequent deeds extinguish arbitration clauses in earnest money contracts?

At the hearing on the motion to compel arbitration, the trial court expressed

some reservations that perhaps the "[earnest money] contract has been ultimately

supplanted by deeds and all those kinds of things . . . ." Thus, we must address

whether the subsequent deeds extinguished the arbitration provisions that were in the

earnest money contracts. Stanford argues that the arbitration agreement is a collateral

agreement and that it continues to exist even after deeds for the property were

transferred.

As a general rule, a deed made in full execution of a contract of sale of land

merges the provisions of the contract. Harris v. Rowe , 593 S.W.2d 303, 306-07 (Tex.

1979). However, the merger doctrine does not apply to a deed that constitutes only

partial performance of the preceding contract. Id. The deed does not merge other

distinct and unperformed provisions of the contract. Id. A contract for the sale of

land that creates rights collateral to and independent of the conveyance, such as

completion of construction or escrow agreements pending construction, survives a

deed that is silent with respect to the construction or escrow agreement. Id.

In Pleasant Grove Builders, Inc. v. Phillips , the buyer purchased a home from

the seller. 355 S.W.2d 818, 819 (Tex. Civ. App.--Dallas 1962, writ ref'd n.r.e.). The

purchase agreement contained a promise by the seller to provide a title insurance

policy. Id. at 823 . On appeal, the seller argued that the buyer could not recover

damages based on the seller's failure to provide title insurance because that provision

of the purchase agreement merged with the subsequently-issued deed, which was

silent on the issue. Id. The court of appeals held that "the agreement to furnish a title

policy must be considered as a separate agreement, not superseded by the deed and

properly not included in the deed." Id.

In Head v. Finley , the buyer purchased a house from the seller. No. 2-03-296-CV, 2004 WL 1699895 (Tex. App--Fort Worth, pet. denied). The earnest money

contract between the two provided that, in the event of a dispute between the parties

arising out of the earnest money contract, the prevailing party in the dispute would

be entitled to recover attorneys' fees. Id. at *7 . On appeal, the buyer argued that the

earnest money contract was extinguished by the merger doctrine when the deed to the

property was delivered. Id. The court of appeals, citing Harris v. Rowe and Pleasant

Grove Builders, Inc. v. Phillips , held that the merger doctrine did not apply and that

the attorneys' fee provision of the earnest money contract survived. Id.

Again, another jurisdiction has considered the issue more directly. In Drees

Co. v. Osburg , 144 S.W.3d 831, 832 (Ky. Ct. App. 2003), the buyers contracted for

the construction and purchase of a new home. Id. at 832 . The purchase agreement

had an arbitration clause, but the deed that followed did not. Id. The seller moved

for arbitration based on the arbitration clause in the purchase agreement, but the trial

court denied the motion. Id. On appeal, the court reversed, holding that the merger

doctrine did not apply to collateral agreements, and that the arbitration agreement was

such a collateral agreement. Id. at 833 .

Based on these authorities, we conclude that the doctrine of merger is not

applicable in this case. The earnest money contracts in this case contained

agreements that created rights collateral to and independent of the conveyance. For

example, the earnest money contracts in this case, like the earnest money contract in

Pleasant Grove Builders, Inc. v. Phillips , contained a promise by the seller to provide

a title policy. Also, the earnest money contracts in this case, like the earnest money

contract in Head v. Finley , contained an attorneys' fee provision. The arbitration

provision, like the provisions mentioned above, created rights independent of the

conveyance, and, as such, were not merged out of existence by the subsequent deeds. (2)

CONCLUSION

Having determined that the Association and its members are bound by the

arbitration clauses, which were not merged away by the issuance of the subsequent

deeds, we hold that the trial court erred in denying Stanford's motion to compel

arbitration.

Accordingly, we sustain Stanford's issues on appeal and reverse and remand

for further proceedings.

Sherry Radack

Chief Justice

Panel consists of Chief Justice Radack and Justices Higley and Nuchia. (3)

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