HOUSTON – The Court of Appeals for the 1st District of Texas reversed and remanded a case after a lower court confirmed an arbitration award and denied a company and its leaders' request to vacate it.
Chief Justice Sherry Radack authored the opinion and Terry Jenkins and Russell Lloyd were on the panel.
The appellants, Brown Lab Investments LLC, Joel Katz and Andrea Katz, raised two issues in their appeal that challenged the 190th District Court in Harris County, Texas decision. Their first issue was that they alleged they never agreed to the arbitration. Their second allegation was that the arbitrator exceeded his authority when it issued an award against them and in favor of appellee Lane Moesser. The appeals court agreed with Brown and the Katzes on both issues and reversed and remanded the case back to the lower court.
Moesser first filed the lawsuit after he was fired from his position as employee and vice president of a company called Align. He was also an owner of a minority interest. He was first brought on board in 2011. At that time, Moesser and Align signed an employment agreement and a membership interest purchase agreement in which Moesser bought 7.5 percent of membership interest in Align for $63,333 (Brown owned 82.5 percent interest of Align). Both Moesser and Align also signed a limited liability company agreement.
Moesser was fired after he suggested the Katzes were allegedly misusing Align’s funds, the ruling states. Align then repurchased his membership for $63,333. Moesser disputed what the amount his membership was worth, so Align hired an appraiser that said it was actually valued at $42,375.
The ruling states Moesser pointed out the Katzes selected the appraiser that subsequently gave an incorrect amount of value for his membership. Moesser then requested Align’s financial records so it could prove the fair market value concerning his membership, which Align declined to provide.
Align later sued Moesser so it could get declaration that Moesser was paid properly for his membership. Moesser responded with a motion to dismiss and stated there was a lack of subject matter jurisdiction and said the issue should go before arbitration based on the employment agreement.
Once in arbitration, Moesser made accusations against Align as well as the appellants in their individual involvements. He alleged they breached their contract, their fiduciary duty, duty of good faith and fair dealing and that they committed fraud, conversion and conspiracy. He asked for $1 million in actual damages and $3 million in exemplary damages as well as legal costs.
Brown and the Katzes objected to the arbitration and said the arbitrator didn’t have the authority to rule on the case considering they weren’t parties in the employment agreement. They also pointed out they never agreed to arbitration. They subsequently asked the arbitrator to dismiss them from arbitration and said it didn’t have jurisdiction over them. Still, the arbitrator denied the objections and awarded Moesser $750,000, and held Align, Brown and the Katzes responsible for the award.
Moesser then filed a petition and requested the lower court to confirm the award, which it did. It also denied Align, Brown and the Katzes' request to vacate the award.
The appeals court pointed out Joel Katz never signed any of the agreements. Since Moesser brought the lawsuit against the individuals, and not their representation or positions within Align, the appeals court agreed they were not actually signatories in the arbitration agreement.
Considering this, the court ruled Moesser failed to prove they agreed to arbitration. It also added Brown and the Katzes requested the arbitrator to dismiss them from the arbitration before and during the hearing. Considering this, they aren’t tied by the arbitrator’s authority or decision.
“We conclude that the question of whether Brown and the Katzes, in their individual capacities, are parties to the arbitration agreement was a matter of the trial court, and not the arbitrator,” the appeals court determined.
With this in mind, it said the trial court should have decided if the Brown and Katzes were bound by the arbitration, not the arbitrator. Therefore, the arbitrator did exceed his authority.
The appeals court reversed and remanded the case so the trial court could rule on the arbitration matter.