Premium Plastics Supply v. Howell – Claims Voluntarily Withdrawn from Arbitration barred by Res Judicata


AAA Arbitration, Case Summaries / Friday, November 24th, 2017

In Premium Plastics Supply, Inc. v. Howell, 01-16-00481-CV, 2017 WL 4288074 (Tex. App.—Houston [1st Dist.] Sept. 28, 2017, no pet. h.), Houston’s First Court of Appeals addressed issues of res judicata in confirming an arbitration award.

Background

In 2012, Appellants, Premium Plastics Supply, signed a two-year lease for commercial space from appellees, Thomas and Laura Howell. The lease agreement contained a broad form arbitration clause: “Any controversy or claim related to this contract, including the construction or application of this contract, will be settled by binding arbitration under the rules of the American Arbitration Association, and any judgment granted by the arbitrator(s) may be enforced in any court of proper jurisdiction.” Premium Plastics Supply continued to occupy the the space following the termination of the lease, and four months later, the Howells sent a notice of default seeking payment under the holdover clause in the lease agreement. Premium Plastics Supply didn’t pay and the Howells initiated arbitration with the American Arbitration Association (AAA).

After initiating arbitration, the Howells changed the locks on the leased space. Premium Plastics Supply responded by asserting counterclaims in the arbitration for improper lockout under the Property Code, unauthorized access, and breach of oral agreements. Prior to the final evidentiary hearing Premium Plastics Supply dismissed those counterclaims. In their briefs on appeal, Premium Plastics Supply stated that they dismissed those claims so that they could pursue them in trial court. The arbitrator, Houston-based <a href=”http://www.whkarb.com”>William H. Knull III</a> issued an award, awarding the Howells $33,500 in unpaid rent for the period from November 2014 to May 2015.

The Howells then filed suit in district court in Harris County, seeking a declaratory judgment to confirm the arbitration award. They later filed a summary-judgment motion. At that point, Premium Plastics Supply amended their answer to reassert the counterclaims previously raised and withdrawn in the arbitration. The trial court granted the Howells’ partial summary judgment and confirmed the arbitration award. The Howells then moved for summary judgment on the counterclaims, arguing that they were barred by res judicata because they should have been raised in the arbitration. The trial court also granted the second summary-judgment motion and rendered a final judgment. Premium Plastics Supply appealed, arguing that the trial court erred by granting summary judgment on the counterclaims because the issue of res judicata had to be decided by the arbitrator and not the trial court. The court of appeals rejected this argument affirmed judgment confirming the award.

Decision–Res Judicata

Res judicata, also referred to as claims preclusion, prevents the relitigation of a claim or cause of action that has been finally adjudicated, as well as related matters that, with the use of diligence, should have been litigated in the prior suit. Under Texas procedural rules, a counterclaim is required to be litigated in an initial arbitration or suit when “it arises out of the transaction or occurrence that is the subject matter of the opposing party’s claim and does not require for its adjudication the presence of third parties of whom the court cannot acquire jurisdiction. Tex. R. Civ. P. 97(a). Res judicata promotes the finality of judgments and thus “serves vital public interests.

Take Aways

It’s hard to know what Premium Plastics Supply or its counsel had in mind by withdrawing its counterclaims from the arbitration and reasserting them in the state court litigation. The award itself notes that the claims were withdrawn without prejudice. In its briefing in the district court, Premium Plastics Supply argued that arbitration was not the proper forum for its claims, noting that the lease terminated on Oct. 31, 2014 and they were not locked out until Dec. 2014 or Jan. 2015 and the eviction occurred after the arbitration was initiated.  This interpretation is undermined by the fact that the claims were in fact asserted in the arbitration and nothing in the record indicates that the arbitrator had refused to hear them or considered them outside of his jurisdiction in resolving that dispute. At the same time, nothing in the arbitration proceeding appears to have clearly put Premium Plastics Supply on actual notice that its counterclaims were effectively being adjudicated through their voluntary withdrawal. The First Court of Appeals was unpersuaded, noting that the counterclaims filed in the arbitration were identical to the ones asserted in the trial court after the award issued, and were voluntarily dismissed. Important to the Court of Appeals analysis is the broad interpretation given to the phrase “related to” in an arbitration clause. Such a broad form clause, in contrast to a narrow “arising out of” clause, encompasses more than a breach of contract claim, stating that “[b]road arbitration provisions like this one are not limited to claims that literally arise under the contract, but rather embrace all disputes between the parties having a significant relationship to the contract, regardless of the label attached to the dispute.

While the outer limits to broad form arbitration clauses may be subject to debate, in the Court of Appeals eyes it certainly would include claims arising out of the landlord-tenant relationship created by the lease agreement.

Broad arbitration provisions like this one are not limited to claims that literally arise under the contract, but rather embrace all disputes between the parties having a significant relationship to the contract, regardless of the label attached to the dispute. Premium Plastics Supply, Inc. v. Howell, 01-16-00481-CV, 2017 WL 4288074 (Tex. App.—Houston [1st Dist.] Sept. 28, 2017, no pet. h.); see also RSR Corp. v. Siegmund, 309 S.W.3d 686, 701 (Tex. App.—Dallas 2010, no pet.)(phrase “relates to,” in particular, is recognized as very broad term with respect to scope of arbitrable claims); Am. Realty Trust, Inc. v. JDN Real Estate–McKinney, L.P., 74 S.W.3d 527, 531 (Tex. App.—Dallas 2002, pet. denied) (“A broad arbitration clause, purporting to cover all claims, disputes, and other matters arising out of or relating to the contract or its breach, creates a presumption of arbitrability.”)

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Luke Gilman is an attorney at Jackson Walker in Houston, Texas, specializing in arbitration and ancillary litigation in federal and state court.