Reported / Citable
Background
Stratton Borchers sued Karl Drusch and affiliated companies in the First Division of the Texas Business Court over claims arising from Borchers’s termination as president of an affiliated aviation company. That division compelled arbitration under the holding company’s Operating Agreement, which required controversies arising from the agreement to be submitted to the American Arbitration Association.
While arbitration was underway, the holding company treated Borchers as having defaulted on a note used to purchase 975 membership units and sold the pledged units to Drusch after Borchers paid all demanded principal and interest but not $5,000 in claimed attorneys’ fees. Borchers filed a second suit in the Business Court’s Eighth Division, which denied dismissal and arbitration and temporarily barred further transfer of the units. The First Division later limited its arbitration order to Operating Agreement claims and stayed the arbitration pending resolution of the Eighth Division litigation. Drusch and the companies appealed both divisions’ orders.
The Court’s Holding
The court affirmed the Eighth Division’s exercise of subject-matter jurisdiction. Borchers’s pleaded valuation of the disputed units exceeded the Business Court’s $5 million threshold, and Drusch did not readily establish that valuation was a sham or plainly incredible. A suit seeking the return of membership interests also concerned an organization’s governance, governing documents, or internal affairs and therefore fell within the Business Court’s substantive jurisdiction.
The court reversed the Eighth Division’s refusal to compel arbitration. The Operating Agreement’s submission of disputes to the AAA incorporated AAA rules that clearly and unmistakably delegated questions about the arbitration agreement’s scope to the arbitrator. Because the parties disputed whether an existing arbitration agreement covered claims under the separate Security Agreement—not whether the arbitration agreement still existed—the arbitrator must first decide arbitrability. The court did not hold that the arbitrator necessarily must decide the merits of the ownership dispute. It remanded for an order compelling arbitration, expressly subject to the Texas Supreme Court’s stay of trial-court proceedings.
The court nevertheless affirmed the temporary injunction preventing further transfer of the units. The Eighth Division did not abuse its discretion in finding a probable right to relief because the Security Agreement’s reference to “expenses” did not unmistakably authorize the demanded attorneys’ fees, or in finding a risk of irreparable harm. The injunction preserved the controversy’s subject matter while the arbitrator determines arbitrability. The court separately reversed the First Division’s order limiting and staying arbitration and remanded with instructions to order arbitration resumed because scope had been delegated to the arbitrator and arbitration had priority over collateral litigation involving the same issues.
Key Takeaways
- An arbitration clause need not appear in every related contract it may cover; when scope is delegated, the arbitrator decides whether claims under another contract fall within the clause.
- Submitting a domestic commercial dispute to the AAA without specifying particular rules can incorporate the AAA rules and clearly delegate arbitrability questions to the arbitrator.
- A court may preserve disputed property through a temporary injunction while arbitrability is decided, even when the court erred by refusing to refer the scope question to the arbitrator.
Why It Matters
The decision distinguishes disputes over an arbitration agreement’s existence, which courts decide, from disputes over its scope, which an arbitrator decides when the parties have clearly delegated that issue. Contracting parties therefore may delegate arbitrability through an agreement calling for AAA arbitration even without expressly citing the AAA rules.
The opinion also addresses coordination between divisions of Texas’s unitary Business Court. It emphasizes that litigation must yield when necessary to avoid deciding issues that the parties agreed an arbitrator should address first, while allowing limited injunctive relief to preserve the disputed property pending that determination.