United States: Fifth Circuit Allows Non-Signatories To Enforce Arbitration Agreement

The Fifth Circuit has affirmed an order compelling arbitration, despite the fact that the parties seeking to compel arbitration were not signatories to the relevant arbitration agreement.

The litigation arose out of a 1998 transaction in which Henry House purchased a home and real property from Jim Walter Homes, Inc. and Mid-State Trust IV. The sale contract contained an arbitration agreement under which the parties agreed to arbitrate any disputes "in accordance with the Comprehensive Arbitration Rules and Procedures administered by J●A●M●S/Endispute."

In 2016, Mr. House sued Green Tree Servicing, L.L.C. and Walter Investment Management Corporation (WIMC), alleging that they conspired with Jim Walter Homes and Mid-State Trust IV to induce Mr. House to enter into the 1998 agreement based on the false premise that he would get a properly constructed home. Green Tree and WIMC moved in federal court to compel arbitration. Mr. House argued that Green Tree and WIMC, as non-signatories to the arbitration agreement, lacked standing to enforce it, but the district court found that they had standing under Mississippi's intertwined claims test and that the arbitration agreement, by incorporating the JAMS rules, delegated questions of arbitrability to the arbitrator.

On appeal, Mr. House argued (1) that the intertwined claims test did not apply because Green Tree and WIMC did not exist at the time the arbitration agreement was executed; (2) that Mr. House, as an unsophisticated party, could not agree to delegate the question of arbitrability by agreeing to the JAMS rules; and (3) that the arbitration agreement was invalid because it was fraudulently induced.

The court quickly disposed of the second argument, refusing to consider it at all because Mr. House had not raised the issue of his lack of sophistication before the trial court.

As regards the first, the court found that the exact date when the entities formed was irrelevant. Mississippi's intertwined claims test allows a non-signatory to enforce an arbitration agreement against a party who makes "'allegations of substantially interdependent and concerted misconduct' between a non-signatory and a signatory that have a close legal relationship." The court found that this was satisfied by Mr. House's complaint, which alleged that Green Tree and WIMC were coconspirators and joint venturers with the parties to the 1998 arbitration agreement in a scheme to get Mr. House to enter into that transaction.

Finally, the court held that when the parties have delegated questions of arbitrability to the arbitrator, a court may only find that the arbitration agreement was procured by fraud if the party seeking to avoid arbitration challenges the validity of the arbitration agreement specifically, rather than the contract as a whole. Mr. House did not do that, however, instead alleging generally that his signature on the 1998 sales contract and related documents was procured through fraud, which the court found was not specific enough to take this question out of the hands of the arbitrator.

Green Tree Servicing, L.L.C., et al. v. House, et al., (5th Cir. May 14, 2018)

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.