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Campanile Investments LLC v. Westmoreland Equity Fund LLC

United States District Court, W.D. Texas, San Antonio Division

May 22, 2019

CAMPANILE INVESTMENTS LLC, JOAQUIN JUAN BOSCO GARZA MUGUERZA, Plaintiffs,
v.
WESTMORELAND EQUITY FUND LLC, ED RYAN, AMERICAN ESCROW AND SETTLEMENT SERVICES, BERNARD FELDMAN, ELIAS CORREA MENENDEZ, ALAN FELDMAN, LYDECKER, LEE, BERGA & DE ZAYAS, LLC, Defendants.

          ORDER

          ELIZABETH S. ("BETSY") CHESTNEY, UNITED STATES MAGISTRATE JUDGE

         Before the Court in the above-styled cause of action are Defendant Sandy Hutchens Motion to Compel Arbitration and Dismiss or to Stay [#98] and Defendant Bernard Feldman Motion to Compel Arbitration [#127]. The Court held a hearing on Defendant Hutchens's motion to compel arbitration on April 24, 2019, at which counsel for Plaintiffs appeared in person and Defendant Hutchens and Defendant Feldman, both of whom are proceeding pro se, appeared telephonically. At the hearing, the Court asked the parties to file supplemental briefing on Hutchens's motion. Subsequent to the hearing, Feldman filed his own motion to compel arbitration.

         In reviewing the two motions, the Court has considered the following written filings: Plaintiffs' Response to Ed Ryan a/k/a Sandy Hutchens' Motion to Compel Arbitration and Dismiss or Stay [#100], Plaintiffs' Second Supplement to their Response to Ed Ryan a/k/a Sandy Hutchens' Motion to Compel Arbitration and Dismiss or Stay [#125], Sandy Hutchens Reply to Plaintiffs' Second Supplement to Motion to Compel [#129], [1] and Plaintiffs' Response to Bernard Feldman's Motion to Compel Arbitration [#130].

         All pretrial matters in this case have been referred to the undersigned for disposition pursuant to Rules CV-72 and 1(c) of Appendix C of the Local Rules of the United States District Court for the Western District of Texas [#7]. The undersigned has authority to enter this order pursuant to 28 U.S.C. § 636(b)(1)(A).[2] For the reasons set forth below, the Court will deny Defendant Sandy Hutchens Motion to Compel Arbitration and Dismiss or to Stay [#98] and Defendant Bernard Feldman Motion to Compel Arbitration [#127].

         I. Procedural Background

         This case has had a lengthy procedural history, despite the fact that the Court is just now considering two motions to compel arbitration. Plaintiffs Campanile Investments LLC and Joaquin Juan Bosco Garza Muguerza originally filed this action on April 17, 2017 against Defendants Westmoreland Equity Fund (“Westmoreland”), Ed Ryan (“Hutchens”), American Escrow and Settlement Services (“AESS”), and Feldman regarding an “advance-fee loan scam” allegedly perpetrated by Defendants in connection with Plaintiffs' efforts to obtain financing for the purchase of a condominium in San Antonio, referred to as Four Oaks Tower. (Orig. Compl. [#1] at ¶ 1.) Plaintiffs allege that Westmoreland-a company solely owned and managed by Hutchens-agreed to loan Plaintiffs $7.5 million for the purchase of Four Oaks Tower, and Plaintiffs remitted $480, 935.00 in advance fees to Westmoreland and AESS (a now defunct Florida-based LLC owned by Feldman), but Westmoreland refused to disburse the loan funds, terminated the agreement, and has failed to return the advance fees. (Compl. [#1] at ¶ 2.) As a result, Plaintiffs allege that the seller terminated Plaintiffs' exclusive option to purchase Four Oaks Tower. (Id.)

         Plaintiffs filed an Amended Complaint on October 6, 2017, which added Elias Correa Menendez, Alan Feldman, and the law firm of Lydecker, Lee, Berga & De Zayas, LLC (“Lydecker”) as additional Defendants. (Am. Compl. [#15].) Plaintiffs alleged that Hutchens and Feldman engaged Lydecker and two of its attorneys Defendants Alan Feldman (Bernard Feldman's son) and Menendez to assist with the scam. (Id. at ¶ 48.) Plaintiffs filed a Second Amended Complaint on January 11, 2018, alleging claims of fraud, negligent misrepresentation, civil conspiracy, violations of the Racketeer Influenced and Corrupt Organizations Act (“RICO”), and conversion against all Defendants, as well as a claim of breach of contract against Westmoreland. (Id. at ¶¶ 57-94.) Lydecker, Alan Feldman, and Mendendez subsequently filed a motion to compel arbitration, which was dismissed as moot after Plaintiffs reached a settlement agreement with these Defendants [#50]. These Defendants were dismissed with prejudice from this lawsuit on May 4, 2018 [#62].

         Plaintiffs also reached a settlement in principle with Feldman and AESS and advised the Court of the same on March 29, 2018 [#51]. Issues arose with the finalization of the settlement agreement between Plaintiffs and Feldman, which resulted in the Court repeatedly extending the deadline for the filing of a stipulation of dismissal as to this Defendant [#63, #70]. The settlement agreement was never consummated, and Plaintiffs have resumed litigation against Feldman [#74]. On April 24, 2019, Plaintiffs filed their Third Amended Complaint, which is the live pleading in this case, to add causes of action for breach of contract against Westmoreland and for breach of the settlement agreement with Feldman and AESS.[3] (Third Am. Compl. [#115] at ¶¶ 89-92.)

         That leaves Hutchens and Westmoreland. Plaintiffs struggled to locate and serve Hutchens with process for the first year of this lawsuit, eventually moving for an order allowing alternative service via international mail at a new address for Hutchens in Ontario, Canada. The Court granted the motion on July 11, 2018 and ordered Plaintiffs to direct their service request to the Canadian Central Authority for Ontario in compliance with the Hague Convention [#70]. Hutchens was finally served on September 23, 2018 [#77], and Hutchens appeared in this action for the first time on October 15, 2018 [#80].[4] Hutchens filed the motion to compel arbitration currently before the Court five months later on March 15, 2019, arguing that a binding agreement requires Plaintiffs to arbitrate their claims against him before an arbitrator in Miami, Florida.

         Plaintiffs' response to the motion argues that the Court should not enforce the arbitration agreement because it was procured by fraud. Plaintiffs contend that Hutchens, a resident of Canada, failed to disclose (and has known since at least 2013) that he is barred from entering the United States by the U.S. Department of Homeland Security due to a prior criminal conviction and therefore has never been available to adjudicate any dispute arising between the parties in the chosen arbitral forum of Miami.

         Feldman filed his motion to compel arbitration, which is also addressed by this report and recommendation, on May 7, 2019, arguing that, although he was not a signatory to the arbitration agreement at issue, Plaintiffs should be compelled to arbitrate their claims against him under the doctrine of equitable estoppel. The two motions to compel arbitration are now ripe for the Court's review.

         II. Legal Standard

         Courts apply a two-step inquiry in determining whether the parties have agreed to arbitrate a claim. “The first is contract formation-whether the parties entered into any arbitration agreement at all. The second involves contract interpretation to determine whether this claim is covered by the arbitration agreement.” Kubala v. Supreme Prod. Servs., Inc., 830 F.3d 199, 201 (5th Cir. 2016) (emphasis in original). In the absence of a valid clause delegating the threshold issue of arbitrability to the arbitrator, both steps are questions for the Court. Id.

         Although there is a strong presumption favoring arbitration, the presumption arises only after the party seeking to compel arbitration proves that a valid arbitration agreement exists. J.M. Davidson, Inc. v. Webster, 128 S.W.3d 223, 227 (5th Cir. 2003). Hence, the party moving to compel arbitration bears the initial burden of proving the existence of a valid agreement to arbitrate. See Huckaba v. Ref-Chem, L.P., 892 F.3d 686, 688 (5th Cir. 2018). Once the moving party has met its initial burden, the burden shifts to the party resisting arbitration to assert a reason that the arbitration agreement is ...


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