Taylor Morrison of Texas, Inc. and Taylor Woodrow Communities-League City, Ltd. v. Andrew Kohlmeyer and April Kohlmeyer ( 2021 )


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  • Opinion issued August 17, 2021
    In The
    Court of Appeals
    For The
    First District of Texas
    ————————————
    NO. 01-19-00519-CV
    ———————————
    TAYLOR MORRISON OF TEXAS, INC. AND TAYLOR WOODROW
    COMMUNITIES—LEAGUE CITY, LTD., Appellants
    V.
    ANDREW KOHLMEYER AND APRIL KOHLMEYER, Appellees
    On Appeal from the 10th District Court
    Galveston County, Texas
    Trial Court Case No. 18-CV-1285
    OPINION ON REHEARING
    Appellants Taylor Morrison of Texas, Inc. and Taylor Woodrow
    Communities—League City, Ltd. (collectively, “Taylor Morrison”) filed a motion
    for rehearing of this Court’s December 8, 2020 opinion.1 We grant the motion for
    rehearing, and we withdraw our December 8, 2020 opinion and judgment. Without
    rebriefing and oral argument, we issue this opinion and judgment in their stead. See
    TEX. R. APP. P. 49.3. The disposition remains the same.
    This is an accelerated appeal from the trial court’s order denying arbitration.
    Andrew and April Kohlmeyer own a home built by Taylor Morrison. They sued for
    violations of the Texas Deceptive Trade Practices Act (DTPA), common-law breach
    of the implied warranties of habitability and workmanship, and negligent
    construction. Taylor Morrison filed a plea in abatement and moved to compel
    arbitration under a purchase agreement with the original owner, who was the
    predecessor-in-interest to the Kohlmeyers’ predecessor-in-interest. The trial court
    denied the motion to compel arbitration and the plea in abatement.
    1
    Two justices who served on the panel on original submission, Justice Evelyn Keyes
    and Justice Russell Lloyd, are no longer sitting. Texas Rule of Appellate Procedure
    49.3 provides:
    Unless two justices who participated in the decision of the case agree
    on the disposition of the motion for rehearing, the chief justice of the
    court of appeals must assign a justice to replace any justice who
    participated in the panel decision but cannot participate in deciding
    the motion for rehearing. If rehearing is granted, the court or panel
    may dispose of the case with or without rebriefing and oral argument.
    TEX. R. APP. P. 49.3. Pursuant to Rule 49.3, Justice April Farris and Justice
    Veronica Rivas-Molloy have been assigned to the panel for the rehearing.
    2
    On appeal, Taylor Morrison argues that the trial court abused its discretion
    because the Kohlmeyers, although nonsignatories to the purchase agreement, were
    subject to the arbitration provision in the purchase agreement under the theories of
    direct benefits estoppel and implied assumption.
    We affirm.
    Background
    In 2013, Jason and Amanda Davis entered into a purchase agreement with
    Taylor Morrison for a house to be built at 4835 Piares Lane in League City, Texas.
    The purchase agreement expressly provided a one-year limited warranty. Taylor
    Morrison disclaimed the existence of any other warranty, and the Davises waived
    any other warranty.2 The purchase agreement also prohibited the buyer from
    2
    Paragraph 10 provided:
    b. Disclaimer and Buyer Waiver of Express and Implied Warranties: SELLER
    EXPRESSLY DISCLAIMS, AND BUYER HEREBY WAIVES, ANY
    WARRANTIES, EXPRESS OR IMPLIED, OTHER THAN THE LIMITED
    WARRANTY, INCLUDING, WITHOUT LIMITATION, ANY WARRANTIES
    OF MERCHANTABILITY, HABITABILITY, QUALITY OF CONSTRUCTION,
    OR FITNESS FOR A PARTICULAR PURPOSE, WITH RESPECT TO THE
    PROPERTY AND THE SUBDVISION/COMMUNITY IN WHICH THE
    PROPERTY IS LOCATED. BUYER ACKNOWLEDGES THAT OTHER THAN
    THIS LIMITED WARRANTY, SELLER IS MAKING NO OTHER
    REPRESENTATIONS, PROMISES, OR WARRANTIES OF ANY KIND,
    INCLUDING WITHOUT LIMITATION, ANY EXPRESS OR IMPLIED
    WARRANTIES OF MERCHANTABILITY, HABITABILITY, QUALITY OF
    CONSTRUCTION, OR FITNESS FOR A PARTICULAR PURPOSE, WITH
    RESPECT TO THE PROPERTY OR THE COMMUNITY. IF ANY PROVISION
    OF THIS DISCLAIMER AND BUYER WAIVER OF EXPRESS AND IMPLIED
    WARRANTIES SHALL BE DETERMINED TO BE UNENFORCEABLE OR
    3
    assigning the agreement “without prior written consent of the Seller, which consent
    may be granted or withheld by Seller in Seller’s sole and absolute discretion. . . .
    This Purchase Agreement shall bind the heirs, executors, administrators, and
    successors of the parties, and their assigns (subject to the limitations stated above).”
    The purchase agreement required that disputes be settled by binding
    arbitration under the Federal Arbitration Act (“FAA”), stating that the parties had
    waived their rights “to have disputes litigated in a court or jury trial.” The first page
    of the agreement referred to “Paragraph 11,” which provided for mandatory binding
    arbitration of, among other things, “any dispute arising out of or relating to the terms
    of this purchase agreement or the planning, design, engineering, grading,
    construction or other development of the property.”
    11) DISPUTE RESOLUTION—ARBITRATION:
    ANY AND ALL CLAIMS, CONTROVERSIES, BREACHES OR
    DISPUTES BY OR BETWEEN THE PARTIES HERETO, ARISING
    OUT OF OR RELATED TO THIS PURCHASE AGREEMENT, THE
    PROPERTY, THE SUBDIVISION OR COMMUNITY OF WHICH
    VOID AS AGAINST PUBLIC POLICY, THEN THE REMAINING
    PROVISIONS OF THIS DISCLAIMER AND BUYER WAIVER OF EXPRESS
    AND IMPLIED WARRANTIES SHALL BE DEEMED TO BE SEVERABLE
    THEREFROM AND ENFORCEABLE ACCORDING TO THEIR TERMS, AND
    BUYER SHALL BE DEEMED TO HAVE WAIVED ANY WARRANTIES,
    EXPRESS OR IMPLIED OTHER THAN THE LIMITED WARRANTY
    INCLUDING, WITHOUT LIMITATION, ANY WARRANTIES OF
    MERCHANTABILITY, HABITABILITY, QUALITY OF CONSTRUCTION, OR
    FITNESS FOR A PARTICULAR PURPOSE, WITH RESPECT TO THE
    PROPERTY AND THE SUBDIVISION/COMMUNITY IN WHICH THE
    PROPERTY IS LOCATED TO THE FULLEST EXTENT PERMITTED BY
    LAW.
    4
    THE PROPERTY IS A PART . . . WHETHER SUCH DISPUTE IS
    BASED ON CONTRACT, TORT, STATUTE, OR EQUITY,
    INCLUDING WITHOUT LIMITATION, ANY DISPUTE OVER . . .
    (f) ALLEGATIONS OF LATENT OR PATENT DESIGN OR
    CONSTRUCTION DEFECTS, . . . (g) THE PROPERTY, INCLUDING
    WITHOUT LIMITATION, THE . . . DESIGN . . . OF THE
    PROPERTY, (h) DECEPTIVE TRADE PRACTICES . . . . 3
    In March 2016, the Davises sold the property to Gerald Morris Strong and his
    wife Peggy Strong, together with Rachel DeLeon and her husband Benjamin
    DeLeon. In September 2016, they in turn sold the property to Andrew Kohlmeyer,
    3
    The agreement further stated:
    NOTICE: BY INITIALING IN THE SPACE BELOW, BUYER
    AND SELLER AGREE TO HAVE ANY DISPUTE ARISING OUT
    OF THE MATTERS INCLUDED IN THIS ARBITRATION
    AGREEMENT (PARAGRAPH 11 OF THIS PURCHASE
    AGREEMENT)     ENTITLED    “DISPUTE   RESOLUTION–
    ARBITRATION” DECIDED BY NEUTRAL ARBITRATION IN
    ACCORDANCE WITH THE FEDERAL ARBITRATION ACT,
    AND BUYER AND SELLER ARE GIVING UP ANY RIGHTS
    BUYER AND SELLER MIGHT POSSESS TO HAVE THE
    DISPUTE LITIGATED IN A COURT OR JURY TRIAL BY
    INITIALING IN THE SPACE BELOW BUYER AND SELLER
    ARE GIVING UP THEIR RESPECTIVE JUDICIAL RIGHTS TO
    DISCOVERY AND APPEAL, UNLESS THOSE RIGHTS ARE
    SPECIFICALLY INCLUDED IN THIS ARBITRATION
    AGREEMENT. IF BUYER OR SELLER REFUSES TO SUBMIT
    TO ARBITRATION AFTER AGREEING TO THIS PROVISION,
    BUYER OR SELLER MAY BE COMPELLED TO ARBITRATE
    UNDER THE FEDERAL ARBITRATION ACT. THE PARTIES’
    AGREEMENT TO THIS ARBITRATION PROVISION IS
    VOLUNTARY. I/WE HAVE READ AND UNDERSTAND THE
    FOREGOING AND AGREE TO SUBMIT ALL DISPUTES
    AR1SING    OUT   OF    THE    MATTERS    INCLUDED
    IN THIS PARAGRAPH ENTITLED “DISPUTE RESOLUTION
    ARBITRATION” TO NEUTRAL, BINDING ARBITRATION.
    5
    “a married person.” Two years later, in August 2018, the Kohlmeyers sent Taylor
    Morrison a demand letter, asserting that the house had “a substantial amount of mold
    growth throughout resulting from numerous water and moisture sources caused by
    construction defects.” The following month, the Kohlmeyers filed the underlying
    lawsuit.
    Taylor Morrison filed a plea in abatement and a motion to compel arbitration
    asserting that, although the Kohlmeyers were nonsignatories to the purchase
    agreement, they were nevertheless bound by it under the doctrines of equitable or
    direct benefits estoppel and implied assumption. The trial court initially granted the
    motion to compel arbitration, but, on reconsideration, the trial court denied the plea
    in abatement and request for arbitration. Taylor Morrison appealed.
    Analysis
    On appeal, Taylor Morrison argues that the trial court abused its discretion by
    denying the motion to compel arbitration and by denying the plea in abatement.
    Taylor Morrison asserts that the arbitration provision from the original purchase
    agreement with the Davises applies to this case and requires arbitration under the
    FAA.
    I.     Standard of review
    We review a trial court’s ruling on a motion to compel arbitration for an abuse
    of discretion. In re Labatt Food Serv., L.P., 
    279 S.W.3d 640
    , 642–43 (Tex. 2009);
    6
    IPFS Corp. v. Lopez, No. 01-18-00145-CV, 
    2018 WL 6175119
    , at *2 (Tex. App.—
    Houston [1st Dist.] Nov. 27, 2018, no pet.) (mem. op.). Although we defer to a trial
    court’s factual findings, we review the trial court’s legal determinations de novo,
    including questions of contract interpretation. See Labatt Food Serv., 279 S.W.3d at
    642–43; see also Barrow-Shaver Res. Co. v. Carrizo Oil & Gas, Inc., 
    590 S.W.3d 471
    , 479 (Tex. 2019) (appellate courts construe contracts under de novo standard of
    review).
    II.   Enforceability of arbitration agreements
    Arbitration is a creature of contract, and parties seeking to compel arbitration
    must rely upon an agreement to arbitrate. In re Merrill Lynch Tr. Co. FSB, 
    235 S.W.3d 185
    , 192 (Tex. 2007) (orig. proceeding); Speedemissions, Inc. v. Bear Gate,
    L.P., 
    404 S.W.3d 34
    , 42 (Tex. App.—Houston [1st Dist.] 2013, no pet.). A party
    “may be compelled to arbitrate only if it has entered into a valid arbitration
    agreement and if the claims raised fall within that agreement’s scope.”
    Speedemissions, 404 S.W.3d at 42 (citing In re Kellogg Brown & Root, Inc., 
    166 S.W.3d 732
    , 737 (Tex. 2005) (orig. proceeding)). Ordinarily, “parties must sign
    arbitration agreements before being bound by them.” In re Rubiola, 
    334 S.W.3d 220
    ,
    224 (Tex. 2011) (orig. proceeding) (citing Grigson v. Creative Artists Agency,
    L.L.C., 
    210 F.3d 524
    , 528 (5th Cir. 2000)). “Courts may not order parties to arbitrate
    7
    unless they have agreed to do so.” Stanford Dev. Corp. v. Stanford Condo. Owners
    Ass’n, 
    285 S.W.3d 45
    , 48 (Tex. App.—Houston [1st Dist.] 2009, no pet.).
    “Texas law has long recognized that nonparties may be bound to a contract
    under various legal principles,” and “contract and agency law may bind a nonparty
    to an arbitration agreement.” In re Weekley Homes, L.P., 
    180 S.W.3d 127
    , 131 (Tex.
    2005). “Nonsignatories to an agreement subject to the FAA may be bound to an
    arbitration clause when rules of law or equity would bind them to the contract
    generally.” Santander Consumer USA, Inc. v. Mata, No. 03-14-00782-CV, 
    2017 WL 1208767
    , at *2 (Tex. App.—Austin Mar. 29, 2017, no pet.) (mem. op.) (citing Labatt
    Food Serv., 279 S.W.3d at 643). Under “common principles of contract and agency
    law,” a nonsignatory to a contract may be bound to an arbitration agreement within
    it under six theories: “(1) incorporation by reference, (2) assumption, (3) agency, (4)
    alter ego, (5) equitable estoppel, and (6) third-party beneficiary.” Kellogg Brown &
    Root, 166 S.W.3d at 739; accord D.R. Horton-Emerald, Ltd. v. Mitchell, No. 01-17-
    00426-CV, 
    2018 WL 542403
    , at *3 (Tex. App.—Houston [1st Dist.] Jan. 25, 2018,
    no pet.) (mem. op.).
    A party seeking to compel arbitration under the FAA must establish the
    existence of a valid arbitration agreement and that the claims at issue fall within the
    scope of that agreement. Venture Cotton Co-op. v. Freeman, 
    435 S.W.3d 222
    , 227
    (Tex. 2014); Rubiola, 334 S.W.3d at 223 (citing Kellogg Brown & Root, 
    166 S.W.3d
                                           8
    at 737). When appropriate, the party seeking arbitration must also establish “that the
    arbitration agreement binds a nonsignatory.” Santander Consumer USA, 
    2017 WL 1208767
    , at *2. After the proponent of arbitration has made these showings, “the
    burden shifts to the party opposing arbitration to raise an affirmative defense to the
    agreement’s enforcement.” Venture Cotton Co-op., 435 S.W.3d at 227.
    III.   Taylor Morrison has not shown the existence of a valid arbitration
    agreement that is binding on the Kohlmeyers.
    The central issue in this appeal is whether the arbitration provision in the
    original purchase agreement signed by the Davises is binding upon the Kohlmeyers.4
    It is undisputed that the Kohlmeyers are nonsignatories to the original purchase
    agreement. Therefore, they can be required to arbitrate their claims only if some rule
    of law or equity binds them to the purchase agreement generally. See Santander
    Consumer USA, 
    2017 WL 1208767
    , at *2 (citing Labatt Food Serv., 279 S.W.3d at
    643). It is also undisputed that the following four of the six theories by which a
    nonsignatory can be bound by a contract do not apply in this case: incorporation by
    reference, agency, alter ego, and third-party beneficiary. See Kellogg Brown & Root,
    166 S.W.3d at 739; D.R. Horton-Emerald, 
    2018 WL 542403
    , at *3. In the trial court
    4
    The Kohlmeyers also dispute that their claims, which they maintain are not contract
    claims, fall under the scope of the arbitration agreement. Because Taylor Morrison
    has not demonstrated that the Kohlmeyers are bound by the arbitration provision in
    the original purchase agreement, we do not address the second element needed to
    compel arbitration—that the claims are within the scope of the arbitration provision.
    9
    and on appeal, Taylor Morrison has relied on the remaining two theories—equitable
    estoppel and implied assumption—to support its argument that the Kohlmeyers
    should be required to arbitrate their claims.
    Taylor Morrison argues that the Kohlmeyers’ claims seek a direct benefit of
    the original purchase agreement in terms of the quality of workmanship and
    construction. Taylor Morrison also argues that the Kohlmeyers are bound to the
    arbitration agreement under a theory of implied assumption. We consider each of
    these theories by which Taylor Morrison seeks to bind the Kohlmeyers to the
    original purchase agreement, which they did not sign.
    A.     Equitable estoppel, specifically direct benefits estoppel, is not
    applicable.
    “Under ‘direct benefits estoppel,’ a non-signatory plaintiff seeking the
    benefits of a contract is estopped from simultaneously attempting to avoid the
    contract’s burdens, such as the obligation to arbitrate disputes.” Kellogg Brown &
    Root, 166 S.W.3d at 739; see D.R. Horton-Emerald, 
    2018 WL 542403
    , at *6. Direct
    benefits estoppel can bind a nonsignatory to an arbitration agreement in two ways.
    See D.R. Horton-Emerald, 
    2018 WL 542403
    , at *6. First, when a nonsignatory
    plaintiff alleges liability based solely on contract, he subjects himself to the
    contract’s terms, including arbitration provisions. G.T. Leach Builders, LLC v.
    Sapphire V.P., LP, 
    458 S.W.3d 502
    , 527 (Tex. 2015); see D.R. Horton-Emerald,
    
    2018 WL 542403
    , at *6. Second, a nonsignatory may be bound by an arbitration
    10
    provision when he has sought or obtained a benefit from the contract itself. Weekley
    Homes, 180 S.W.3d at 132. In this situation, direct benefits estoppel depends “on the
    nonparty’s conduct during the performance of a contract.” Id. at 132–33. For
    example, “a firm that uses a trade name pursuant to an agreement containing an
    arbitration clause cannot later avoid arbitration by claiming to have been a
    nonparty.” Id. at 133.
    Taylor Morrison maintains that the Kohlmeyers sued based on the original
    purchase agreement, and therefore, the first type of direct benefits estoppel requires
    them to arbitrate.
    We consider the substance of a claim to determine whether it seeks to obtain
    the benefits of or to enforce the terms of a contract containing an arbitration
    provision. See id. at 131–32; D.R. Horton-Emerald, 
    2018 WL 542403
    , at *6. It is
    “not enough” that “the party’s claim ‘relates to’ the contract that contains the
    arbitration agreement,” it must “depend on the existence” of the contract and be
    “unable to ‘stand independently’ of it.” G.T. Leach Builders, 458 S.W.3d at 527–28
    (quoting Meyer v. WMCO-GP, LLC, 
    211 S.W.3d 302
    , 307 (Tex. 2006), then Kellogg
    Brown & Root, 166 S.W.3d at 739–40). The alleged liability must “arise[] solely
    from the contract or must be determined by reference to it.” G.T. Leach Builders,
    458 S.W.3d at 529 (quoting Weekley Homes, 180 S.W.3d at 132).
    11
    Whether a stranger to a contract may be compelled to arbitrate under a
    provision in the contract depends on the facts of the claims alleged. See Weekley
    Homes, 180 S.W.3d at 131–32. For example, nonsignatory adult children were held
    to the arbitration provision of a contract when they joined their parents’ lawsuit for
    breach of contract related to the purchase of a mobile home in which the adult
    children lived. See In re FirstMerit Bank, N.A., 
    52 S.W.3d 749
    , 755–56 (Tex. 2001).
    Similarly, a condo association that sued the development company on behalf of its
    members was also bound to a contractual arbitration provision because it sued for
    breach of contractual duties set forth in the contracts with the condo owners. See
    Stanford Dev. Corp., 
    285 S.W.3d at 49
    . In contrast, subsequent purchasers were not
    bound by arbitration provisions in the original purchase agreements under the theory
    of direct benefits estoppel simply because the houses were built pursuant to the
    original purchase agreements. D.R. Horton-Emerald, 
    2018 WL 542403
    , at *6; Toll
    Austin, TX, LLC v. Dusing, No. 03-16-00621-CV, 
    2016 WL 7187482
    , at *3 (Tex.
    App.—Austin Dec. 7, 2016, no pet.) (mem. op.).
    1.     The Kohlmeyers do not allege a breach of any provision of the
    original purchase agreement.
    Taylor Morrison argues that the Kohlmeyers are bound by the arbitration
    provision because they have alleged only contract claims. In particular, it contends
    that the Kohlmeyers allege defects arising from the initial construction of the house.
    Taylor Morrison asserts that the house was built to specific standards, which were
    12
    identified in the express limited warranty that was incorporated by reference in the
    purchase agreement. Taylor Morrison contends that because the purchase agreement
    and limited warranty were the “genesis of all duties regarding construction of the
    home,” the Kohlmeyers’ claims necessarily arise from the contract. Taylor Morrison
    maintains that because the Kohlmeyers seek a direct benefit of the original purchase
    agreement, they are estopped to deny the applicability of the arbitration provision.
    In their live pleading, the Kohlmeyers alleged violations of the Deceptive
    Trade Practices Act, breach of the implied warranty of habitability, breach of the
    implied warranty of good workmanship, and negligent construction. All of these
    claims are based on their allegations that their home “has numerous construction and
    design defects that cause unacceptable levels of moisture and water to develop”
    inside the home “causing substantial mold growth.” The Kohlmeyers did not allege
    that Taylor Morrison breached any specific provision of the original purchase
    agreement. They do not allege that the house was not built in accordance with the
    contract. They allege that a defect in the construction has led to substantial mold
    growth. Their pleading does not refer to the original purchase agreement or seek to
    enforce its terms, nor does it allege liability that arises solely from the original
    purchase agreement or that must be determined by reference to it. See Kellogg Brown
    & Root, 166 S.W.3d at 739 (party who sues to enforce the terms of a contract may
    be compelled to comply with an arbitration provision in that contract). Rather, the
    13
    Kohlmeyers’ claims allege liability arising from general obligations imposed by
    common-law negligence and relevant statutes, such as the DTPA. See Weekley
    Homes, 180 S.W.3d at 132 (“Claims must be brought on the contract (and arbitrated)
    if liability arises solely from the contract or must be determined by reference to it.
    On the other hand, claims can be brought in tort (and in court) if liability arises from
    general obligations imposed by law.”).
    In D.R. Horton—Emerald,5 the Mitchells were subsequent purchasers of a
    home that was build pursuant to a purchase agreement between the homebuilder
    (“DRH”) and the initial purchasers, the Jinaduses. 
    2018 WL 542403
    , at *1. The
    Mitchells later discovered foundation problems and sued for defective construction.
    
    Id.
     DRH moved to compel arbitration under a provision in the original purchase
    agreement between it and the Jinaduses. Id. at 2. The trial court denied arbitration.
    Id.
    5
    In their brief, the appellants attempted to distinguish D.R. Horton–Emerald based
    on its holding that nonsignatories are not bound by an arbitration provision solely
    by virtue of being successors in interest. See Appellant’s Brief at 16 (“Appellants
    do not seek to coerce Appellees into arbitration simply because they, ‘as subsequent
    purchasers of the property, are bound as successors in interest to the terms of the
    [“Purchase Agreement”].’”) (citing D.R. Horton-Emerald v. Mitchell, No. 01-17-
    00426-CV, 
    2018 WL 542403
     at *3–*4 (Tex. App.—Houston [1st Dist.] Jan. 25,
    2018, no pet.) (mem. op.). D.R. Horton-Emerald addressed the successors-in-
    interest argument as well as arguments that the subsequent purchasers were bound
    by the arbitration agreement under the doctrines of direct benefits estoppel and
    implied assumption. See D.R. Horton-Emerald, 
    2018 WL 542403
    , at *4–6 (implied
    assumption) & *6–7 (direct benefits estoppel).
    14
    On appeal, DRH argued that the Mitchells’ claim existed only “because
    DRH’s obligations and duties regarding the quality of construction” were created by
    the original purchase agreement it had with the Jinaduses. We disagreed, noting that
    “the supreme court has rejected the type of ‘but for’ argument asserted by DRH,
    recognizing that ‘the fact that the [plaintiff’s] claims would not have arisen but for
    the existence of the [contract containing the arbitration agreement] is not enough to
    establish equitable estoppel.’” 
    Id.
     (quoting G.T. Leach Builders, 458 S.W.3d at 529).
    For the same reasons, Taylor Morrison’s argument that direct benefits
    estoppel applies because the purchase agreement and limited warranty were the
    “genesis of all duties regarding construction” of the Kohlmeyers’ house fails. See
    G.T. Leach Builders, 458 S.W.3d at 527–28; D.R. Horton—Emerald, 
    2018 WL 542403
    , at *7.
    2.     The economic loss rule cannot be applied to bind the Kohlmeyers
    to a contract they never signed.
    Taylor Morrison argues that the Kohlmeyers’ claims seek recovery of
    damages to the house itself, which is “a claim for economic loss recoverable in
    contract alone.” It suggests that because the Kohlmeyers seek to recover damages to
    the house itself, and the house was the subject of the original purchase agreement,
    the Kohlmeyers’ claims are contract claims. We disagree. As we have explained, we
    determine the nature of a claim by looking to its substance.
    15
    Taylor Morrison’s argument about the applicability of the economic loss rule
    is misplaced. See, e.g., Jim Walter Homes, Inc. v. Reed, 
    711 S.W.2d 617
    , 618 (Tex.
    1986) (economic loss rule). The economic loss rule can prevent a plaintiff from
    obtaining recovery in both tort and contract when he seeks damages for a loss to the
    object of the contract.6 See 
    id.
     In this case, the question is whether the Kohlmeyers,
    who did not sign the purchase agreement with the arbitration provision, are bound
    by that contract under rules of law or equity. The economic loss rule “has no
    application in the appeal before us because it is not one of the six exceptions to the
    general rule that a non-signatory is not bound by an arbitration clause.” Toll Austin,
    
    2016 WL 7187482
    , at *4 (citing Kellogg Brown & Root, 166 S.W.3d at 739).
    3.     The Kohlmeyers’ claims for breach of the implied warranties of
    habitability and good workmanship do not arise solely from the
    original purchase agreement.
    Taylor Morrison argues that the direct benefits estoppel theory applies
    because the Kohlmeyers pleaded claims for breach of express or implied warranties.
    6
    “The economic loss rule generally precludes recovery in tort for economic losses
    resulting from a party’s failure to perform under a contract when the harm consists
    only of the economic loss of a contractual expectancy.” Chapman Custom Homes,
    Inc. v. Dallas Plumbing Co., 
    445 S.W.3d 716
    , 718 (Tex. 2014); see LAN/STV v.
    Martin K. Eby Constr. Co., Inc., 
    435 S.W.3d 234
    , 243 & n.2 (Tex. 2014); Jim Walter
    Homes, Inc. v. Reed, 
    711 S.W.2d 617
    , 618 (Tex. 1986). The economic loss rule does
    not bar all tort claims that arise from a contractual setting. See Chapman Custom
    Homes, 445 S.W.3d at 718; Sharyland Water Supply Corp. v. City of Alton, 
    354 S.W.3d 407
    , 415 (Tex. 2011) (party cannot “avoid tort liability to the world simply
    by entering into a contract with one party”; “economic loss rule does not swallow
    all claims between contractual and commercial strangers”).
    16
    Taylor Morrison relies on Gupta v. Ritter Homes, 
    646 S.W.2d 168
     (Tex. 1983), for
    the proposition that the implied warranties of habitability and good workmanship
    are implicit in the contract between a builder and the original purchaser and they are
    automatically assigned to the subsequent purchaser. It also relies on Centex Homes
    v. Buecher, 
    95 S.W.3d 266
     (Tex. 2002), for the proposition that the implied warranty
    of good workmanship is not independent of the original purchase agreement.
    In Gupta, the Texas Supreme Court considered whether the there is an implied
    warranty under the DTPA from the sale of a used house. 646 S.W.2d at 168. The
    supreme court held that an implied warranty of habitability extends to subsequent
    purchasers to “cover latent defects not discoverable by a reasonably prudent
    inspection of the building at the time of sale.” Id. at 169. The court explained: “As
    between the builder and the owner, it matters not whether there has been an
    intervening owner. The effect of the latent defect on the subsequent owner is just as
    great as on the original buyer and the builder is no more able to justify his improper
    work as to a subsequent owner than to the original buyer.” Id. Gupta characterized
    an implied warranty as a contract remedy that is automatically assigned to a
    subsequent purchaser.7 Id.
    7
    The continued vitality of Gupta has been called into question by PPG Industries,
    Inc. v. JMB/Houston Centers Partners Ltd. Partnership, 
    146 S.W.3d 79
    , 87 & n.27
    (Tex. 2004) (noting that Amstadt v. U.S. Brass Corp., 
    919 S.W.2d 644
    , 650 (Tex.
    1996), “appears to overrule Gupta v. Ritter Homes, Inc., in which we held an implied
    warranty asserted under the DTPA could be brought by a subsequent purchaser”);
    17
    In Centex Homes, the Texas Supreme Court considered whether a
    homebuilder can disclaim the implied warranties of habitability and good and
    workmanlike construction that accompany a new home sale. 95 S.W.3d at 267.
    Centex Homes distinguished the two implied warranties. Id. at 273. The court
    explained that the implied warranty of habitability is a type of “strict liability” that
    protects the purchaser “from those defects that undermine the very basis of the
    bargain.” Id. The implied warranty of habitability “requires the builder to provide a
    house that is safe, sanitary, and otherwise fit for human habitation.” Id. The Supreme
    Court characterized the implied warranty of good workmanship as a “gap-filler” that
    “applies unless and until the parties express a contrary intention.” Id. “It “requires
    the builder to construct the home in the same manner as would a generally proficient
    builder engaged in similar work and performing under similar circumstances.” Id.
    The Kohlmeyers’ second amended petition alleged that Taylor Morrison
    breached the DTPA by “breach of an expressed or implied warranty” and by
    violating multiple “laundry list” items. See TEX. BUS. & COM. CODE § 17.46(b). They
    but see PPG Indus., 146 S.W.3d at 102 (Justice O’Neill, concurring in part and
    dissenting in part) (opining that Amstadt was “entirely consistent” with Gupta, and
    quoting Gupta: “As between the builder and owner, it matters not whether there has
    been an intervening owner. The effect of the latent defect on the subsequent owner
    is just as great as on the original buyer and the builder is no more able to justify his
    improper work as to a subsequent owner than to the original buyer.”).
    18
    also pleaded claims for breach of the implied warranties of habitability and good
    workmanship.8
    “Implied warranties are created by operation of law and are grounded more in
    tort than contract.” JCW Elecs., Inc. v. Garza, 
    257 S.W.3d 701
    , 704–05 (Tex. 2008)
    (quoting La Sara Grain Co. v. First Nat’l Bank, 
    673 S.W.2d 558
    , 565 (Tex. 1984));
    cf. Centex Homes, 95 S.W.3d at 274–75. The Supreme Court has observed that
    “[c]auses of action for breach of implied warranties”—such as the implied
    warranties of habitability and good workmanship—“defy simple categorization
    because an implied warranty is ‘a freak hybrid born of the illicit intercourse of tort
    and contract.’” Nghiem v. Sajib, 
    567 S.W.3d 718
    , 723 (Tex. 2019) (quoting JCW
    Elecs., 
    257 S.W.3d 701
    , 705 (Tex. 2008) (quoting William L. Prosser, The Assault
    Upon the Citadel (Strict Liability to the Consumer), 69 YALE L.J. 1099, 1126
    (1960))). They can “have feet in both camps, created by operation of law in
    connection with a contract.” Nghiem, 567 S.W.3d at 723. (“The implied warranty of
    workmanlike repairs is a creature of the common law,” and it can “be asserted in a
    common-law action.”).
    The Kohlmeyers’ claims for breach of the implied warranties of habitability
    and good workmanship do not “arise[] solely from the contract” nor must they “be
    8
    On appeal, the Kohlmeyers have indicated that they have not brought an express
    warranty claim, and we see no such claim independent of the DTPA claim in their
    live pleading.
    19
    determined by reference to it.” Id. (quoting G.T. Leach Builders, 458 S.W.3d at 529).
    The implied warranties of habitability and good workmanship arise by operation of
    law. See JCW Elecs., 257 S.W.3d at 704–05. While the question of whether Taylor
    Morrison validly disclaimed the implied warranty of good workmanship may be
    determined by reference to the original purchase agreement, the warranty itself does
    not arise solely from the contract.
    4.     The Kohlmeyers’ claim for damages to possessions in their house.
    Taylor Morrison acknowledges that direct benefits estoppel does not apply
    when a claim does not seek a direct benefit of the contract, but it relies on general
    duties imposed by law or equity. And it concedes that the Kohlmeyers’ claim for
    damages to goods in their residence does not seek a direct benefit of the purchase
    agreement. However, it argues that this claim is collateral to their claim for damages
    to the house itself and it cannot transform a contract claim into a tort claim.
    We agree that the Kohlmeyers’ claims for their possessions that were
    damaged inside the house cannot transform a contract claim into a tort claim.
    However, we have already concluded that the Kohlmeyers’ claims for damages to
    the house itself did not seek a direct benefit of the purchase agreement or state a
    contract claim.
    We conclude that direct benefits estoppel does not apply.
    20
    B.     Implied assumption is not applicable.
    Taylor Morrison also argues that the doctrine of implied assumption requires
    the Kohlmeyers to arbitrate their claims because the implied warranties of
    habitability and good workmanship were implicit in the original purchase agreement
    and were automatically assigned to them under Gupta. In addition, it argues that the
    benefit of these implied warranties was entwined with the obligation to arbitrate
    under the original purchase agreement. We disagree.
    “Generally, a party cannot be held liable under another party’s contract
    without an express or implied assumption of the obligations of that contract.”
    NextEra Retail of Tex., LP v. Inv’rs Warranty of Am., Inc., 
    418 S.W.3d 222
    , 226
    (Tex. App.—Houston [1st Dist.] 2013, pet. denied). It is undisputed in this case that
    the Kohlmeyers did not expressly assume obligations under the original purchase
    agreement. See 
    id.
     (“[T]here must be actual promissory words, or words of
    assumption, on the part of the assignee for there to be an express assumption of
    contractual obligations.”). Taylor Morrison argues that the Kohlmeyers impliedly
    assumed both the benefits and obligations of the original purchase agreement.
    “[T]he assignee of a contract is not responsible for the assignor’s obligations
    unless he expressly or impliedly assumes them.” 
    Id.
     “An implied assumption of
    obligations may arise ‘when the benefit received by the assignee is so entwined with
    the burden imposed by the assignor’s contract that the assignee is estopped from
    21
    denying assumption and the assignee would otherwise be unjustly enriched.’” Id. at
    228 (quoting Jones v. Cooper Indus., Inc., 
    938 S.W.2d 118
    , 125 (Tex. App.—
    Houston [14th Dist.] 1996, writ denied)); see D.R. Horton-Emerald, 
    2018 WL 542403
    , at *4 (holding that claims for warranty services were not entwined with
    purchase contract when limited warranty was a separate instrument and claims did
    not refer to purchase contract); Toll Austin, 
    2016 WL 7187482
    , at *4 (rejecting
    implied assumption of obligations in purchase contract when contract terms
    prohibited assignment).
    “[T]he ‘assumption’ theory by which non-signatories may be bound to
    arbitration agreements only applies to contracts that have been assigned from one
    party to another.” Toll Austin, 
    2016 WL 7187482
    , at *4. Nothing in the record
    indicates that there was an assignment of the original purchase agreement to the
    Kohlmeyers. In addition, the original purchase agreement prohibited assignment
    without prior written consent from Taylor Morrison: “This Purchase Agreement may
    not be assigned by Buyer without prior written consent of Seller, which consent may
    be granted or withheld by Seller in Seller’s sole and absolute discretion.” Nothing in
    the record indicates that Taylor Morrison gave prior written consent to assign the
    contract. See Zbranek Custom Homes, Ltd. v. Allbaugh, No. 03-14-00131-CV, 
    2015 WL 9436630
    , at *4 (Tex. App.—Austin Dec. 23, 2015, pet. denied) (mem. op.)
    (holding no evidence that construction contract was assigned to subsequent
    22
    purchasers when contract required consent for assignment and the record included
    no evidence that either party consented to assignment of the contract). Because
    Taylor Morrison has not demonstrated that there was any assignment of the original
    purchase agreement to the Kohlmeyers, we reject the argument that the doctrine of
    implied assumption applies. See Toll Austin, 
    2016 WL 7187482
    , at *4 (rejecting
    theory of implied assumption when the plaintiffs were not assignees of the original
    homebuilding contract).
    We conclude that implied assumption does not apply.
    IV.   The trial court properly denied the motion to compel arbitration.
    Without commenting on the ultimate viability of the Kohlmeyers’ claims that
    are independent of the contract, we hold that those claims are not susceptible to
    arbitration because they are just that—independent of the contract. We conclude that
    Taylor Morrison has not shown that the Kohlmeyers, as nonsignatories, are bound
    by the arbitration provision in the original purchase agreement, and therefore it has
    not established the existence of a valid agreement to arbitrate. See Santander
    Consumer USA, 
    2017 WL 1208767
    , at *2. Having reached this conclusion, we do
    not need to consider whether the Kohlmeyers’ claims fall within the scope of the
    arbitration provision in the original purchase agreement. See Dusing, 
    2019 WL 2127885
    , at *4 (courts do not reach the second requirement for compelling
    arbitration if the first is not established). We hold that the trial court did not abuse
    23
    its discretion by denying the motion to compel arbitration. See Labatt Food Serv.,
    279 S.W.3d at 643.
    Conclusion
    We grant the motion for rehearing, and the motion for reconsideration en banc
    will be denied by separate order of the court. We affirm the interlocutory order of
    the trial court. All other pending motions are dismissed as moot.
    Peter Kelly
    Justice
    Panel consists of Justices Kelly, Rivas-Molloy, and Farris.
    24
    

Document Info

Docket Number: 01-19-00519-CV

Filed Date: 8/17/2021

Precedential Status: Precedential

Modified Date: 8/23/2021