### TEXAS COURT OF APPEALS, THIRD DISTRICT, AT AUSTIN

NO. 03
- 22
- 00036
- CV

Yong Yu and Chao Qun Restaurant Group, LLC , Appellant s

v. Chao
- Qun Lu , Appellee

FROM THE 455TH DISTRICT COURT OF TRAVIS CO UN TY NO. D
- 1
- GN
- 21
- 006966 , THE HONORABLE MAYA GUERRA GAM BLE , JUDGE PRESIDING

M E M O R A N D U M O P I N I O N

In th is interlo c utory appeal, Yong Yu (Yu) and Chao Qun R estaurant Group, LLC (th e Company ) challenge the trial court ’ s order denying their motion to compel a rbitration of
t heir respective cl aim s a g ainst Chao

- Qun Lu (Lu) a rising from disputes related to loans to, ownership interests in , and management of the Company

. See Tex. Civ. Pr ac. & Rem. Code § § 51.014 (a) (listing appealable interlocutory orders) , 171.098(a)(1) ( allowing in ter locutory

a ppe als f rom orders denying mo tions to com pel arbitration )

. For the following reason s, we

reverse the order denying the motion to compel arbitration and remand for further proceedings consistent with thi s opinion

.
BACKGROUND

Prior to the event s giving ri se to th is lawsuit, Lu was the mana ging member of the
C ompany , which owns commercial real estate (the Pro perty) on North Lamar Boulevard in
A ustin and rents out space in the Property to commercial tenants, including a re staurant owned2

and operated by C hang Le R estaura nt , LLC (the Restaurant)

. When the C ompany encountered financial dif

ficult ies and was at risk of foreclosure by its lenders , it solicited assist ance from Yu, who agreed to l end funds to the C ompany pursuant to a promissory note . The note reci ted that upon Yu ’ s sat isf

act orily completing “ his due diligence ” in connection with the Com pany ’ s business , the parties would enter into a “ subscription agreement ” or similar instrument whereby he would a cq uire 65% of the C ompany ’ s membership interests

. W ith in two mo nths of Lu ’ s

execu tio n of the pr omissory note o n be half of the Co mpany , the parties exec uted several other agreements, including the follo wing two relevant to this appeal : (1) a “ Members hip Purchase Agreement ” (Purchase Agreement) , by which Yu ag r eed to purchase from Lu a 65%
i nte rest in the Company , and (2) a “ First Amended and R estated Operating Agreement of

. . . [the Company] ” ( Operating A g reement) , b oth executed May 1 4, 2021.

After dispute s arose among the parties to this appeal and thir d p arties about debt obligations, lease pa yments, ownership of the Company , and whether Yu p aid the consideration required by the Purchase A g reement

— including whether an y of his loan funds converted into ownership interests in the Company

— Y u and the Comp an y f iled t he underlying lawsuit

. In the live petiti on, Y u made claims against Lu for fraud, fraudulent inducement, and ne gligent misreprese ntation and sought a dec lara tory judgment that he o wns a 65% interest in the Company and i s i t s sole manager. The Co mpa ny made claims against Lu for breach of fiduciary duty a nd of the O perating A greement. 1 Appellants ’ live petition inclu ded request s for a temporary restraining order and in junction to e njoin defendants ’ conduct t hat might inter fere with the Company ’ s o per ations.

1 Th e Company m ade claims against t he two other individuals and the Restaurant , but we need not recite those deta ils because they are n ot relevant to the issues on appeal.3 About a week after filing th eir lawsuit, appella nts fil ed a motion to com pel

me diation and arbitration as to their claims against Lu only. In their motion, they contende d that the Operating A g reemen t con tains a b inding agreement to arbitrat e “ al l disputes of any kind between the parties, arising out of or relating in any w ay to the ” Opera ting Agreement. Ap pellants alleged in their motion that Y u and Lu executed “ numerous do cuments assi gning
Y u 65% of the Membership Interests of [the Company ] ” and that Lu “ accept[ed] the significant benefits of consideration pa id by Y u ” and “ sp eci fically acknowledge [ ed ] ‘ th e receipt and suf ficien cy ’ of Y u ’ s con sider ation. ” Noneth eless, appellants allege d , six mo nths after execution of the Operating Agreement and r elated Purchase Agreement , Lu “ s ent demand disputing Y u ’ s

own ership ” in the Comp any .

On December 22, 2021, t he trial court conducted a hearing on appellants ’ motion

. Y u testified and the trial court admitted into evid ence copi es of the Purcha se Agreement , the Operating Agre ement, and correspondence from Lu ’ s attorney to Y u ’ s attorney s tat ing that Y u had breached the Purchase Agreement by failing to p ay the con sideration outlined therein. Following the hearing, the trial court signed an order den ying appel la nts ’ motion to compel mediation and arbitration without stating it s r easons . T h is in terlocu tory appeal followed

.
DISCUSSION A party seeking to compel arbitration must prove the existence of a valid agreement to arbitrate and that the disputed claims a re within the scope of that agreement. See G.T. Leach B uil ders, LLC v . S apphire V.P., LP , 458 S.W.3d 502, 519 (Tex. 2 0 1 5 )

. We resolve these questions by applying “co mmon principles of general contract law to determine the parti es ’
i ntent.” Id. at 520 n. 15 ; see also Wagner v. Apache Corp. , 627 S.W.3d 277, 283 (T ex. 2021)4

( “Ar bitration agreements are on equal footing with other contracts and must be enforced according t o their terms.”). After a court determines that a valid agreement to arb itrate exi sts, it should resolve any doubts as to an agreement ’s sco pe in favor of arbi t ration. See In re Poly

America, L.P. , 262 S.W.3d 337, 348 (Tex. 2008)

. If a party proves that the disputed claims are within the scope of a v alid agreement to arbitrate, the burden shifts to the opposing party to set up an affirmative de fen se to arbit rat ion. Bonsmara Nat. Beef Co. v. Hart of Tex. Cattle Feed ers, LLC , 603 S.W.3d 385, 397

– 98 (Tex. 2020)

.

We review the denial of a motion to c ompel arbitration for an abuse of discreti on, reviewing legal questions de novo. Henry v. Cash Biz , LP , 551 S .W. 3d 111, 115 (Tex. 2018)

. The validity and scope of an arbitration agreement are legal questions that we review de novo. Wagner , 627 S.W.3d at 283

.

Appella nts contend that the trial co urt abused its discretion in denying their motion to compel arb itr ation because , although the P urchase Agreement does not contain an arbitration provision, the Operating Agreement does, and the two agreement s constitute “ one

en tire agreement

. ” Therefore, appellants ’ argument continues, the arbitration p rov ision in th e O perating Agr eement applies to al l their claims as serted against Lu , which fall within the provision ’ s scope . We agree.

Pursuant to the Pur chase Agreement, w hich Yu signed as “ Purchaser ” a nd
Lu signed as “ Seller, ” Lu agre ed to sell and assign to Yu a 6 5% membership interest in the Company for $400,000. “ [U]pon such sale and assign ment pursuant to an Assignment of Membership I nterests in the form of Exhibit A attached h ereto, ” Yu would “ be come the Manager and a Member holdin g the Majorit y M embership I nte res t [65%] in the Company set forth ” in Schedule A of the Operating Agreement

. I n Article V II, the Purchase Agreement provide s,5

T his Agreement, including the exhibits, schedules hereto, an d the Operating Agree ment , em body the entire agre eme nt and unde rst and ing of the parties hereto in respect of the subject matter hereof and s upersede all prior agreements, representatio ns, warranties , and understandings between or among the parties , whether written or oral, with respect to such subject ma tte r. (Emphas e s a dde d.) Article V II also provides that each party
irrevocably agree s that any legal action or proceedi ng arising out of or relating to this Agreement or for th e recognition and enforcement o f any judgment in respect hereof brought by th e oth er p arty or it s s uccessors or assigns shall be brought in the courts of the State of Texas, County of Travis , or . . . the United States District Court for th e Western D i stri ct of Texas.

As for the Op era ting Agr e ement, Lu and Yu each signed it in their respect ive
cap acities as members, and Yu additionally signed it in his capacity as the Company ’ s manager :

“ Th e undersigned hereby assents to his election as manager of the ” Com pany . The Operating Agreement incor

porate s by reference a “ Sched ule A, ” which id entifies Y u an d L u as the Company ’ s only members with , respectively, 65% and 35% ownership interest s . Of particular relevance to thi s appeal, in Article X the Operat ing Agreement provides,
The Manager (s), Members, and any other par ty aff ected hereby , agr ee to negotiat e i n good faith in an effort to informally res olve any dispute arising out of or related to this Agreement that may arise between the Manager(s), Member s, and any other party affected hereby. If the dispute cannot be resolved by informal neg otiation, the par ties agree to proceed to mediation in Austin, Travis County. If the dispute cannot be resolved by mediation within thirty (30) [sic] after such disp ute is mediated, the parties agree that all di sputes of any kind between the parties , a ris in g out of or rel ating in any way to the Agreement shall then be sub j ect to BINDING ARBITR ATION pursuant to the Commercial Arbitration Rules of the A merican Arbitrati on Assoc iation ( “ A AA ” )

. (Emphasis added. )6 In construing contracts, we consi der t he en tir e writing in a n e ffort to harmo nize and give effect to all the provisions of the contract so that none will be ren dered meaningless. J.M. Davidson, Inc. v. W ebster , 128 S.W.3d 223, 229 (Tex. 2003)

. Also, w hen, as here, separ ate instruments are exe cute d c on temporaneous l y by the same parties, for the same purpose s, and as part of the same transaction, we construe them to gether. See Kirby H ighland Lakes Surgery C tr. , L .L. P . v. Kirb y , 183 S.W.3d 891, 900 (Tex. App.

— Austin 2006, no pet. ) . When one of such
ag re ement s that is “ essential ” to the overall transaction c ontains an arbitration provision but the other agreement does not, we will presume that the parties intended the a rbitration provision
to reach all as pects of the transa ction un less there is a “ co ntr ary expression of intent. ” See id.
at 901 (quoting Personal Sec

. & Safety Sys. , Inc. v. Motorola, Inc. , 297 F.3d 388, 3 95 (5 th Cir. 2002) )

. Here, not only do the su bject matters recited in the Purchase Agr eement and Operating Agree ment reveal that th ey are part of th e same overall transaction , but the Purchase Agre ement expressly states that it and the Ope rating Agreement, together, constitute the “ entire agreement

. ”
Fu rthe rmore, the Operating Agreement

— gov erning relations among the Co mpany ’ s member s

a nd the Co mpany ’ s o per ations

— is essential to the overall transaction the parties struct ured to facilit ate Yu becom ing the majority owner and sole manager of the Company through his
pu rchase of such ownership int erest.

While Lu points to the provision in A r t icl e V II of t he Purchase Agreement requiring “ any legal action or proceedi ng arising out of or relating to this Agreement or for the recognition and enforcement of any judgment in respect hereof ” to be brough t in the courts of Travis County or the Western D is trict of Tex as, such provision can be harmon ized with the broad arbi tration provision in the O perating Agreement b y construing it to mean that it applies only in the event of a non

- arbitra ble dispute that must be litigated in court or, for instance, a7

p art y ’ s at tem pt to enforce an arbitration award. See Ki rby , 183 S.W.3d at 901 ( co ncluding similarly where one agreement as part of overall transaction contained sim ilar forum provision and another agreement c ont ained simil ar arbi tration pr ov isi on ). Al so, notably, the A rticle VII provision in the Purchase A greement refers to “ any legal action or proceeding arising out of or relating ” to the agreement whereas the arbi tration provision in the Operating Agreement refers to

“ all disputes arising out of or relating in any way ” to th e agreeme nt. “ D isputes ” is a broader and

more all

- encompassing term than the specific term “ legal action , ” supporting the conclusion that the parties intended th at all disputes related t o the agre ements be resol ved via ar bitr at ion whil e only non - arbitr abl e legal actions be brought in the specified courts

. Cf. Pinto Te ch. Ventures, L.P. v. Sheldon , 526 S.W.3d 428, 439 (T ex. 2017) ( “ When a forum

- selec tion clause encompasses all ‘ disputes ’ ‘ a rising out of ’ the agreement, in stead of ‘ claims, ’ its scope is necessarily broader than claims based so lely on rights originating exclusively from the contract. ” ). We, accordingly, conclude that the re is a va lid agreement requiring the parties to arbi t rate “ all disputes arising out of or relating in any way to ” the Purchase Agreement and Operating A g reement.

Lu counters that as part of their burden to prove the existence of a valid arbitration agre ement , appellants had the burden of proving that “ all conditions pr ecedent ” to the Operating Agreem ent ’ s “ taking effe c t ” had occur red but that appellants di d n ot

— and could
not

— so prove because the evi dence conclu sively established that Yu had not paid the consideration as required by the closing provision in the Purchase Agreement

. 2 Lu relies on the following provision in Article 2.1 of the Purchase Ag r eement t o supp ort his argument that Yu ’ s

2 We take no position on whether the evidence conclusively established Yu ’ s payment of consideration or failure of su ch payment, as we are able to resolve the issues on appeal on the basis of l egal determinations.8

payment of the $400,000 consideration was a condition precedent to t he Operating A greement ’ s becoming effec tive :

After giving effect to the sale and purchase un der Section 2.1 and the completi on of the Cl osing, Pur chaser s h all be a Member in the Company pursuant to the terms of the Operating Agreement, holding the Perc enta ge Interest in the Company as set forth opposite i ts name in Sc h edule A of the Operating Agreement.
We disagree with L u ’ s contention that Y u ’ s all eged “ fai lure of c ons ideratio n ” required by the Purchase Agreement ren dered the O perating A greement (and , necessarily, its arbi tration provision) invalid and un enfor ceable

.

First, “ f a ilure of consideration ” is distinct from “ lack of consideration

. ” Th e former is a defense to a party ’ s prevailing on a cause of action broug ht under a contract , but

— unlike th e latter

— it does not render a contr act unenforceable or invalid. See , e.g. , Tex. R. Civ. P. 94 (listing failure of consideration as affirmative defen se); Wald en v. Affiliated Comput

. Servs., Inc. , 97 S.W.3d 303, 320

– 21 (Tex. App.

— Houston [14 th Dist.] 2003 , pet. denied) ( “ A complete fa ilure of consideration con st itu tes a defense to an action for breach of contract. ” ) ; cf. S.C. Maxwell Fam. P ’ ship Ltd. v. Ke nt , 472 S.W.3d 341, 34 4

– 45 (Tex. App.

— Hous ton [1 st Dist.] 2015, no pet. ) ( “ [ C ] onsideration is a necess ary requirement for the formation of a
contrac t. If the re is no consideration

— that is, no mutuality of obligation

— then there is no
contract. ” )

. In contrast to lack of con sideration, which “ oc curs when the contract, at its inception, does not impose oblig ations on both parties , ” a failure of consideration “ occ urs when, because of some supervening cause arising after the contract is formed, the promised perfo rmance fails. ” Doskocil Mf g. Co

. v. Sang Nguyen , No. 02

- 16

- 00382

- CV, 2017 WL 2806322, at * 6

– 7 (Tex. App.

— Fo rt Worth June 29, 2017, no pet. ) (mem. op.)

. Bo th the9

Purc hase Agreement and Ope rating Agreement are supported by consideration , i .e., mutuality of obligation, in that the former contains mutual prom ises by the parties to r espec tively buy and sell the mem bership interests and the latter contains mutual p romises b etween the part ies (as members of the Company ) regarding their conduct and duties to the Company (such as each making specified capital contributions)

. T hus, even if Yu did not pay the con sideration r equired b y the Purchase Agreement or make th e capital contribut ion required by the Operating
A g reement

— which are material fact issue s we need not reach in this appeal

— such non

- payment does not render the agreement invalid. 3

Secondly , while th e common law reco gnizes that there can be conditions
pr e ce dent to contra ct formation, see Sharifi v. Ste e n Auto., LLC , 370 S.W.3d 126, 143

– 44 (T ex. App.

— Dallas 2012, no pet.) , we conclude that Yu ’ s payment of the $400, 000 required by the Purchase Agreement is not a condition precedent to the f ormation of the Op erating A g reemen t

. Because of their “ harshness in operation, conditions are not favorites of the law, ” and in construing a contract, c o u r t s avoid finding forfe iture by condition precedent if another reasonable rea ding of the contract is possible

. Criswell v. Eu ropean Cr ossroads Shopping Ctr. , Ltd. , 792 S.W. 2d 945, 948 (Tex. 1990) ; Great W . Drilling , Ltd. v. Pathfinder Oil & Ga s., Inc. , No. 11

- 14

- 00206

- CV , 2020 WL 373096, at * 8 (T ex. Ap p.

— Eastland Jan . 23, 2020, pet. dis m ’ d ) (mem. op .)

. “ I f the language of the c ontract i s susceptible to a non

- condition p recedent interpretation, we accept that construction and construe the language as a mere covenant. ” Great
W. D rilling , 2020 WL 37309 6, at *8

. F urthe rmore , contract terms that use conditional language such as “ if , ” “ provi ded that, ” “ on c ondition that, ” or similar conditional phrases r e flect th e

3 Additionally, even if Lu were lodging a tru e complaint about lack of consideration, such defect would go to the validity of the agree ment as a whole and w ould have to be decided by an arbitrat or , not the court. See In re Labatt Food S er v. , L.P. , 279 S.W.3d 640, 647

– 48 (Tex. 2009)

.10

parties ’ intent to create a condition precedent , whereas t he a bsence of such lan guage is at least some indica tion that a provision s hould be const rued as a covenant r ather than a co nd ition. See Criswell , 792 S.W

. 2d at 948 ; Schwarz

- Jordan, Inc. v. Delisle Constr. Co ., 569 S.W.2d 878,
881 (Tex. 1978) (concluding that terms “shall” and “upon approval” were “not tho se usually associated with a condition precedent”) ; see a lso Ch alker Ene rgy Partners, III, LLC v. Le Norman Ope r

ating LLC , 595 S.W.3d 668, 673

– 74 (Tex. 2020) ( noting that whether agreement

c reates conditions precedent to formation may be decided as matter of law when terms a re unambiguous, and holding that provi sion s tating pa rties have no “ legal obligation of any kind ”

“ unless and until ” certain events have occurred creat es condition precedent )

.

The A r ticle 2.1 contract provision on which Lu relies

— prov iding that “ [ a] fter giving effect to the sale and purchase un de r Section 2.1 and the completi on of the Cl osing, Purchaser s hall be a Member

. . . pursuant to

. . . the O pera ting A g reement ”

— does not contain
any terms such as “ provided that ” or “ i f ” t hat cus tomarily in dicate th e parties intended to create

a condit ion. Furthermo re, Article 2.1 does not condition the fo rmation of the O p erating Agreement on Yu ’ s paying consideration at closing but merely recites that after such performance he will be a member p ursuant to the Ope rating Agreement . The effecti ven ess of the O perating Agreement is not made expressly contingent upon Yu making payment ( or upon
any other event ) ; rather, the effectiv eness of the O p erating Agreement is impliedly concurrent with the imme diate effective ness of the Purchase Agreement , b y vi rtue o f the provisio n providing that both agreements c ompris e the parties ’ “ entire agreement. ” It also bears no ting that A rticle IV of the Operating Agre ement provides a remedy for any mem ber ’ s “ fail [ure ] to contribute the f

ull amount of his or her ‘ Initial Cap ital C ommit men t ’ ” : t he “ def icien cy will be considered a debt ” for which the Company “ s hall have the right to take legal action against the11

defaulting Member to recover on suc h deb t. ” 4 The fact that the Operating Agreement pro vides

a remedy for Y u ’ s allege d failure to pay h is capital commit ment or capi tal contribution of , presumably, the $400,000 referenced in the Purchase Agreement lends further support to our conclusion that payment ther eof is not a condition prece dent to fo rmation of the Ope rating Agreem ent. As to whether the claims at issue fall within the scope of the arbi tration provision, we conclud e that they do. The clai ms at issue consti tute the following: (1) Yu ’ s request f or a decl aratory judgment that he owns 6 5% of the Co mpany , (2) Y u ’ s fr au d claim s stemming from
Lu ’ s allege d misrepresentation of the Company ’ s debts and resulting induc ement of Yu t o l end fund s to the Company and convert the pr omisso ry note into the Purchase Agreem ent , and (3) the
Com pany ’ s claims against Lu for breach of f idu ciary duty and of t he Operati ng Agreement arising f rom his alleged attempt to sell th e Property through a brokerage ag reement

. The Operating A g reement ’ s arbitration clause is broad, embra c ing “ all di sputes of any kind between the parties , arisin g out of o r relating in any w ay to the Agreement ” (emphasis added), terminology that this Court has held to be “ extremely broad ” and “ ca p ab le of expansive r each. ”
See Kirby , 183 S.W.3d at 8 98 (quoting P en nzoi l Expl

. & Prod. Co. v. Ramco Energy Ltd. , 139 F.3d 1061, 1 067

– 68 (5 th Cir. 1998) )

. Such “related to ” language, in contrast to narrower phrases lik e “arising out of,” extends to “all disputes between the parties having a significant relationship to t he contract regardless of the label attached to the dispute” or that “touch” on

4 T he O peratin g Agreement defines “ Initial Capital Commitment ” as “ the amount the Member agrees to con tribute for his or her Me mbership Interest ” and the related term “ Initial Capital Contribution ” as “ the amou n t the member has contributed for his or her M embership Inte rest as of the Effective Date

. ” ( E mphas e s added

. ) It notes that the amount of each is listed next to the mem ber s ’ name s on the attached Sc hedule A. Next to Yu ’ s name on Schedule A , the amou nt o f $400,000 is identified as his “ Capital Contr ibution , ” but there is no “ Capital Commitment ” listed.12

matter s cover ed by the contra ct containing the arbitration provision. Id. ( quoting Pennzoil , 1 39 F.3d at 1067

– 68 )

. Given our determination that both the Purchase A g reemen t and the Operating A g reement, viewed as on e agre ement, constitu te t he contract at issue, i t necessarily follows that the part ies ’ disputes about the perce ntage of Yu ’ s ow nership interest in the
Co mpa n y , if any ; Lu ’ s alleged breach of contractual or fiduci ary duties as a member of the
Co mpany ; and Lu ’ s alle ged misrepre sent ations with the intent to indu ce Y u into loans and

co nversion thereof into a n o wnership interest in the Company are matters that “ touch ” on and have a significant relationship to t he agree ment

. This is especiall y so given our mandate to resolve any do ubts as to an agreement ’s sco pe in fav or of ar bi tration. See In re Poly

- Am erica , 262 S.W.3d at 348

. We, accord ingly, h old th at the claims at issue are su bject to the arbi tration provi sion , a nd the t rial court should have granted appellants ’ motion to com pel mediation and arbitration.

CONCLUSION

Having concluded that the trial court should have granted appellants ’ motion to compel mediation and arbitrati on, we reverse the order and re mand this cause f or further proceedings consistent with this opinion. See Tex. Civ. Prac. & Rem . Code § 171.0 2 1 ; Tex. R. App. P. 43.2(d)

.

__________________________________________ Thomas J. Baker , Justice Before Jus tice s Good win, Baker, and T riana
Revers ed and Remanded Filed: June 8, 2022