Dan Ryan Builders, Inc v. Nelson et al
Filing
77
MEMORANDUM OPINION AND ORDER DENYING IN PART AND GRANTING IN PART RESPONDENTS 63 MOTION TO DISMISS ARBITRATION. Mr. Nelsons claims against Dan Ryan Builders, Inc. and Eagle Excavating and Contracting, LLC are STAYED and SUBMITTED TO ARBITRATION in accordance with Paragraph 19 of the Agreement of Sale. The parties are DIRECTED to notify this Court forthwith upon the conclusion of the matter. However, Angelia Nelsons claims against Dan Ryan Builders, Inc. and Eagle Excavating and Contracting, LLC are NOT COMPELLED TO ARBITRATION. Signed by District Judge Gina M. Groh on 2/6/14. (njz)
UNITED STATES DISTRICT COURT
NORTHERN DISTRICT OF WEST VIRGINIA
MARTINSBURG
DAN RYAN BUILDERS, INC.,
Petitioner,
v.
CIVIL ACTION NO. 3:10-CV-76
(JUDGE GROH)
NORMAN C. NELSON and
ANGELIA NELSON,
Respondents.
MEMORANDUM OPINION AND ORDER DENYING IN PART AND GRANTING IN
PART RESPONDENTS’ MOTION TO DISMISS ARBITRATION
On May 7, 2013, Respondents Norman C. Nelson and Angelia Nelson filed a
motion to dismiss arbitration [Doc. 63]. On May 28, 2013, Petitioner Dan Ryan Builders,
Inc. (“DRB”) filed its response. On June 14, 2013, Respondents filed their reply.
Petitioner and Respondents attached supporting affidavits and documents to their
pleadings to aid the Court in rendering its decision. Additionally, on November 15,
2013, the Court held an evidentiary hearing where it received testimony and listened to
arguments of counsel. For the following reasons, the Court finds that Respondents’
Motion to Dismiss Arbitration should be DENIED IN PART and GRANTED IN PART.
I. Statement of Facts and Procedural History
The Nelsons are a married couple that ultimately purchased a home in
Hedgesville, West Virginia from DRB. Mr. Nelson joined the United States Army at age
eighteen, and he spent the majority of his adult life serving as an enlisted soldier. Resp.
Ex. 2, Nelson Aff. at ¶ 37.
Mr. Nelson served in the Army from 1983 through 1999,
and he achieved the rank of Staff Sergeant. Pet. Ex. 1, N. Nelson Dep., p. 10, ln. 1924. Mr. Nelson is a high school graduate. Id. at p. 9, ln. 19-23. He also earned a
Bachelor’s degree from Excelsior College. Id. at p. 10, ln. 9-12. After his military career,
Mr. Nelson worked as a private investigator from 1999 to early 2002. Id. at p. 12, ln. 1122. From 2002 to 2004, Mr. Nelson worked as an intelligence professional in Fort
Meade, Maryland. Id. at p. 13, ln. 21-22. From 2004 to 2006, Mr. Nelson worked at
NASA performing intelligence work. Id. at p. 13, ln. 23-24; p. 14, ln. 7-8. After 2006,
Mr. Nelson began working at the Department of Health and Human Services as a
supervisor in the Program Protection Office. Id. at p. 14, ln. 9-18.
Mrs. Nelson is also a high school graduate. Pet. Ex. 2, A. Nelson Dep., p. 7-8.
She has received some higher education and training. Id. She studied accounting at
City College of Chicago and the University of Maryland, and she has received computer
and business administration training. Id.
In early 2008, Mr. Nelson began working with real estate agent Emory Csulak to
assist in selling his current home in New Market, Maryland and purchasing a different
home. N. Nelson Dep., p. 16-17. Mr. Nelson began looking in Georgetown Orchard, a
DRB subdivision, because he had found a home he was interested in located in that
subdivision on the Internet. Id. at p. 19. He also liked the Hedgesville, West Virginia
area because he was looking for a larger home and thought the area had a pretty good
school district. Id. at p. 17-18.
Upon driving through the Georgetown Orchard subdivision, Mr. Nelson first
looked at the home he ultimately purchased from only the outside. Id. at p. 20. Later,
his real estate agent arranged a tour of the inside of the home with DRB for May 10,
2
2008. Id. at p. 21. However, this tour was later postponed to May 16, 2008. Id. On
this date, Mr. Nelson, his wife, his real estate agent, and Cathy Ho, a DRB
representative, toured the inside of the home and the lot over a two-hour period. Id.
After touring the home and the lot, the Nelsons drove to DRB’s divisional office.
While driving to DRB’s office, the Nelsons discussed purchasing the home, and, during
this discussion, Mr. Nelson stated he would only purchase the home if he could get it for
the right price. After they arrived at the office, they were placed in a conference room to
review the contract. The Nelsons reviewed the contract with Ms. Ho. This process took
about an hour, and their real estate agent was present during this process. This was
Mr. Nelson’s first new home purchase. However, he previously purchased two homes
that were existing construction.
Mr. Nelson entered into a contract with DRB to purchase the home, located at
453 Ploughman Way in the Georgetown Orchards subdivision, for $385,000. The preprinted Agreement of Sale (“contract”) was seven pages. The arbitration provision was
on the fifth page. The acknowledgment that the purchaser read and understood the
agreement was on the seventh page. The entire agreement, with addenda, was
approximately fifty-six pages. See Resp. Ex. 1.
Ms. Ho, a DRB sales representative, reviewed the documents, including the
contract and addenda, with Mr. Nelson. Pet.’s Ex. 3, C. Ho Dep., p. 19-22. While
reviewing the contract, Ms. Ho highlighted some of its provisions to Mr. Nelson. N.
Nelson Dep. p. 44. Ms. Ho stated that she reviewed the whole contract, not just
portions of the agreement. C. Ho Dep., p. 19-22. She would review one page at a time
and cover the “highlights” on that page. Id. Ms. Ho testified that her usual practice was
3
to explain the arbitration provision and point out that if a problem arose between the
purchaser and DRB, the purchaser was willing to go through arbitration instead of to
judge and jury in order to save the company money. She estimated that the review of
the contract took approximately an hour and a half to two hours. Id.
Ms. Ho also stated that she would answer any questions asked by a purchaser.
Id. If she would not know the answer, she would seek clarification from someone else
at DRB. Ms. Ho testified that Mr. Nelson was very astute and tedious, and she
described Mr. Nelson as being very careful and taking his time in reviewing the
documents. As Ms. Ho reviewed the documents, the Nelsons’ real estate agent was
present, but he did not ask any questions. N. Nelson Dep., p. 42-43. Additionally, the
Nelsons’ real estate agent did not point out any items that the Nelsons should be
familiar with. Id.
During the review of the contract, Mr. Nelson negotiated the price of the home.
Id. Additionally, Mr. Nelson used an outside lender, National Bank of Kansas City,
rather than DRB’s preferred lender Monocacy Home Mortgage. The contract had a
provision requiring the purchaser to use DRB’s preferred lender and title company in
order to receive the incentives for the home. However, Mr. Nelson, negotiated with
DRB to continue to use his outside lender and keep the incentives offered by DRB. N.
Nelson Dep., p. 41-42, 44; C. Ho Dep., p. 16.
Mr. Nelson also negotiated quite a few addenda to the contract. The first
handwritten changes to the contract provided that DRB would grade and seed any
disturbed area of the home, including the rear and sides of the home. DRB also agreed
to make sure the area to the left of the home, where the septic reserve was located,
4
would be graded and seeded by the time of closing. Resp. Ex. 1, 49. The second
handwritten addendum stated DRB agreed to grant purchasers “permission to build a
storage shed or an inground pool (as long as there will be a 6 foot fence around it) to
the side of the property instead of the rear due to the irregularity of Lot 11 at
Georgetown Orchards.” Resp. Ex. 1, p. 50. The third handwritten addendum provided
that “DRB and the purchaser agrees that this contract is contingent on the settlement of
the property located at 10630 Old Barn Road, New Market, Frederick County, Maryland
to occur on or before June 16, 2008.” Resp. Ex. 1, 51. This addendum permitted Mr.
Nelson to walk away from the contract if his house had not sold on or before June 16,
2008. The last addendum provided that DRB would remove the rock/boulders at the
side of the septic field and in the high grass area near and in between the apple trees.
Resp. Ex. 1, p. 53. The addendum also provided that DRB would remove construction
debris, a broken fence, and piles of dirt from the property at Mr. Nelson’s request. Id.
Although the home was a spec home, Mr. Nelson made selections and
modifications to it, such as selecting the place for the phone, cable, ceiling fans, and
recessed lights. Resp. Ex. 1, p. 13. Mr. Nelson also upgraded the countertop to granite,
the flooring to cherry, and the cabinets to Squire/Village Cherry in a hazelnut color. Id.
at 16. Mr. Nelson selected the colors of the tile and the wall. He also added Guardian
home protection services and selected the location of the alarms and motion detectors.
Prior to closing on the home, the Nelsons hired their own personal property
inspector who performed a professional inspection of the home. N. Nelson Dep., p. 47.
Although the inspector was not permitted to damage the home in his inspection, he did
provide a thorough inspection that lasted several hours. On June 13, 2008, prior to
5
closing, Mr. Nelson did a walkthrough of the home. N. Nelson, Dep. 73. There were
items that needed to be completed prior to the closing scheduled for June 16, 2008, and
Mr. Nelson created a “punch list” of items that still needed to be completed. Id. On the
day of closing, Mr. Nelson drove by the house and noticed that tasks outside of the
house were still not completed, such as the grading.
At the closing, Mr. Nelson told the settlement attorney that “there was a problem
with the grading and seeding and there was also some construction debris and whatnot
on the property that they were supposed to remove that they never removed, and that I
was upset and that I was not going to close on the property.” Pet. Ex. 4, p. 9. As a
result, Mr. Nelson and DRB negotiated the June 18 addendum providing for the
completion of the additional work. Mr. Nelson stated that his real estate agent was
present at the closing, but he did not retain his own attorney. However, Mr. Nelson
acknowledged that he knew he had a right to consult his attorney to review the contract
and attend the closing. Pet. Ex. 4, p. 12. Mr. Nelson proceeded with the closing after
the settlement attorney created an addendum to the contract providing for the
unfinished items to be completed. Mr. Nelson acknowledged that he never expressed
to DRB–even at that point–that he wanted them to take the house back. N. Nelson
Dep., p. 20.
After closing, Mr. Nelson, in responding to DRB’s survey regarding the overall
construction experience/quality of their home, stated “Todd did a good job and we are
satisfied with the overall quality of the home. My only recommendation is to follow up to
insure subs complete work as agreed.” Pet. Ex. 4, p. 13. Mr. Nelson rated the following
categories as excellent: (1) the overall sales experience; (2) the overall construction
6
experience/quality of their home; (3) the overall mortgage/loan experience with National
Bank of Kansas; and (4) the settlement experience. See Doc. 19-4.
On May 28, 2010, the Nelsons filed their Complaint in the Circuit Court of
Berkeley County, West Virginia. The Complaint alleged five counts against DRB and
two counts against Eagle Excavating & Contracting, LLC (“Eagle”), including counts for
fraud and negligence, gross negligence, and willful and wanton reckless misconduct.
The Complaint alleged that “[t]he septic system was installed in an unworkmanlike
fashion, in violation of numerous laws and regulations and in violation of acceptable
building practice.” Compl., ¶ 6. The Nelsons allege that DRB “knew the Class Two
Septic system was illegal for the lot” and that DRB knew of other defects in the home
prior to the sale, including “concrete significantly too soft throughout the basement and
elsewhere, missing/incomplete bracing for trusses and gables in the roof system,
unstable sub-grade soils beneath the home, broken concrete foundation walls and
hidden water damage in the finished basement.” Compl. ¶¶ 8-9.
On August 6, 2010, DRB filed a Petition to Compel Arbitration in this Court
pursuant to the Federal Arbitration Act. On December 23, 2010, the Court dismissed
DRB’s petition to compel arbitration. Dan Ryan Builders, Inc. v. Nelson, 2010 WL
5418939 (N.D.W. Va. Dec. 23, 2010). The Court held that although DRB had satisfied
preliminary requirements to compel arbitration under the FAA, the arbitration provision
was unenforceable as a matter of law because it lacked mutual consideration. DRB
timely appealed to the Fourth Circuit Court of Appeals.
On appeal, the Fourth Circuit Court of Appeals found that West Virginia had no
controlling decisions on whether additional consideration was needed for an arbitration
7
provision. Dan Ryan Builders, Inc. v. Nelson, 682 F.3d 327 (4th Cir. 2012). Therefore,
the Fourth Circuit certified the following question to the West Virginia Supreme Court of
Appeals:
Does West Virginia law require that an arbitration provision, which appears
as a single clause in a multi-clause contract, itself be supported by mutual
consideration when the contract as a whole is supported by adequate
consideration.
On November 15, 2012, the West Virginia Supreme Court of Appeals addressed the
certified question. Dan Ryan Builders, Inc. v. Nelson, 737 S.E.2d 550 (W. Va. 2012). In
answering the certified question, the court noted that parties frequently challenge the
enforceability of arbitration clauses on the ground that the clauses lack consideration or
lack equivalent promises. However, the court held that “the formation of a contract with
multiple clauses only requires consideration for the entire contract, and not for each
individual clause.” Id. The court recognized that mutuality of obligation in the formation of
a contract is “a factor for a court to consider when assessing whether a contract (or
provision therein) is unconscionable.” Id. The court summarized its answer to the certified
question stating:
West Virginia’s law of contract formation only requires that a contract as a
whole be supported by adequate consideration. Hence, a single clause
within a multi-clause contract does not require separate consideration.
However, we further conclude that under the doctrine of unconscionability,
a trial court may decline to enforce a contract clause–such as an arbitration
provision–if the obligations or rights created by the clause unfairly lack
mutuality.
Id.
On January 29, 2013, the Fourth Circuit acknowledged the West Virginia
Supreme Court of Appeals’ answer. Dan Ryan Builders, Inc. v. Nelson, No. 11-1215,
8
508 F. App’x 207 (4th Cir. Jan. 29, 2013) (unpublished). The Fourth Circuit concluded
that the arbitration provision did not require separate consideration, and it remanded the
case to this Court to decide whether the arbitration clause was unconscionable under
West Virginia law.
On April 19, 2013, this Court held a Status Conference and Scheduling Hearing,
and the Court set a briefing schedule to address the issues in the case. Additionally, on
November 15, 2013, this Court held a hearing where it listened to testimony and heard
arguments from counsel. Accordingly, this matter is ripe for review.
II. Legal Standard under the Federal Arbitration Act
The Federal Arbitration Act (“FAA”) applies to “[a] written provision in any . . .
contract evidencing a transaction involving commerce to settle by arbitration a
controversy thereafter arising out of such contract or transaction, or the refusal to
perform the whole or any part thereof . . . .” 9 U.S.C. § 2. The FAA reflects “a liberal
federal policy favoring arbitration agreements.” Moses H. Cone Mem’l Hosp. v. Mercury
Constr. Corp., 460 U.S. 1, 24 (1983). This policy is supported by Congress’ view that
arbitration constitutes a more efficient dispute resolution process than litigation.
Hightower v. GMRI, Inc., 272 F.3d 239, 241 (4th Cir. 2001). Therefore, “due regard
must be given to the federal policy favoring arbitration, and ambiguities as to the scope
of the arbitration clause itself resolved in favor of arbitration.” Adkins v. Labor Ready,
Inc., 303 F.3d 496, 500 (4th Cir. 2002).
A district court also applies “the federal substantive law of arbitrability, which
governs all arbitration agreements encompassed by the FAA.” Id. (citations omitted).
9
However, a district court applies ordinary state law principles governing the formation of
contracts, “including principles concerning the ‘validity, revocability, or enforceability of
contracts generally.’” Muriithi v. Shuttle Exp., Inc., 712 F.3d 173, 179 (4th Cir. 2013)
(citations omitted). Section 2 of the FAA provides that arbitration agreements may be
declared unenforceable “upon such grounds as exist at law or in equity for the
revocation of any contract.” 9 U.S.C. § 2. “This savings clause permits agreements to
arbitrate to be invalidated by ‘generally applicable contract defenses, such as fraud,
duress, or unconscionability,’ but not by defenses that apply only to arbitration or that
derive their meaning from the fact that an agreement to arbitrate is at issue.” AT&T
Mobility LLC v. Concepcion, __ U.S. ___, 131 S. Ct. 1740, 1746 (2011) (quoting
Doctor’s Assoc., Inc. v. Casarotto, 517 U.S. 681, 687 (1996)).
To compel arbitration under the FAA, the Fourth Circuit held that a moving party
must
demonstrate “(1) the existence of a dispute between the parties, (2) a
written agreement that includes an arbitration provision which purports to
cover the dispute, (3) the relationship of the transaction, which is
evidenced by the agreement, to interstate or foreign commerce, and (4)
the failure, neglect or refusal of the defendant to arbitrate the dispute.”
Adkins, 303 F.3d at 500-01 (quoting Whiteside v. Teltech Corp., 940 F.2d 99, 102 (4th
Cir. 1991)). “Under the FAA, courts must stay any suit ‘referable to arbitration’ under an
arbitration agreement, where the court has determined that the agreement so provides,
and one of the parties has sought to stay the action.” Noohi v. Toll Bros., Inc., 708 F.3d
599, 604 (4th Cir. 2013) (citing 9 U.S.C. § 3).
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III. Discussion
The Nelsons’ motion to dismiss arbitration is based upon the following arbitration
clause contained in the contract:
19. ARBITRATION.
(a) Any dispute arising under or pursuant to this Agreement, or in any way
related to the Property and/or with respect to any claims arising by virtue
of any representations alleged to have been made by Us, or any agents
and/or employees thereof, (with the exception of “Consumer Products” as
defined by the Magnuson-Moss Warranty Federal Trade Commission
Improvements Act, 15 U.S.C. Section 2301 et seq. and the regulations
promulgated thereunder) shall be settled and finally determined by
arbitration and not in a court of law, irrespective of whether or not such
claim arises prior to or after Settlement hereunder, pursuant to the
Construction Industry Arbitration Rules and the Supplementary
Procedures for Residential Construction Disputes of the American
Arbitration Association (“AAA”) then in effect. Prior to commencing
arbitration, the dispute shall first be mediated in accordance with the
Construction Industry Mediation Rules of AAA, or another mediation
service designated by Us. The parties hereto specifically acknowledge
that they are and shall be bound by arbitration and are barred from
initiating any proceeding or action whatsoever in connection with this
Agreement. Notwithstanding anything to the contrary herein contained, in
the event You default by failing to settle on the Property within the time
required under this Agreement, then We may either (i) commence an
arbitration proceeding under this Section 19, or (ii) bring an action for its
damages, including reasonable attorneys’ fees, as a result of the default in
a court having jurisdiction over the Purchaser. You expressly waive your
right to mediation and arbitration in such event. Each party shall be
entitled to full discovery in accordance with the local rules of court in the
event that arbitration is invoked under this Section 19. The provisions of
this Section 19 shall survive the execution and delivery of the deed, and
shall not be merged therein.
(b) In the event that an action is brought in court under Section 19(a) or for any
reason a claim is determined not to be subject to binding arbitration under
Section 19(a), then You and Us knowing and voluntarily waive our rights to a trial
by jury in any action, proceeding or counterclaim related to this Agreement or the
Property, including such actions, proceedings or counterclaims in which You and
Us as well as others are parties.
Resp. Ex. 1, Doc. 63-1 ¶ 19.
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A.
All Four Elements Exist for Compelling Arbitration of Mr. Nelson’s
Claims
As outlined above, for DRB to compel arbitration it must “demonstrate ‘(1) the
existence of a dispute between the parties, (2) a written agreement that includes an
arbitration provision which purports to cover the dispute, (3) the relationship of the
transaction, which is evidenced by the agreement, to interstate or foreign commerce,
and (4) the failure, neglect or refusal of the defendant to arbitrate the dispute.’” Adkins,
303 F.3d at 500-01 (quoting Whiteside, 940 F.2d at 102).
1.
A Dispute Exists Between the Parties
The first element is readily satisfied. DRB identified the existence of a dispute
between the parties as the Nelsons filed suit against DRB in Berkeley County Circuit
Court for alleged defects in the construction of their home.
2.
A Written Agreement Includes an Arbitration Provision Purporting to
Cover the Dispute
The second element is also satisfied. The contract between Mr. Nelson and
DRB contains an arbitration provision at Paragraph 19 that purports to cover the dispute
as to Mr. Nelson and DRB. The Fourth Circuit Court of Appeals recognized that a court
“may not deny a party’s request to arbitrate an issue ‘unless it may be said with positive
assurance that the arbitration clause is not susceptible of an interpretation that covers
the asserted dispute.’” Am. Recovery Corp. v. Computerized Thermal Imaging, Inc., 96
F.3d 88, 92 (4th Cir. 1996) (citing United Steelworkers of Am. v. Warrior & Gulf
Navigation Co., 363 U.S. 574, 582-83 (1960)). The arbitration clause is very broad and
covers “[a]ny dispute arising under or pursuant to this Agreement, or in any way related
12
to the Property and/or with respect to any claims arising by virtue of any representations
alleged to have been made by [DRB] . . . .” Resp. Ex. 1, ¶ 19. Additionally, the
arbitration clause provides that “[t]he parties hereto specifically acknowledge that they
are and shall be bound by arbitration . . . .”
In the underlying civil action, Mr. and Mrs. Nelson allege a variety of defects in
the workmanship of the home, including “concrete significantly too soft throughout the
basement and elsewhere, missing/incomplete bracing for trusses and gables in the roof
system, unstable sub-grade soils beneath the home, broken concrete foundation walls
and hidden water damage in the finished basement.” Compl. ¶ 9. The Nelsons allege
the “septic system was installed in an unworkmanlike fashion, in violation of numerous
laws and regulations and in violation of acceptable building practice.” Compl. ¶ 6. In
reviewing the Complaint, Mr. Nelson’s disputes arise under and pursuant to the contract
and are related to their property. Accordingly, the arbitration provision covers Mr.
Nelson’s claims against DRB.
3.
The Transaction Relates to Interstate Commerce
Mr. Nelson does not dispute that the transaction is related to interstate
commerce. The United States Supreme Court “interpreted the term ‘involving
commerce’ in the FAA as the functional equivalent of the more familiar term ‘affecting
commerce’-words of art that ordinarily signal the broadest permissible exercise of
Congress’ Commerce Clause power.” Citizens Bank v. Alafabco, Inc., 539 U.S. 52, 56
(2003) (quoting Allied-Bruce Terminix Cos., Inc. v. Dobson, 513 U.S. 265, 273-74
(1995)). The Court noted that “the statute provides for ‘the enforcement of arbitration
agreements within the full reach of the Commerce Clause,’ therefore, it is perfectly clear
13
that the FAA encompasses a wider range of transactions than those actually ‘in
commerce’-that is, ‘within the flow of interstate commerce.’” Id. (internal quotation
marks, citation, and emphasis omitted).
In this case, the parties, Mr. Nelson and DRB, entered into a contract for
construction of a home that was built with materials transported in interstate commerce.
See EQT Corp. v. Miller, Civil Action No. 1:11CV197, 2012 WL 3839417, at *2 (N.D.W.
Va. Sept. 5, 2012) (finding agreement related to interstate commerce because “the work
performed under the relevant employment relationship involved a product which is
largely commercially transported and sold in interstate commerce.”). The agreement
was between Mr. Nelson and DRB, a Maryland corporation, to construct a home in
Berkeley County, West Virginia. The materials to construct the house were inevitably
transported through the channels of interstate commerce. Therefore, the contract
involved interstate commerce, and the third element is satisfied.
4.
The Nelsons Failed and Refused to Arbitrate the Dispute
The final element is also satisfied. The Nelsons failed and refused to arbitrate
the dispute by filing the suit in Berkeley County Circuit Court rather than attending
arbitration. Accordingly, all four elements exist for compelling arbitration.
B.
“The Savings Clause”: No Adequate Defense Exists to Prevent
Enforcement of the Arbitration Clause
The Nelsons argue that the Court should refuse to compel arbitration because
the arbitration clause is unconscionable. The Nelsons contend that the contract is one
of adhesion as “[n]one of the terms of the contract were bargained for by the parties
except the price” and “[t]he contract was full of pre-printed boiler-plate.” The Nelsons
14
argue that the contract “contains a one way (or unilateral) arbitration clause,” that
essentially forces them, but not DRB, to arbitration. The Nelsons do not challenge the
enforceability of the agreement as a whole; rather, they challenge the enforceability of
the arbitration provision of the agreement, paragraph 19. See Rent-A-Ctr., West, Inc. v.
Jackson, 561 U.S. 63, 130 S. Ct. 2772, 2778 (2010) (holding that a party’s challenge to
an arbitration clause is for the district court to consider, but “a party’s challenge to
another provision of the contract, or to the contract as a whole, does not prevent a court
from enforcing a specific agreement to arbitrate”).
Section 2 of the FAA permits courts to invalidate arbitration agreements using
general contract principles. See 9 U.S.C. § 2. “This savings clause permits agreements
to arbitrate to be invalidated by ‘generally applicable contract defenses, such as fraud,
duress, or unconscionability,’ but not by defenses that apply only to arbitration or that
derive their meaning from the fact that an agreement to arbitrate is at issue.” AT&T
Mobility LLC, __ U.S. ___, 131 S. Ct. at 1746; see also Syl. Pt. 6, Brown v. Genesis
Healthcare Corp., 724 S.E.2d 250 (W. Va. 2011) (Brown I) overruled on other grounds
by Marmet Health Care Ctr., Inc. v. Brown, __ U.S. __, 132 S. Ct. 1201 (2012) (“Under
the [FAA], 9 U.S.C. § 2, a written provision to settle by arbitration a controversy arising
out of a contract that evidences a transaction affecting interstate commerce is valid,
irrevocable, and enforceable, unless the provision is found to be invalid, revocable, or
unenforceable upon a ground that exists at law or in equity for the revocation of any
contract.”).
On certified question from the Fourth Circuit, the West Virginia Supreme Court of
Appeals noted that parties frequently challenge the enforceability of arbitration clauses
15
on the ground that the clauses lack consideration or lack equivalent promises. Nelson,
737 S.E.2d at 558. The Court held that “the formation of a contract with multiple
clauses only requires consideration for the entire contract, and not for each individual
clause.” Id. Thus, a single clause within a multi-clause contract does not require
separate consideration. However, the West Virginia Supreme Court of Appeals further
concluded that “under the doctrine of unconscionability, a trial court may decline to
enforce a contract clause—such as an arbitration provision—if the obligations or rights
created by the clause unfairly lack mutuality.” Id. Therefore, lack of mutuality of
obligation in the formation of a contract is “a factor for a court to consider when
assessing whether a contract (or provision therein) is unconscionable.” Id.
“Unconscionability has generally been recognized to include an absence of
meaningful choice on the part of one of the parties together with contract terms which
are unreasonably favorable to the other party.” Brown v. Genesis Healthcare Corp.,
729 S.E.2d 217, 226 (W. Va. 2012) (“Brown II”). Under West Virginia law, courts
“analyze unconscionability in terms of two component parts: procedural
unconscionability and substantive unconscionability.” Nelson, 737 S.E.2d at 558
(quoting Brown I, 724 S.E.2d at 285). In establishing procedural unconscionability,
courts look at “inequities, improprieties, or unfairness in the bargaining process and the
formation of the contract, inadequacies that suggest a lack of a real and voluntary
meeting of the minds of the parties.” Nelson, 737 S.E.2d at 558. In assessing the
substantive unconscionability, a court may look to the “unfairness in the terms of the
contract itself, and arises when a contract term is so one-sided that it has an overly
16
harsh effect on the disadvantaged party.” Id. In the substantive unconscionability
analysis, lack of mutuality in a contractual obligation is a proper element to consider. Id.
Therefore, “[i]f a provision creates a disparity in the rights of the contracting parties such
that it is one-sided and unreasonably favorable to one party, then a court may find the
provision is substantively unconscionable.” Id.
1. Procedural Unconscionability
The Nelsons argue that the contract is procedurally unconscionable for several
reasons. First, the Nelsons contend that the contract is one of adhesion because the
terms were pre-printed; the terms were not negotiated between the parties, except for
the price of the home; and the contract was presented on a take it or leave it basis.
Second, the Nelsons contend there was an “inequality of the parties’ bargaining position
. . . . [because] DRB controlled all the facts and the knowledge [Mr.] Nelson needed to
make a rational decision about the contract closing and withheld it from him.” Resp.
Mot., p. 10.
Procedural unconscionability requires “gross inadequacy in bargaining power.”
Adkins, 303 F.3d at 502 (quoting Troy Mining Corp. v. Itmann Coal Co., 346 S.E.2d 749,
753 (W. Va. 1986)). The West Virginia Supreme Court of Appeals set forth the following
guidelines for determining procedural unconscionability:
Procedural unconscionability is concerned with inequities, improprieties, or
unfairness in the bargaining process and formation of the contract.
Procedural unconscionability involves a variety of inadequacies that
results in the lack of a real and voluntary meeting of the minds of the
parties, considering all the circumstances surrounding the transaction.
These inadequacies include, but are not limited to, the age, literacy, or
lack of sophistication of a party; hidden or unduly complex contract terms;
the adhesive nature of the contract; and the manner and setting in which
the contract was formed, including whether each party had a reasonable
17
opportunity to understand the terms of the contract.
Syl. Pt. 17, Brown I.
The Nelsons argue that the contract was adhesive. “Procedural
unconscionability often begins with a contract of adhesion.” State ex rel. Richmond Am.
Homes of W. Va., Inc. v. Sanders, 717 S.E.2d 909, 921 (W. Va. 2011). However,
“[f]inding that there is an adhesion contract is the beginning point for analysis, not the
end of it; what courts aim at doing is distinguishing good adhesion contracts which
should be enforced from bad adhesion contracts which should not.” Id. (quoting State
ex rel. Dunlap v. Berger, 567 S.E.2d 265 (W. Va. 2002)). The West Virginia Supreme
Court cautioned that although adhesion contracts include all form contracts submitted
by one party on the basis of this or nothing, “[s]ince the bulk of contracts signed in this
country, if not every major Western nation, are adhesion contracts, a rule automatically
invalidating adhesion contracts would be completely unworkable.” Pingley v. Perfection
Plus Turbo-Dry, LLC, 746 S.E.2d 544, 550 (W. Va. 2013) (quotation marks and citation
omitted).
First, the Nelsons assert that the contract Mr. Nelson entered into with DRB was
a form contract. They argue that “[n]one of the terms of the contract were bargained for
by the parties except the price” and that the contract was presented on a “take it or
leave it basis” and “full of pre-printed boiler-plate” provisions. Resp. Mot., p. 5.
Therefore, the Nelsons contend the contract is one of adhesion.
The West Virginia Supreme Court of Appeals defines adhesion contracts as “all
‘form contracts’ submitted by one party on the basis of this or nothing.” State ex rel.
Dunlap, 567 S.E.2d at 273. A contract of adhesion “leaves the subscribing party little or
18
no opportunity to alter the substantive terms.” Brown II, 729 S.E.2d at 228 (quoting Syl.
Pt. 18, Brown I). Although the contract is pre-printed, the contract could be and was in
fact negotiated. The fill-in-the-blank provisions of the contract were for a description of
the property being purchased, the base price of the home, the option price, the initial
cash deposit amount, any additional cash deposit amount and date to be paid, the
balance due at closing, the amount DRB contributes to closing costs, the option to use
DRB’s preferred settlement attorney, title company, and lender, or one of the
purchaser’s own choosing, and a listing of addenda, including blank spaces to enter any
addenda not mentioned in the contract. In this case, there are ten addenda, listed in the
contract. See Resp. Ex. 1.
The Nelsons contend that Mr. Nelson negotiated only the price of the home and
none of the other terms. However, the contract and other statements indicate to the
contrary. Although the form was a “fill-in-the-blank” contract, the parties, DRB and Mr.
Nelson, negotiated over the fill-in-the-blank terms, including the price and other details
regarding the construction of the home. Therefore, this was not a contract of adhesion
as terms could be negotiated and modified. Mr. Nelson had an opportunity to and in
fact did alter the substantive terms of the contract. For example, Mr. Nelson
successfully negotiated over using an outside lender and keeping all of the incentives.
Additionally, the Nelsons provide no evidence that there were no meaningful
alternatives to signing the contract with DRB. The Nelsons were free to seek the
services of another homebuilder, as DRB is not the only residential builder in operation
in the Berkeley County area of West Virginia. See Ciampi v. Dan Ryan Builders, Inc.,
Civ. Action No. 3:10-CV-55 (N.D.W. Va. July 15, 2010); see also Saturn Dist. Corp. v.
19
Williams, 905 F.2d 719, 727 (4th Cir. 1990) (“[T]he mere fact that Saturn requires
dealers to agree to its arbitration provisions in order to obtain a Saturn dealership does
not make its Dealership Agreement non-consensual. If a dealer does not wish to agree
to non-negotiable arbitration provisions, the dealer need not do business with Saturn.”).
Additionally, the Nelsons were represented by a professional licensed realtor, who
certainly could have presented them with other options in the area. Mr. Nelson also
stated that he found a similar home in the Georgetown Orchard Subdivision on the
Internet. Therefore, Mr. Nelson conducted an independent search of available homes in
the area, and he knew there were other builders, homes, and lots available to him.
Second, although the Nelsons have not directly argued that they are
unsophisticated consumers and DRB is a large sophisticated corporation, it is proper for
the Court to consider possible inadequacies in bargaining power, including the age,
literacy, or lack of sophistication of a party. See Syl. Pt. 17, Brown I. The Nelsons are
high school graduates and have some higher education. Compare State ex rel. Saylor
v. Wilkes, 613 S.E.2d 914 (W. Va. 2005) (weighing an employee’s “tenth grade
education” in favor of finding an employee agreement unenforceable). Mr. Nelson
received a Bachelor’s degree from Excelsior College, and he has worked for years in
the intelligence field. He is currently employed as a supervisor at the Department of
Health and Human Services.
Mr. Nelson did not allege his age weighs in favor of finding that he is an
unsophisticated consumers. Compare Arnold v. United Cos. Lending Corp., 511 S.E.2d
854 (W. Va. 1998) (finding an agreement unconscionable based upon predatory lending
because United Lending was a national lending institution and the Arnolds were elderly,
20
uneducated consumers) overruled on other grounds by Nelson, 511 S.E.2d 854. Mr.
Nelson did not allege that he was illiterate or unable to read the contract. Mr. Nelson
also had the opportunity to review the contract containing the arbitration provision after
he signed the contract and prior to closing as he was provided with a copy of the
contract. Mr. Nelson also admitted that he could have retained an attorney to review
the contract, but he did not. Mr. Nelson failed to identify any conduct on the part of DRB
that prevented him from reading and reviewing the contract. Mr. Nelson admitted that
when reviewing the contract, he was given an opportunity to ask questions about it, was
given enough time to read through it, and was not rushed into signing it. Also, Ms. Ho
testified that Mr. Nelson was very astute and tedious. She described Mr. Nelson as
being very careful and taking his time in reviewing the documents.
Third, Mr. Nelson argued that the arbitration provision was not explained to them
or highlighted. Mr. Nelson averred that “[a]t no point during the process was [he]
directed to the arbitration agreement nor did [he] read it.” N. Nelson Aff., ¶ 33.
However, there is no evidence or suggestion that Mr. Nelson attempted to opt-out of the
provision or negotiate its terms. Also, there is no evidence that Mr. Nelson even asked
a question regarding the arbitration provision.
The arbitration provision was not hidden in a lengthy form contract. Rather, the
pre-printed form contract was relatively short–seven pages. The addenda was fortynine pages. On page five of the contract, the page with the arbitration provision, the
heading is clearly marked in bold typeface and all capital letters: 19. ARBITRATION.
Additionally, Mr. Nelson initialed directly below the arbitration provision on page five.
Although Mr. Nelson claims he did not read the arbitration provision, he specifically
21
acknowledged when he signed the contract that he had read the contract and
understood its provisions, including the arbitration provision. This provision was
obvious, as it was in all capital letters directly above the signature line on the last page.
Also, the arbitration provision in the contract briefly explained the process to the
parties. First, the provision explained that any claims arising from the contract or by
virtue of alleged representations “shall be settled and finally determined by arbitration
and not in a court of law.” Second, the provision stated that before “commencing
arbitration, the dispute shall first be mediated.” This highlighted that mediation and
arbitration are two different processes. Last, the provision stated that the parties
“specifically acknowledge that they are and shall be bound by arbitration and are barred
from initiating any proceeding or action whatsoever in connection with this Agreement.”
This emphasized that arbitration is a binding process, and that parties are prohibited
from initiating other proceedings or actions. Additionally, Ms. Ho testified that her usual
practice was to explain the arbitration provision and point out that if a problem arose
between the purchaser and DRB, the purchaser was willing to go through arbitration
instead of to judge and jury in order to save the company money. Therefore, the
arbitration provision in the contract provided some explanation of the process.
Fourth, the Nelsons argue that the contract was procedurally unfair because
“DRB controlled all the facts and the knowledge [Mr.] Nelson needed to make a rational
decision about the contract closing and withheld it from him, then made him pay for a
lawyer who advised him to close even though lost his last chance to avoid arbitration by
doing so.” Resp. Mot., p. 10. Indeed, the Nelsons argue this Court should consider the
issues regarding the construction of the home and the fact that DRB has used the same
22
settlement attorney in many real estate closings because the facts go to elements of
deception, compulsion, and bargaining power. Although DRB is a home builder in
several states, there is no evidence that DRB is “either a monopolistic or olgopolistic
position in [this] particular line of commerce.” Pingley, 746 S.E.2d at 551.
In viewing all the circumstances, the Nelsons have failed to demonstrate a gross
inadequacy in bargaining power suggesting a lack of real and voluntary meeting of
minds. Mr. Nelson’s age, literacy, education, the lack of hidden or unduly complex
terms in the contract, and the manner and setting of executing the contract demonstrate
that Mr. Nelson had a reasonable opportunity to understand the terms of the contract.
Therefore, in light of all the facts, the Court does not find the contract was procedurally
unconscionable. Although West Virginia law requires a finding of “both ‘gross
inadequacy in bargaining power’ and ‘terms unreasonably favorable to the stronger
party,’” this Court will also explain why it does not find substantive unconscionability.
Adkins, 303 F.3d at 502 (quoting Troy Mining Corp., 346 S.E.2d at 753 (internal
citations omitted)).
2.
Substantive Unconscionability
The Nelsons argue that the arbitration provision should not be enforced because
it is substantively unconscionable. The Nelsons point out that “DRB has the power to
opt for either court or arbitration if it seeks to enforce the Agreement of Sale. On the
other hand, once DRB has [Mr.] Nelson’s money, there are no other claims it might
bring. Whenever [Mr.] Nelson wishes to make a claim, however, he is bound to
arbitration.” Resp.’s Mot., p. 11-12.
The West Virginia Supreme Court of Appeals explained that “[s]ubstantive
23
unconscionability involves unfairness in the contract itself–‘overall imbalance, onesidedness, laesio enormis, and the evils of the resulting contract’–and whether a
contract term has ‘overly harsh or one-sided results’ or is ‘so one-sided as to lead to
absurd results.’” Brown I, 724 S.E.2d at 287 (internal citations omitted). Courts must
focus their inquiry on “whether the [contract] term is one-sided and will have an overly
harsh effect on the disadvantaged party. To determine substantive unconscionability,
courts have focused on vague matters such as the commercial reasonableness of the
contract terms, the purpose and effect of the terms, the allocation of the risks between
the parties, and similar public policy concerns.” Id. (internal citations omitted).
“Substantive unconscionability may manifest itself in the form of an agreement requiring
arbitration only for the claims of the weaker party but a choice of forums for the claims
of the stronger party.” Brown II, 729 S.E.2d at 228. Therefore, lack of mutuality of
obligation is “a factor for a court to consider when assessing whether a contract (or
provision therein) is unconscionable.” Nelson, 737 S.E.2d at 558.
In this case, the Nelsons argue that the contract is substantively unconscionable
because it lacks mutuality of obligation. Paragraph 19 provides:
in the event You default by failing to settle on the Property within the time
required under this Agreement, then We may either (i) commence an
arbitration proceeding under this Section 19, or (ii) bring an action for its
damages, including reasonable attorneys’ fees as a result of the default in
a court having jurisdiction over the Purchaser. You expressly waive your
right to mediation and arbitration in such event.
Resp.’s Ex. 1, ¶ 19.
Upon reviewing the relative remedies of the parties, the Court finds that the
arbitration provision is commercially reasonable. Although DRB is permitted to seek a
24
remedy from the courts if Mr. Nelson defaults, this is a narrow remedy. Essentially, the
only instance when DRB may go to court rather than arbitration is to enforce the
contract and recover damages in the event of default, which DRB admits is “failing to
settle on a property.” For every other issue arising out of the contract, DRB must go to
arbitration. See Miller v. Equifirst Corp. of W. Va., Civil Action No. 2:00-0335, 2006 WL
2571634, at *11 (S.D.W. Va. Sept. 5, 2006) (finding an agreement was not so one-sided
as to be unconscionable where the lender defendants retained access to a judicial
forum for foreclosure and bankruptcy proceedings, but were required to arbitrate all
other claims). Therefore, the contract term is not so one-sided as to have an overly
harsh effect on Mr. Nelson. Additionally, this Court, as evidenced by the procedural
unconscionability analysis, does not find that there is a gross inadequacy in bargaining
power as Mr. Nelson is a sophisticated consumer with higher levels of education and
training. Taking into account Mr. Nelson’s bargaining position when reviewing the
contract, the Court does not find that the terms unreasonably favor DRB as to make the
contract unconscionable.
In sum, considering the totality of the circumstances in this case, Mr. Nelson has
failed to demonstrate that the contract and its terms were so unfair that it resulted in an
overall imbalance or one-sidedness of the contract. Therefore, the Court does not find
substantive unconscionability.
C.
Compelling Nonsignatories to Arbitration
The Nelsons argue that Mr. Nelson’s wife, Angelia, is not bound to arbitrate her
claims because she is not a signatory to the contract containing the arbitration
provision. Additionally, the Nelsons argue that any claims against Eagle should not be
25
subject to arbitration because Eagle was not a signatory of the contract.
As a general principle, “arbitration is a matter of contract and a party cannot be
required to submit to arbitration any dispute which it has not agreed to arbitrate.” R.J.
Griffin & Co. v. Beach Club II Homeowners Ass’n, 384 F.3d 157, 160 (4th Cir. 2004)
(internal quotation marks omitted). However, “[i]t is well-established . . . that a
nonsignatory to an arbitration clause may, in certain situations, compel a signatory to
the clause to arbitrate the signatory’s claims against the nonsignatory despite the fact
that the signatory and nonsignatory lack an agreement to arbitrate.” Am. Bankers Ins.
Group, Inc. v. Long, 453 F.3d 623, 627 (4th Cir. 2006).
There are two circumstances when equitable estoppel allows a nonsignatory to
compel arbitration: (1) “when the signatory to a written agreement containing an
arbitration clause must rely on the terms of the written agreement in asserting its claims
against the nonsignatory” and (2) “when the signatory raises allegations of substantially
interdependent and concerted misconduct by both the nonsignatory and one or more of
the signatories to the contract.” Brantley v. Republic Mortg. Ins. Co., 424 F.3d 392, 39596 (4th Cir. 2005) (internal quotations and citation omitted). The Fourth Circuit Court of
Appeals stated that “at a minimum, there must be allegations of coordinated behavior
between a signatory and a nonsignatory defendant, and that the claims against both the
signatory and nonsignatory defendants must be based on the same facts, be inherently
inseparable, and fall within the scope of the arbitration clause.” Aggarao v. MOL Ship
Mgmt. Co., Ltd., 675 F.3d 355, 374 (4th Cir. 2012) (internal citations and quotations
omitted).
The West Virginia Supreme Court of Appeals has applied equitable estoppel as a
26
basis for enforcing a forum selection clause against signatories and nonsignatories to a
contract. See Caperton v. A.T. Massey Coal Col., Inc., 690 S.E.2d 323, 347 (W. Va.
2009) (“In order for a non-signatory to benefit from or be subject to a forum selection
clause, the non-signatory must be closely related to the dispute such that it becomes
foreseeable that the non-signatory may benefit from or be subject to the forum selection
clause.”) (noting cases applying equitable estoppel to bind a nonparty of a contract to
the contract’s arbitration or forum selection clause). Additionally, arbitration clauses
have been recognized as a form of a forum selection clause. Holmes v. Chesapeake
Appalachia, LLC, Civil Action No. 5:11-cv-123, 2012 WL 3647674, at *12 (N.D.W. Va.
Aug. 23, 2012).
1.
Claims Against Eagle
The Nelson’s Complaint alleges two claims against Eagle. First, the Nelsons
allege that DRB and Eagle, “acting in concert, breached their duties to the Nelsons in a
negligent, grossly negligent, and/or willful, wanton, reckless manner” in the design and
construction of the septic system. Second, the Nelsons allege that as a result of DRB’s
and Eagle’s negligence, Angelia Nelson suffered severe bodily injury.
The Nelsons have alleged that Eagle, a nonsignatory to the contract, acted in
concert with DRB, a signatory to the contract, to act in a negligent and reckless manner
in the design and construction of the septic system. Therefore, the Nelsons have
alleged substantially interdependent and concerted misconducted by both DRB and
Eagle. Additionally, the Nelsons seek damages against Eagle and DRB, jointly and
severally, for negligence, gross negligence, and willful, wanton, and reckless
misconduct. The allegations of their coordinated behavior is based on the same facts
27
as alleged in the Complaint, are inherently inseparable, and fall within the scope of the
broad arbitration clause.
Mr. Nelson, a signatory to the contract, is equitably estopped from arguing that
Eagle was not a signatory to the arbitration clause because his individual causes of
action against Eagle in the underlying Complaint raises allegations of substantially
interdependent and concerted misconduct by Eagle and DRB. Accordingly, Mr.
Nelson’s claims against Eagle are compelled to arbitration.
2.
Claims Brought by Angelia Nelson
Angelia Nelson alleges several claims against Dan Ryan Builders, Inc. and Eagle
Excavating and Contracting, LLC. However, unlike her husband, Mrs. Nelson did not
sign the contract containing the arbitration clause. As a general principle, “arbitration is
a matter of contract and a party cannot be required to submit to arbitration any dispute
which it has not agreed to arbitrate.” R.J. Griffin & Co., 384 F.3d at 160. However, “[i]t
is well-established . . . that a nonsignatory to an arbitration clause may, in certain
situations, compel a signatory to the clause to arbitrate the signatory’s claims against
the nonsignatory despite the fact that the signatory and nonsignatory lack an agreement
to arbitrate.” Am. Bankers Ins. Group, Inc., 453 F.3d at 627. As discussed above, there
are two exceptions to the general rule.
In this case, however, the two exceptions to the general rule do not apply. The
first exception does not apply because Mrs. Nelson is not a “signatory to a written
agreement containing an arbitration clause” that “rel[ies] on the terms of the written
agreement in asserting [her] claims against the nonsignatory.” See Brantley, 424 F.3d
at 395-86. Indeed, Mrs. Nelson never signed the contract, and she is not bound by its
28
terms. Additionally, the contract stated it was between “You and Us for the sale of land
and a home.” “You” was defined as the “Purchaser who signs below.” Therefore, Mr.
Nelson, as the only purchaser who signed the contract, was bound to the contract–not
Mrs. Nelson.
The second exception does not apply because she is not a signatory “rais[ing]
allegations of substantially interdependent and concerted misconduct by both the
nonsignatory and one or more of the signatories to the contract.” Id. Again, Mrs.
Nelson is not a signatory to the contract. Therefore, the two exceptions do not apply to
Mrs. Nelson and her claims. As a result, Mrs. Nelson’s claims are not ordered to
arbitration as she is not bound by the arbitration clause in the contract.
IV. Conclusion
For the reasons stated above, this Court finds that Respondents’ Motion to
Dismiss Arbitration should be, and hereby is, DENIED IN PART and GRANTED IN
PART. Accordingly, Mr. Nelson’s claims against Dan Ryan Builders, Inc. and Eagle
Excavating and Contracting, LLC are STAYED and SUBMITTED TO ARBITRATION in
accordance with Paragraph 19 of the Agreement of Sale. The parties are DIRECTED to
notify this Court forthwith upon the conclusion of the matter. However, Angelia Nelson’s
claims against Dan Ryan Builders, Inc. and Eagle Excavating and Contracting, LLC are
NOT COMPELLED TO ARBITRATION..
It is so ORDERED.
The Clerk is hereby directed to transmit copies of this Order to all counsel of
record herein.
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DATED: February 6, 2014
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