Another South Carolina Arbitration Case

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Following these cases is like watching a tennis match!

This is the third blog on this topic this summer! The June 7 blog surrounded a South Carolina Court of Appeals case* that held an arbitration clause in a roofing supplier’s warranty provision was not unconscionable. The lower court had ruled that the supplier’s sale of shingles was based on a contract of adhesion and that the injured property owners lacked any meaningful choice in negotiating the warranty and arbitration terms, which were actually contained in the packaging for the shingles.

The Court of Appeals indicated that the underlying sale was a typical modern transaction for goods in which the buyer never has direct contact with the manufacturer to negotiate terms. The Court found it significant that the packaging for the shingles contained a notation:  “Important: Read Carefully Before Opening” providing that if the purchaser is not satisfied with the terms of the warranty, then all unopened boxes should be returned. The Court pointed to the standard warranty in the marketplace that gives buyers the choice of keeping the goods or rejecting them by returning them for a refund, and blessed the arbitration provision.

SCORE:  15- Love in favor of arbitration

tennis ball court

Let’s Talk Dirt on July 14 addressed a South Carolina Supreme Court case that appeared to take the opposite approach. ** A national residential construction company’s contract contained a number of “oppressive and one-sided provisions”, including an attempted waiver of the implied warranty of habitability and a prohibition on awarding money damages of any kind. The Supreme Court held that the home purchasers lacked a meaningful ability to negotiate their contract, the only remedy through which appeared to be repair or replacement.

SCORE:  15-all.

Note that Justices Kittredge and Pleicones dissented, stating that the contract involves interstate commerce and, as a result, is subject to the Federal Arbitration Act (FAA), “a fact conspicuously absent in the majority opinion”. The dissent stated that federal law requires that unless the claim of unconscionability goes to the arbitration clause itself, the issue of enforceability must be resolved by the arbitrator, not by the courts. The majority construed the Warranties and Dispute Resolution provisions of the contract as comprising the arbitration agreement and thus circumvented controlling federal law, according to the dissent.

Since the property owners raised no challenges to the arbitration clause itself, the dissent would have required that the other challenges be resolved through arbitration.

In a case dated August 17***, the majority decision is written by Chief Justice Pleicones with Justice Kittredge concurring. (Do you see a pattern here?) This case involved a residential subdivision that had been built on property previously used as an industrial site. The developer had demolished and removed all visible evidence of the industrial site and removed underground pipes, valves and tanks.

The plaintiffs bought a “spec” home in the subdivision and later discovered on their property PVC pipes and a metal lined concrete box containing “black sludge”, which tested positive as a hazardous substance. The present lawsuit was brought, alleging the developer failed to disclose the property defects. The developer moved to compel arbitration.

Paragraph 21 of the purchase agreement stated that the purchaser had received and read a copy of the warranty and consented to its terms. The purchasers had been provided with a “Homeowner Handbook” containing the warranty.

The circuit court, which was affirmed by the Court of Appeals, found the arbitration clause was enforceable for two reasons:

  1. it was located within the warranty booklet, making its scope limited to claims under the warranty. The Supreme Court held that the plain and unambiguous language of the arbitration clause provides that all claims, including ones based in warranty, are subject to arbitration.
  2. The alleged outrageous tortious conduct of the developer in failing to disclose concealed contamination made the outrageous torts exception to arbitration enforcement applicable. The Supreme Court overruled all South Carolina cases that applied to outrageous torts exception, making that exception no longer viable in South Carolina.

The Supreme Court discussed the heavy presumption in favor of arbitration by the FAA and in the federal courts and the push to place arbitration agreements on equal footing with other contracts and enforce them in accordance with their terms.

SCORE30-15 in favor of arbitration

You won’t be surprised to learn that there was a dissent, this time by Acting Justice Toal, and a concurrence, by Justices Hearn and Beatty.

And remember that the CFPB recently announced a proposed rule that would ban financial companies from using mandatory pre-dispute arbitration clauses to deny consumers the right to join class action lawsuits.

SCORE:  30-all

All of these authorities affect matters involving dirt law. So the tennis match involving arbitration clauses in our area is still being played, and we will continue to watch!

*One Belle Hall Property Owners Association v. Trammell Crow Residential Company, S.C. Ct. App. Opinion 5407 (June 1, 2016)
** Smith v. D.R. Horton, Inc., S.C. Supreme Court Opinion 27643 (July 6, 2016)
*** Parsons v. John Wieland Homes, S.C. Supreme Court Opinion 27655 (August 17, 2016

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It’s Tough to Nail Down the Treatment of Arbitration Clauses in Housing Cases

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Authorities disagree!

On June 7, this blog discussed a South Carolina Court of Appeals case* that held an arbitration clause in a roofing supplier’s warranty provision was not unconscionable. The lower court had ruled that the supplier’s sale of shingles was based on a contract of adhesion and that the injured property owners lacked any meaningful choice in negotiating the warranty and arbitration terms, which were actually contained in the packaging for the shingles.

The Court of Appeals indicated that the underlying sale was a typical modern transaction for goods in which the buyer never has direct contact with the manufacturer to negotiate terms. The Court found it significant that the packaging for the shingles contained a notation:  “Important: Read Carefully Before Opening” providing that if the purchaser is not satisfied with the terms of the warranty, then all unopened boxes should be returned. The Court pointed to the standard warranty in the marketplace that gives buyers the choice of keeping the goods or rejecting them by returning them for a refund, and blessed the arbitration provision.

In a residential construction case, the South Caroline Supreme Court appeared to take the opposite approach last week.**  A national residential construction company’s contract contained a number of “oppressive and one-side provisions”, including an attempted waiver of the implied warranty of habitability and a prohibition on awarding of money damages of any kind.  The Supreme Court held that the home purchasers lacked a meaningful ability to negotiate their contract, the only remedy through which appeared to be repair or replacement.

nailing roofJustices Kittredge and Pleicones dissented, stating that the contract involves interstate commerce and, as a result, is subject to the Federal Arbitration Act (FAA), “a fact conspicuously absent in the majority opinion”.  The dissent stated that federal law requires that unless the claim of unconscionability goes to the arbitration clause itself, the issue of enforceability must be resolved by the arbitrator, not by the courts. The majority construed the Warranties and Dispute Resolution provisions of the contract as comprising the arbitration agreement and thus circumvented controlling federal law, according to the dissent.

The property owners raised no challenges to the arbitration clause itself, so the dissent would have required that the other challenges be resolved through arbitration.

Consider the CFPB’s recently-announced proposed rule that would ban financial companies from using mandatory pre-dispute arbitration clauses to deny consumers the right to join class action lawsuits. That proposed rule can be read here and is the subject of May 12 blog entitled “CFPB’s proposed rule would allow consumers to sue banks”.

It seems the authorities are all over the place on the issue of arbitration provisions affecting consumers in the housing arena. We will surely see more discussion on this topic!

 

*One Belle Hall Property Owners Association, Inc., v. Trammell Crow Residential Company, S.C. Ct. App. Opinion 5407 (June 1, 2016).

**Smith v. D.R. Horton, Inc., S.C. Supreme Court Opinion 27645 (July 6, 2016).

SC Supreme Court Decides Family Equitable Mortgage Case

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…and dirt lawyers are gratified to see the deeds called deeds!tug o war

On Oct. 28, the South Carolina Supreme Court decided a family dispute surrounding a transaction between a deceased brother and his sister and held that two deeds to the sister were, in fact, deeds, and did not constitute an equitable mortgage*.

While Justice Kittredge’s dissent suggested the Court established a “categorical rule” that only evidence created contemporaneously with a conveyance can be considered in support of an equitable mortgage, the majority, in a footnote, disagreed with Justice Kittredge’s interpretation and signified subsequent events and writings may assist in determining the intent of the parties at the time of the conveyance.

After two appeals, the facts remain murky.

Kenneth Walker owned and lived on a 200-acre farm in Colleton County. In 1996, he conveyed 26.52 acres to his sister, Catherine Brooks. The stated consideration was $13,250, although Brooks testified she paid nothing. In 2002, Walker conveyed an additional 15.16 acres to Brooks for the stated consideration of $5.00.

According to Brooks, her brother conveyed the property to her because she supported him emotionally and financially. She testified that she paid his debts, paid his electric and telephone bills, bought his groceries, gave him cash for living expenses, helped him receive social security benefits and served as trustee for those benefits.

In 2004, at Walker’s request, Brooks wrote a note stating that Walker intended proceeds from sand removal and soil and waste water discharge onto the property would be paid to Brooks until she received $60,000. Walker and Brooks also generated a ledger that began with an entry of $60,000 and ended with an entry of $27,400.

It is clear that Brooks did not exercise control over the property.

deed - definitionBefore Walker died, his attorney sent a letter to Brooks referring to this note and ledger, and requesting her to tender a deed in exchange for $2,893.87. This amount was inexplicable, according to the Court.  After Walker’s death, his son and personal representative offered to pay Brooks $27,400 in exchange for a deed. Brooks refused, and this dispute arose.

The special referee held that the note and ledger showed that Walker was indebted to Brooks at the time of his death, and the conveyance was intended as security for the debt. He found the existence of an equitable mortgage, and held that the estate was entitled to the property upon payment of $27,400. The Court of Appeals reversed, and the Supreme Court granted certiorari.

The Supreme Court, referring to a C.J.S. article and a prior case, indicated that the existence of an equitable mortgage must be shown by clear and convincing evidence, and that the intent of the parties must be evaluated at the time of the conveyance.  The court referred to the personal representative’s “self-serving testimony” and the fact that Brooks did not exercise control over the property as the only evidence that the parties intended to establish an equitable mortgage at the time the property was conveyed. The existence of the note and ledger were discounted as not being contemporaneous with the deeds.

Justice Kittredge would have reinstated the trial court’s finding of an equitable mortgage, denouncing the Court’s “categorical rule” in the face of these “equitable, fact intensive inquiries.” He found the existence of the note and ledger persuasive that the parties intended that the conveyance was, in legal effect, a mortgage.

Like dirt lawyers everywhere, I like certainty when it comes to deeds and find the Supreme Court’s holding comforting.

 

 

*Walker v. Brooks, Appellate Case No. 2013-001377