REL: 12/21/2007
Notice: This opinion is subject to formal revision before publication in the advance
sheets of Southern Reporter. Readers are requested to notify the Reporter of Decisions,
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SUPREME COURT OF ALABAMA
OCTOBER TERM, 2007-2008
____________________
1061255
____________________
Paragon Limited, Inc.
v.
Emily Boles
Appeal from Tallapoosa Circuit Court
(CV-06-0099)
STUART, Justice.
Paragon Limited, Inc. ("Paragon"), appeals from an order
of the trial court holding that Paragon waived its right to
compel
Emily
arbitration.
Boles
to
submit
her
We reverse and remand.
claims
against
it
to
1061255
Facts and Procedural History
On
April
contract
15,
2005,
pursuant
to
residence for Boles.
claiming
that
it
Boles
which
and
Paragon
Paragon
was
entered
to
into
a
construct
a
On August 22, 2006, Boles sued Paragon,
had
breached
the
construction
contract
because Paragon failed to complete the construction of the
house and had allegedly overcharged Boles for the work it had
completed.
On October 23, 2006, Paragon filed an answer to
Boles's complaint.
The answer denied Boles's claims, asserted
various
asserted
defenses,
various
counterclaims
against
Boles, and asserted a third-party claim against Compass Bank,
who is not a party to this appeal.
One of the counterclaims
sought to enforce a lien that Paragon had filed on August 25,
2006,
against
the
property
construction contract.
construction
contract
that
was
the
subject
of
the
The answer also asserted that the
contained
a
valid
and
enforceable
arbitration clause, which required that any dispute related to
the contract be settled by arbitration.
Contemporaneously
with filing its answer, Paragon filed a "motion to compel
arbitration
arbitration,"
or,
alternatively,
which
further
to
detailed
2
stay
action
Paragon's
pending
claim
that
1061255
Boles must submit her claims against it to arbitration.
Boles
filed a motion in opposition to arbitration.
On January 9, 2007, the trial court conducted a hearing
on the motion to compel arbitration and at the end of the
hearing requested that each party submit a proposed order to
the court.
On February 21, 2007, the trial court entered the
order submitted by Boles, holding that Paragon had waived its
right to arbitration because it filed the lien against the
property.
Specifically, the trial court held:
"Pending before this Court is Defendant['s],
Paragon Limited, Inc., Motion to Stay Proceedings.
A hearing was held on the 9th day of January, 2007,
on this matter and all parties [were] present. This
Court has reviewed the motion, responses, and the
evidentiary submissions of the parties.
Upon
consideration of the pleadings and evidentiary
submission the Court concludes that [Paragon]'s
Motion to Stay Proceedings is due to be denied.
"The Court determined that [Boles] and [Paragon]
had a contract and in that contract there was an
Arbitration Clause. The subject of the contract was
the construction of [Boles]'s home by [Paragon].
"[Paragon] has waived its right to arbitration
under the Federal Arbitration Act, 9 U.S.C.S. §§
1-16 by failing to submit its claims to arbitration
and substantially invoking the litigation machinery
prior to demanding arbitration. [Paragon] used the
litigation process to its benefit and to the
disadvantage of the Plaintiff, Emily Boles, and the
third party Defendant, Compass Bank.
3
1061255
"On or about August 25, 2006, [Paragon] filed a
lien in the Probate Court of Tallapoosa County
against [Boles]'s property for work performed on
[Boles]'s house.
The work that is the subject of
the lien is that which is contemplated by the
contract. A lien is a creation of a statute not a
contract. The lien is a creation of law, and not of
contract; and the law, and not the contract,
determines the character, extent, and [possibility]
of enforcement. Crawford v. Sterling, 155 Ala. 511,
46 So. 849 (Ala. 1908).
A materialman's or
mechanic's lien created by this section loses all
force and vitality unless suit is brought and
prosecuted to final judgment. United States v.
Costas, 273 Ala. 445, 142 So. 2d 699 (Ala. 1962).
[Paragon] has benefitted from the filing of the
lien, by protecting its claim against [Boles], and
making [its] claim a priority over the mortgage of
the third party Defendant, Compass Bank. [Boles] has
been damaged by the filing of the lien because it
has clouded her title in the property.
"[Paragon] never submitted its claims to be
arbitrated, nor notified [Boles] that it was
submitting its claims to arbitration.
It did not
raise the issue of arbitration until it was sued by
[Boles] for breach of contract and breach of
warranty.
[Paragon]
has
filed
an
answer
and
counterclaim
against
[Boles].
[Paragon]'s
counterclaims against [Boles] are contrary to the
terms of the contract, asking for compensation for
work performed above and beyond that which was
agreed to in the contract and the change orders. Ex
parte Prendergast, 678 So. 2d 778 (Ala. 1996).
"[Paragon]'s motion is due to be denied because
it substantially invoked the litigation machinery
and
benefitted
from
it.
[Paragon]'s
actions
disadvantaged [Boles] and the third party Defendant
at the same time it benefitted [Paragon]. [Paragon]
has never submitted its own claims to arbitration."
4
1061255
On
March
22,
2007,
Paragon
filed
a
motion
to
alter,
amend, or vacate the order, which the trial court denied on
May 9, 2007.
On May 23, 2007, Paragon appealed.
Standard of Review
"We review the trial court's grant or denial of a motion
to compel arbitration de novo." Title Max of Birmingham, Inc.
v. Edwards, [Ms. 1051140, May 18, 2007] ___ So. 2d ___, ___
(Ala. 2007).
Issues and Analysis
The trial court and both parties appear to agree that the
construction contract contains a valid arbitration clause and
that
that
clause
encompasses
any
claim
related
to
the
contract, including the claims brought by Boles in the present
case.
"had
The trial court explicitly held that Paragon and Boles
a
contract
and
[a]rbitration [c]lause."
in
that
contract
there
was
an
However, the trial court held that
Paragon had waived its right to enforce the arbitration clause
because it "substantially invok[ed] the litigation machinery
prior
to
demanding
arbitration"
and
"used
the
litigation
process to its benefit and to the disadvantage of [Boles]."
This holding was based solely on the fact that Paragon had
5
1061255
filed a lien against the property that was the subject of the
contract.
On appeal, Paragon disputes the trial court's holding and
alleges that it did not waive its right to arbitration.
her
response
Boles
does
Instead,
argument.
brief,
not
Boles
raises
a
respond
new
to
In
Paragon's
argument.
Boles
alleges that Paragon cannot maintain an action to enforce any
provision of the construction contract because, in a separate
administrative
proceeding,
Paragon
entered
into
a
consent
agreement with the Alabama Home Builders Licensure Board in
which Paragon admitted that it had undertaken to construct
Boles's residence without holding a required license and,
thus,
under
maintain
any
§
34-14A-14,
action
to
Ala.
Code
enforce
1975,
the
Paragon
provisions
cannot
of
the
residential-home-building contract. 1
I.
1
Section 34-14A-14, Ala. Code 1975, provides, in part, as
follows: "A residential home builder, who does not have the
license required, shall not bring or maintain any action to
enforce the provisions of any contract for residential home
building which he or she entered into in violation of this
chapter."
6
1061255
First, this Court must decide whether the trial court
erred
when
it
held
that
Paragon
had
waived
its
right
to
arbitration by filing a lien against the property.
"It is well settled under Alabama law that a
party may waive its right to arbitrate a dispute if
it substantially invokes the litigation process and
thereby substantially prejudices the party opposing
arbitration. Whether a party's participation in an
action amounts to an enforceable waiver of its right
to arbitrate depends on whether the participation
bespeaks an intention to abandon the right in favor
of the judicial process, and, if so, whether the
opposing party would be prejudiced by a subsequent
order requiring it to submit to arbitration.
No
rigid rule exists for determining what constitutes
a
waiver
of
the
right
to
arbitrate;
the
determination as to whether there has been a waiver
must, instead, be based on the particular facts of
each case."
Companion Life Ins. Co. v. Whitesell Mfg., Inc., 670 So. 2d
897, 899 (Ala. 1995).
Thus, "[i]n order to demonstrate that
the right to arbitrate a dispute has been waived, the party
opposing arbitration must demonstrate both (1) that the party
seeking
arbitration
substantially
invoked
the
litigation
process, and (2) that the party opposing arbitration would be
substantially prejudiced by an order requiring it to submit to
arbitration." SouthTrust Bank v. Bowen, 959 So. 2d 624, 633
(Ala. 2006).
Furthermore, "[o]ur cases continue to make it
clear that, because of the strong federal policy favoring
7
1061255
arbitration, a waiver of the right to compel arbitration will
not be lightly inferred, and, therefore, that one seeking to
prove waiver has a heavy burden." Mutual Assurance, Inc. v.
Wilson, 716 So. 2d 1160, 1164 (Ala. 1998).
Paragon argues that it did not substantially invoke the
litigation process by filing a lien against the property and
that Boles has not carried her heavy burden of showing that,
because
the
lien
was
filed,
she
would
be
substantially
prejudiced by an order requiring her to submit her claims to
arbitration.
This
Court
has
never
specifically
decided
whether filing a lien constitutes a substantial invocation of
the litigation process for purposes of a motion to compel
arbitration, or whether a party opposing arbitration would be
substantially
prejudiced
if
she
is
required
to
submit
to
arbitration after the other party files a lien against the
property that is the subject of the contract containing the
arbitration clause.
in
dicta,
mechanic's
that
lien,
However, this Court has suggested, albeit
filing
while
an
answer
and
simultaneously
a
cross-claim
filing
a
for
motion
a
to
compel arbitration, does not substantially prejudice the party
opposing arbitration. Eastern Dredging & Constr., Inc. v.
8
1061255
Parliament House, L.L.C., 698 So. 2d 102, 104 (Ala. 1997). But
cf. Ex parte Prendergast, 678 So. 2d 778 (Ala. 1996) (deciding
that
a
home
builder
had
waived
its
right
to
arbitrate
homeowners' warranty claims by doing all the following: filing
a lien on the property, initiating foreclosure proceedings,
filing an answer and counterclaim to the homeowners' claims,
and demanding arbitration only after the builder had already
received,
through
the
litigation
process,
the
amount
the
builder had claimed from the homeowners).
This Court has
explicitly
the
held
that
mere
invocation
of
litigation
process, alone, does not substantially prejudice the party
opposing arbitration. 2
Generally, this Court has found that
2
See, e.g., Zedot Constr., Inc. v. Red Sullivan's
Conditioned Air Servs., Inc., 947 So. 2d 396, 399 (Ala. 2006)
(holding that filing an answer and a motion to dismiss did not
constitute a waiver of the right to compel arbitration); Lee
v. YES of Russellville, Inc., 784 So. 2d 1022, 1028 (Ala.
2000) (holding that a party's failure to seek arbitration in
an initial pleading is not sufficient, by itself, for a court
to conclude the party waived its right to compel arbitration);
Thompson v. Skipper Real Estate Co., 729 So. 2d 287, 292 (Ala.
1999) (plurality opinion) (stating that "[m]erely moving to
transfer an action to the proper venue and propounding one set
of interrogatories with that motion is not such substantial
involvement in the litigation process as to constitute a
waiver of the right to compel arbitration"); and Ex parte
Rager, 712 So. 2d 333, 336 (Ala. 1998) (holding that a party
had not waived its right to arbitration when it moved to
compel arbitration four months after receiving complaint and
after it had conducted limited discovery).
9
1061255
a
party
demanding
arbitration
waived
its
right
to
compel
arbitration only if the party took an unjustifiable amount of
time
in
demanding
arbitration
or
if
the
party
opposing
arbitration has incurred substantial expenses by participating
in the litigation. 3
In
the
present
case,
Paragon
did
not
take
an
unjustifiable amount of time in demanding arbitration, and
there
is
no
evidence
indicating
3
that
Boles
incurred
See, e.g., Big Valley Home Ctr., Inc. v. Mullican, 774
So. 2d 558, 562 (Ala. 2000) (holding that the defendant waived
its right to compel arbitration when it failed to assert its
contractual right to compel arbitration until the eve of
trial, which was over two years after the plaintiff filed her
claims, and during this period the defendant answered the
complaint, deposed the plaintiff, and made a settlement offer
to the plaintiff); Morrison Rests., Inc. v. Homestead Village
of Fairhope, Ltd., 710 So. 2d 905, 907 (Ala. 1998) (holding
that a party waived its right to arbitration when it did not
assert the right for eight months and then only after it had
received an adverse ruling on a summary-judgment motion); Ex
parte Hood, 712 So. 2d 341, 343 (Ala. 1998) (holding that the
defendant substantially invoked the litigation process when it
responded to the complaint before asking that the arbitration
clause be enforced, removed the case to federal court, and
filed a case-scheduling-meeting report pursuant to Rule 26(f),
Fed. R. Civ. P.); and Palm Harbor Homes, Inc. v. Crawford, 689
So. 2d 3 (Ala. 1997) (holding that the defendant waived its
right to arbitration when it waited more than two years after
receiving the complaint to file its motion to compel
arbitration, which was more than eight months after the other
defendants in the case had moved to compel arbitration, and
the defendant chose to proceed to trial rather than file an
interlocutory appeal when the trial court denied the
defendant's motion).
10
1061255
substantial expenses by participating in the litigation before
Paragon demanded arbitration.
Paragon filed its motion to
compel arbitration contemporaneously with its answer only two
months after the complaint was filed.
Apparently nothing
happened during that two months other than Paragon's filing of
the lien, which occurred three days after the complaint was
filed.
The short period between the filing of the complaint
and the demand for arbitration, coupled with the lack of any
action
by
Boles
during
the
period,
makes
this
case
more
analogous to those cases in which this Court has upheld the
right to arbitrate than to the cases in which this Court has
found a waiver of the right to compel arbitration.
Other than
filing the lien, Paragon did no more than answer the complaint
and make a demand for arbitration.
Therefore, Paragon did not
waive its right to arbitrate unless the mere filing of the
lien manifested an intention to abandon the right to arbitrate
in favor of the judicial process and the filing of the lien
would substantially prejudice Boles if a subsequent order
required her to submit her claims to arbitration.
Other jurisdictions have directly addressed the specific
issue now before this Court and have held that filing a lien
11
1061255
does
not
constitute
a
waiver
of
the
right
to
enforce
an
agreement to arbitrate. Stewart v. Covill & Basham Constr.,
LLC, 317 Mont. at 153, 75 P.3d 1276 (2003); Homestead Savings
& Loan Ass'n v. Superior Court in & for Marin County, 195 Cal.
App. 2d 697,
16
Cal. Rptr. 121 (1961).
In Stewart, the
Supreme Court of Montana reasoned that filing a lien does not
constitute a waiver of the right to arbitrate because the
"filing of a construction lien was not to advance litigation,
but rather to protect [the contractor's] statutorily created
security
interest
in
the
property.
Any
prejudice
to
[the
homeowner] resulting from the filing of the lien would have
occurred whether the parties had arbitrated or litigated."
Stewart, 317 Mont. at 158, 75 P.3d at 1279.
Similarly, in
Homestead Savings & Loan Ass'n, the California District Court
of Appeal reasoned as follows:
"The time in which to file for record a mechanic's
lien is relatively short. It requires no action by
the opposing party. It does preserve the status quo
of the property. Under section 1200 of the Code of
Civil Procedure the real party in interest had a
right to file a separate action to obtain a personal
judgment against the person personally liable for
such debt, notwithstanding his lien. In view of
these circumstances, the filing of a claim of lien
is not inconsistent with, or a repudiation of,
arbitration of the personal liability under the
contract, and is not a waiver of it."
12
1061255
195 Cal. App. 2d at 701, 16 Cal. Rptr. at 122.
In the present case, the only way Paragon could protect
any interest it had in the property against a third-party
claim was by filing a lien.
Paragon was required to file the
lien within a relatively short period after the last item of
work was performed. See § 35-11-215, Ala. Code 1975 (providing
that the lien must be filed within six months); see also § 3511-221, Ala. Code 1975 (providing that "[a]ny action for the
enforcement of the lien declared in this division must be
commenced within six months after the maturity of the entire
indebtedness
secured
thereby").
Filing
protected Paragon's rights to the property.
the
lien
merely
Filing the lien
did not substantially invoke any litigation concerning the
construction contract.
Furthermore, filing the lien did not
put Boles in a position where she would be substantially
prejudiced by a subsequent order requiring her to submit to
arbitration.
Boles,
and
Filing the lien did not require any action by
it
did
not
require
her
to
incur
any
expense.
Indeed, Boles has not shown where she took any action based on
Paragon's filing of the lien that would now negatively impact
her position if the case is submitted to arbitration; thus,
13
1061255
she has not carried her "heavy burden" of showing "substantial
prejudice."
The
only
specifically
portion
states
of
any
the
trial
negative
court's
impact
on
order
Boles
that
is
the
following statement: "[Boles] has been damaged by the filing
of the lien because it has clouded her title in the property."
It
is
unclear
how
a
cloud
on
Boles's
title
would
"substantially prejudice" her if she is required to submit her
claims
to
arbitration.
In
fact,
the
trial
court
mentions "substantial prejudice" in its order.
never
The trial
court held only that Boles was "damaged" or "disadvantaged" by
the filing of the lien.
Again, "[i]n order to demonstrate
that the right to arbitrate a dispute has been waived, the
party opposing arbitration must demonstrate ... that the party
opposing arbitration would be substantially prejudiced by an
order requiring it to submit to arbitration." SouthTrust Bank,
959 So.
2d
at
633 (some emphasis original; some emphasis
added).
Thus, Boles cannot show that Paragon waived its right
to arbitrate without showing that she would be substantially
prejudiced
if
arbitration.
she
were
required
to
submit
her
claims
to
Nothing in the trial court's order indicates
14
1061255
such substantial prejudice; Boles has not claimed in her brief
to this Court that she would be substantially prejudiced; and
a review of the record does not indicate that Boles would be
substantially prejudiced by an order requiring her to submit
her claims to arbitration.
Therefore, Paragon did not waive
its right to enforce the arbitration clause based on the mere
fact that Paragon filed a lien against the property that was
the subject of the contract containing the arbitration clause.
II.
Next, Boles raises an issue that was presented to the
trial court but that the trial court did not address in its
order.
Boles alleges that, under § 34-14A-14, Ala. Code 1975,
Paragon cannot maintain an action to enforce any provision of
the contract, including the arbitration clause, because, in a
separate administrative proceeding, Paragon entered into a
consent agreement with the Alabama Home Builders Licensure
Board in which Paragon admitted that it had engaged in the
construction of Boles's residence without holding a required
license.
This claim is without merit.
In addition to possible collateral estoppel problems,
Boles's
allegation
clearly
attacks
15
Paragon's
ability
to
1061255
enforce the contract as a whole and does not specifically
attack the arbitration clause within the contract.
It is well
established that challenges to the validity of the contract as
a whole and not specifically to the arbitration clause within
the contract must go to the arbitrator, not a court.
In
Buckeye Check Cashing, Inc. v. Cardegna, 546 U.S. 440 (2006),
the United States Supreme Court held:
"Prima Paint [Corp. v. Flood & Conklin Mfg. Co.,
388 U.S. 395 (1967),] and Southland [Corp. v.
Keating, 465 U.S. 1 (1984),] answer the question
presented here by establishing three propositions.
First,
as
a
matter
of
substantive
federal
arbitration
law,
an
arbitration
provision
is
severable from the remainder of the contract.
Second, unless the challenge is to the arbitration
clause itself, the issue of the contract's validity
is considered by the arbitrator in the first
instance.
Third, this arbitration law applies in
state as well as federal courts. The parties have
not
requested,
and
we
do
not
undertake,
reconsideration of those holdings. Applying them to
this case, we conclude that because respondents
challenge the Agreement, but not specifically its
arbitration
provisions,
those
provisions
are
enforceable
apart
from
the
remainder
of
the
contract.
The challenge should therefore be
considered by an arbitrator, not a court."
546 U.S. at 445-46.
Boles attempts to avoid this precedent by alleging that
there is a distinction between void and voidable contracts
when deciding whether to apply the holding of Buckeye Check
16
1061255
Cashing.
Court
However, in that case, the United States Supreme
made
clear
that
such
a
distinction
is
irrelevant,
stating:
"In declining to apply Prima Paint's rule of
severability, the Florida Supreme Court relied on
the distinction between void and voidable contracts.
'Florida public policy and contract law,' it
concluded, permit 'no severable, or salvageable,
parts of a contract found illegal and void under
Florida law.' [Cardegna v. Buckeye Check Cashing,
Inc., 894 So. 2d 860, 864 (Fla. 2005)]. Prima Paint
makes this conclusion irrelevant.
That case
rejected application of state severability rules to
the arbitration agreement without discussing whether
the challenge at issue would have rendered the
contract void or voidable. See 388 U.S., at 400-404.
Indeed, the opinion expressly disclaimed any need to
decide what state-law remedy was available, id., at
400, n.3 (though Justice Black's dissent asserted
that state law rendered the contract void, id., at
407). Likewise in Southland, which arose in state
court, we did not ask whether the several challenges
made there -- fraud, misrepresentation, breach of
contract, breach of fiduciary duty, and violation of
the California Franchise Investment Law –- would
render the contract void or voidable.
We simply
rejected the proposition that the enforceability of
the arbitration agreement turned on the state
legislature's judgment concerning the forum for
enforcement of the state-law cause of action. See
465 U.S., at 10. So also here, we cannot accept the
Florida
Supreme
Court's
conclusion
that
enforceability of the arbitration agreement should
turn on 'Florida public policy and contract law,'
894 So. 2d, at 864."
Buckeye Check Cashing, 546 U.S. at 446; see also Rintin Corp.,
S.A. v. Domar, Ltd., 476 F.3d 1254, 1259 (11th Cir. 2007)
17
1061255
(recognizing that the distinction between void and voidable
contracts
was
deemed
irrelevant
by
the
Supreme
Court
in
Buckeye Check Cashing); Community State Bank v. Strong, 485
F.3d
597,
622
specially)
(11th
(explaining
Cir.
2007)
that
"an
(Marcus,
J.,
arbitration
concurring
provision
is
severable from the remainder of the contract containing it and
separately enforceable even if the remainder of the contract
is later found by an arbitrator to be void. ... Thus, even a
party's
claim
that
a
usurious
finance
charge
renders
the
contract as a whole void ab initio is for the arbitrator, not
the court, to decide, and is no defense to a motion to compel
arbitration.").
Therefore, the arbitration clause in the contract between
Paragon and Boles is enforceable, and it is irrelevant whether
Paragon's actions render the contract as a whole void.
That
question is for the arbitrator to decide, not this Court.
Conclusion
Paragon
arbitration
did
clause
not
waive
merely
by
its
right
filing
a
to
enforce
the
lien
against
the
property that was the subject of the contract containing the
arbitration clause, by answering Boles's complaint, and by
18
1061255
contemporaneously
Also,
the
filing
arbitration
a
motion
clause
is
to
compel
enforceable
contract as a whole is later found to be void.
arbitration.
even
if
the
Therefore, the
judgment of the trial court is reversed, and this case is
remanded for proceedings consistent with this opinion.
REVERSED AND REMANDED.
Cobb, C.J., and Lyons and Bolin, JJ., concur.
Murdock, J., concurs specially.
19
1061255
MURDOCK, Justice (concurring specially).
I concur in the main opinion.
In so doing, I take
particular note of the holding of the Montana Supreme Court in
Stewart v. Covill & Basham Construction, LLC, 317 Mont. 153,
75 P.3d 1276 (2003), as quoted in the main opinion: "'Any
prejudice to [the homeowner] resulting from the filing of the
lien would have occurred whether the parties had arbitrated or
litigated.'" __ So. 2d at __ (quoting Stewart, 317 Mont. at
158, 75 P.3d at 1279).
In this regard, I find the lien at
issue in the present case to be analogous to the eviction
action at issue in CitiFinancial Corp., L.L.C. v. Peoples,
[Ms. 1051519, May 18, 2007] __ So. 2d __ (Ala. 2007).
As I
noted in my special writing in Peoples, in order to give
effect to a mortgagee's right of possession in property, i.e.,
to forcibly remove the mortgagor from the property, "it [was]
necessary in any
event
for the mortgagee
to
invoke
the
assistance of the courts." __ So. 2d at __ (Murdock, J.,
concurring in the result).
Likewise, in the present case,
regardless of whether the rights of Paragon ultimately are
decided by arbitration or litigation, in order to secure
Paragon's position in the subject property against third
20
1061255
parties "it is necessary in any event for [Paragon] to invoke
the assistance of the [probate] court[]."
Paragon's invoking
the
therefore,
assistance
of
the
probate
court,
cannot
logically be treated as an abandonment of the arbitration
process.
21
