ENERGY HOMES VS. PEAY (BRIAN), ET AL.
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RENDERED: APRIL 15, 2011; 10:00 A.M.
NOT TO BE PUBLISHED
Commonwealth of Kentucky
Court of Appeals
NO. 2009-CA-000657-MR
ENERGY HOMES, A DIVISION OF
SOUTHERN ENERGY HOMES, INC.
v.
APPELLANT
APPEAL FROM DAVIESS CIRCUIT COURT
HONORABLE THOMAS O. CASTLEN, JUDGE
ACTION NO. 08-CI-01493
BRIAN PEAY AND LORI PEAY
APPELLEES
OPINION
AFFIRMING
** ** ** ** **
BEFORE: CAPERTON, NICKELL AND THOMPSON, JUDGES.
THOMPSON, JUDGE: Energy Homes, A Division of Southern Energy Homes,
Inc. (SEHI), appeals from an order denying its motion to compel arbitration. SEHI
argues the trial court erred by finding: (1) the terms of a prior purchase agreement
precluded a subsequent arbitration agreement; (2) there was no privity of contract
and no consideration to support the arbitration agreement; and (3) the arbitration
agreement was unconscionable. We agree that the arbitration clause was
unconscionable.
On November 8, 2005, Brian Peay and his wife, Lori Peay, executed a
purchase agreement with American Dream Housing, Inc., for the purchase of a
SEHI manufactured home. The agreement provided:
This agreement contains the entire understanding
between dealer and buyer and no other representations or
inducements, verbal or written, have been made which
are not contained in this contract.
The purchase agreement did not reference a separate agreement and did not contain
an arbitration clause.
On January 30, 2006, SEHI delivered the manufactured home from its
place of business in Alabama to Owensboro, Kentucky, to American Dream,
which later delivered the home to the Peays. Pursuant to a contract with the Peays,
Jerry Morris Construction placed the home over its foundation and Larry Hayden
performed plumbing work.
On June 26, 2006, over seven months after the Peays executed the
purchase agreement for the home, the purchase closed. In addition to signing the
final sales agreement, Brian Peay received a warranty book from SEHI and signed
an attached agreement entitled “Binding Arbitration Agreement and Jury Waiver.”
The warranty book was signed by Brian Peay, representatives of SEHI and
American Dream but was not signed by Lori Peay.
The warranty book included the following clause:
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You and We agree to arbitrate any and all claims and
disputes arising from or relating to the Contract, the
Manufactured Home, the sale of the Manufactured
Home, the design and construction of the Manufactured
Home, the financing of the Manufactured Home, and any
and all other disputes between You and Us, including any
disputes regarding the enforceability, interpretation,
breadth, scope and meaning of this Agreement. The
arbitration will be binding. You and We further agree to
waive any right to trial by jury in any civil action arising
from or relating to the Contract, the Manufactured Home,
the sale of the Manufactured Home, the design and
construction of the Manufactured Home, the financing of
the Manufactured Home and any and all other disputes
between You and Us.
Brian and Lori subsequently received warranty service from SEHI.
On October 3, 2008, Brian and Lori filed a complaint alleging breach
of warranty and demanding monetary damages in the Daviess Circuit Court against
American Dream, Jerry Morris Construction, Larry Hayden and SEHI. SEHI
subsequently filed a motion to compel arbitration of all claims filed against it
pursuant to the arbitration clause.
Following a hearing, the trial court denied arbitration. The trial court
concluded: (1) the integration clause in the earlier purchase agreement between
the Peays and American Dream precluded any subsequent agreements; (2) there
was no privity of contract between the Peays and SEHI and no consideration for
any contract; and (3) the arbitration agreement was unconscionable. SEHI
appealed pursuant to KRS 417.220(1)(a), which permits an appeal from an order
denying an application to compel arbitration.1 The issue is whether the Peays
1
Only SEHI and the Peays are parties to this appeal.
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waived their right to seek redress in the courts by signing the warranty book at the
time of closing.
In 1984, Kentucky adopted the Uniform Arbitration Act (KUAA),
which permits arbitration agreements. KRS 417.050 reads in part:
A written agreement to submit any existing controversy
to arbitration or a provision in written contract to submit
to arbitration any controversy thereafter arising between
the parties is valid, enforceable and irrevocable, save
upon such grounds as exist at law for the revocation of
any contract.
KRS 417.060(1) provides:
On application of a party showing an agreement
described in KRS 417.050, and the opposing party's
refusal to arbitrate, the court shall order the parties to
proceed with arbitration. If the opposing party denies the
existence of the agreement to arbitrate, the court shall
proceed summarily to the determination of the issue so
raised. The court shall order arbitration if found for the
moving party; otherwise, the application shall be denied.
Consistent with the General Assembly’s directive, our courts have consistently
expressed that arbitration is favored. See e.g., Mortgage Electronic Registration
Systems, Inc. v. Abner, 260 S.W.3d 351, 353 (Ky.App. 2008). However, an
arbitration clause remains subject to the general rules of contract and cannot escape
judicial scrutiny.
Preserving the litigant’s right to seek judicial redress, KRS 417.050
contains a saving clause: It provides that arbitration may be avoided “upon such
grounds as exist at law for the revocation of any contract.” As a threshold matter,
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whether an arbitration clause is enforceable is to be resolved by the trial court
based on fundamental principles of contract law and jurisprudence and is subject to
appellate de novo review. First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938,
115 S.Ct. 1920, 131 L.Ed.2d 985 (1995).
A basic premise of jurisprudence is that an unconscionable agreement
is unenforceable. Conseco Finance Servicing Corp. v. Wilder, 47 S.W.3d 335
(Ky.App. 2001). Courts must assess whether an arbitration clause is enforceable
on a case-by-case basis to determine if it is abusive or unfair. Id. at 342.
Heightened scrutiny is required where, as here, the arbitration clause is contained
in an agreement involving parties of unequal bargaining power.
A concise definition of an adhesion contract was provided in
Conseco, “[A] standardized contract, which, imposed and drafted by the party of
superior bargaining strength, relegates to the subscribing party only the opportunity
to adhere to the contract or reject it.” Id. at 342. Restated, contracts of adhesion
are offered to the consumer on “essentially a ‘take it or leave it’ basis without
affording the consumer a realistic opportunity to bargain.” Jones v. Bituminous
Cas. Corp., 821 S.W.2d 798, 801 (Ky. 1991). An adhesion contract that is
procedurally unconscionable will not be enforced against a consumer. Factors to
be considered when determining unconscionability include the parties’ bargaining
power, the clarity of the contract language, the oppressiveness of the terms, and
presence or absence of a meaningful choice. Jenkins v. First American Cash
Advance of Georgia, LLC, 400 F.3d 868, 875-876 (11th Cir. 2005). After
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considering the totality of the circumstances in the case presented, we conclude
that the arbitration agreement is unconscionable.
Unlike the purchasers in Conseco, where the arbitration provision was
contained in the sales contract, the arbitration provision was not presented to the
Peays until the closing and was presented by the manufacturer, not the seller. The
purchase contract with American Dream was executed eight months prior to the
signing of the SEHI warranty book. The purchase agreement excluded all other
documents; yet, the SEHI warranty book contained an arbitration clause. When
confronted with SEHI’s warranty conditions at the closing, the Peays were already
contractually bound by the purchase contract and in the unenviable “take it or leave
it” position.
Presented with a similar fact situation, the Louisiana Supreme Court
summarized the consumer’s predicament:
The parties had already agreed upon the terms of
contract of sale before closing, and binding arbitration
was not one of them. According to the original purchase
agreement's terms, title of the mobile home passed to the
Rodriguezes once they paid for the mobile home, either
through cash or financing. Contrary to what they were
told, they did not need to sign the arbitration agreement
to take delivery of their home.
Rodriguez v. Ed's Mobile Homes Of Bossier City, La., 889 So.2d 461,
464 (La.App. 3 Cir. 2004). We are equally persuaded that the Peays cannot be
bound by the arbitration clause explicitly excluded by the purchase contract and
presented only moments before the closing.
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We conclude that the clause sought to be enforced is unconscionable.
However, because arbitration clauses are increasingly prevalent in consumer
contracts, we comment on the absence of Lori’s signature on the document which
SEHI seeks to enforce against her. As a matter of general contract law, Lori
cannot be legally bound by an agreement to which she did not consent. See Ally
Cat, LLC v. Chauvin, 274 S.W.3d 451 (Ky. 2009) (holding that assent to be bound
by the terms of an agreement must be expressed and simple acknowledgment of
the receipt of the document is insufficient). Thus, enforcement of the arbitration
clause in the warranty book would result in piecemeal litigation and defeat judicial
economy because Lori’s claims against American Dream and the remaining
defendants remain pending in the Daviess Circuit Court.
Based on the foregoing, the order of the Daviess Circuit Court is
affirmed.
CAPERTON, JUDGE, CONCURS.
NICKELL, JUDGE, DISSENTS BY SEPARATE OPINION.
NICKELL, JUDGE, DISSENTING: Respectfully, I dissent. I believe
the majority has disregarded two of SEHI’s arguments on appeal and has
inaccurately concluded that the arbitration agreement was unconscionable.
SEHI argues the trial court erred by finding: (1) the terms of the prior
purchase agreement precluded the subsequent arbitration agreement; (2) there was
no privity of contract and no consideration to support the arbitration agreement;
and (3) the arbitration agreement was unconscionable. The majority bases its
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ruling solely on its perception that the agreement was unconscionable. I disagree
with this conclusion and further believe SEHI is correct in its other claims of error.
Thus, I would reverse and remand.
Brian Peay signed the final sales agreement for the home at the
closing on June 26, 2006. At the closing, Peay received a warranty book from
SEHI and signed an agreement attached to the warranty book entitled “Binding
Arbitration Agreement and Jury Waiver” wherein Peay and SEHI agreed to submit
any and all disputes to arbitration. The arbitration agreement was signed by Brian
Peay, and representatives of both SEHI and American Dream. Peay was shown a
closing video which further explained the arbitration agreement. The Peays
subsequently sought and received warranty service from SEHI on two occasions
after closing, including work performed on or about November 6, 2006, and
November 22, 2006.
KRS 417.050 states, in pertinent part:
A written agreement to submit any existing controversy
to arbitration or a provision in written contract to submit
to arbitration any controversy thereafter arising between
the parties is valid, enforceable and irrevocable, save
upon such grounds as exist at law for the revocation of
any contract.
In American General Home Equity, Inc. v. Kestel, 253 S.W.3d 543, 550 (Ky.
2008), the Supreme Court of Kentucky stated:
Whether state or federal law governs makes little
practical difference, however, because the Kentucky
Uniform Arbitration Act (KUAA) contained in Kentucky
Revised Statutes (KRS) Chapter 417 is similar to and has
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been construed consistently with the FAA. Furthermore,
both the FAA and KUAA state that arbitration
agreements must be enforced unless valid grounds for
revoking any contract are established.
“Naturally, as contract law is generally established as a matter of state law, state
law governing contracts comes into play even when applying the FAA.” Id. at fn.
14 (citing Perry v. Thomas, 482 U.S. 483, 492 n. 9, 107 S.Ct. 2520, 96 L.Ed.2d
426 (1987)). Arbitration agreements are reviewed under the principles of contract
law. Mortgage Electronic Registration Systems, Inc. v. Abner, 260 S.W.3d 351,
353 (Ky.App. 2008). On appeal, this Court reviews the denial of a motion to
compel arbitration under the de novo standard, except that findings of fact are
reviewed for clear error only. Conseco Finance Servicing Corp. v. Wilder, 47
S.W.3d 335, 340 (Ky.App. 2001). Kentucky law favors arbitration agreements.
Kodak Mining Company v. Carrs Fork Corporation, 669 S.W.2d 917 (Ky. 1984).
First, I do not believe the integration clause contained in the purchase
agreement executed between the Peays and American Dream precluded the later
execution of the arbitration agreement. The integration clause states:
This agreement contains the entire understanding
between dealer and buyer and no other representations or
inducements; verbal or written have been made which is
not contained in this contract.
(Emphasis added). The dealer was American Dream. The Peays concede SEHI
was not a party to the purchase agreement. I find nothing in the language of the
integration clause, which would prevent the Peays from entering into a subsequent
and separate arbitration agreement with a different party concerning the modular
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home. The trial court did not cite any authority to support its conclusion that an
integration clause binds a party thereto from entering into a subsequent and
separate agreement with a non-party, nor could I find any. Moreover, the
subsequent arbitration agreement executed between the Peays and SEHI did not
vary the terms of the purchase agreement executed between the Peays and
American Dream. It does not appear that the Peays were compelled to enter into
the subsequent arbitration agreement with SEHI. In the somewhat analogous
context of the merger doctrine,2 this Court has held that arbitration agreements are
collateral to the transfer of property and, thus, are not extinguished or superseded
by a deed. Drees, Co. v. Osburg, 144 S.W.3d 831, 833 (Ky.App. 2003). I
conclude the same reasoning applies to the present case where the arbitration
agreement was entered into with a non-party subsequent to an earlier purchase
agreement.
Second, I believe there was privity of contract and sufficient
consideration for the contract between the Peays and SEHI. In Presnell Const.
Managers, Inc. v. EH Const LLC., 134 S.W.3d 575, 579 (Ky. 2004), the Supreme
Court of Kentucky stated:
“Privity of contract” is “[t]he relationship between parties
to a contract, allowing them to sue each other but
preventing a third party from doing so.” Thus,
“[o]rdinarily, the obligations arising out of a contract are
due only to those with whom it is made; a contract cannot
be enforced by a person who is not a party to it or in
2
Under the merger doctrine, upon delivery and acceptance of a deed, the deed extinguishes or
supersedes the provisions of the underlying contract for the conveyance of the realty.
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privity with it, except under a real party in interest statute
or, under certain circumstances, by a third-party
beneficiary.” Consequently, “[a]s a general rule,
whenever a wrong is founded upon a breach of contract,
the plaintiff suing in respect thereof must be a party or
privy to the contract, and none but a party to a contract
has the right to recover damages for its breach against
any of the parties thereto.”
(Internal citations omitted).
The general requirements for a valid and enforceable contract are
“offer and acceptance, full and complete terms, and consideration.” Cantrell
Supply, Inc. v. Liberty Mut. Ins. Co., 94 S.W.3d 381, 384 (Ky.App. 2002).
Consideration has been defined as a benefit conferred to a promisor or a detriment
incurred by a promisee. Huff Contracting v. Sark, 12 S.W.3d 704, 707 (Ky.App.
2000).
Brian Peay and the general manager of SEHI both signed the
arbitration agreement, which was captioned “Binding Arbitration Agreement
and Jury Waiver.” (Emphasis in original). Peay also acknowledged watching a
video explaining the arbitration agreement and the factory warranty he received.
Peay signed a written script of the video acknowledging that he understood its
contents. In exchange for executing the arbitration agreement, the Peays received
an express warranty, which they availed themselves of on two occasions,
November 6, 2006, and November 22, 2006. Further, even if it could be argued
that the receipt and exercise of the express warranty was not a condition of the
arbitration agreement, “an arbitration clause requiring both parties to submit
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equally to arbitration constitutes adequate consideration.” Kruse v. AFLAC
Intern., Inc., 458 F.Supp.2d 375, 385 (E.D. Ky. 2006). Mutual promises are a
valid form of consideration as long as there is some benefit to the promisor or
detriment to the promisee. More v. Carnes, 309 Ky. 41, 56, 214 S.W.2d 984, 991
(1948). Therefore, I believe there was a valid agreement to arbitrate, which was
supported by sufficient consideration.
Third, I believe the majority is incorrect in concluding the arbitration
agreement unconscionable. In Valued Services of Kentucky, LLC v. Watkins, 309
S.W.3d 256, 260 (Ky.App. 2009), this Court discussed unconscionability in the
context of arbitration agreements as follows:
It is a fundamental rule of contract law that, “absent fraud
in the inducement, a written agreement duly executed by
the party to be held, who had an opportunity to read it,
will be enforced according to its terms.” A narrow
exception to this rule is the doctrine of unconscionability,
which is used by the courts to police the excesses of
certain parties who abuse their right to contract freely. It
is directed against one-sided, oppressive and unfairly
surprising contracts, and not against the consequences
per se of uneven bargaining power or even a simple oldfashioned bad bargain.
An unconscionable contract has been characterized as
one which no man in his senses, not under delusion,
would make, on the one hand, and which no fair and
honest man would accept, on the other.
Unconscionability determinations being inherently factsensitive, courts must address such claims on a case-bycase basis.
(Internal citations omitted). Here the trial court relied solely on the unpublished
case, Paul Miller Ford v. Rutherford, 2007-CA-000293-MR (December 28, 2007),
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review denied, (November 19, 2008), in determining the arbitration agreement was
unconscionable. The majority rests its decision on its belief the arbitration clause
was specifically excluded by the integration clause contained in the purchase
contract. I cannot agree.
This is not a case where any fraud or misleading conduct has been
alleged. The Peays simply deny their obligation under the arbitration agreement.
The arbitration agreement was boldly labeled and set out the terms in plain
language. Peay viewed a video further explaining the arbitration agreement and
signed a written script of the video acknowledging that he had viewed the video
and understood its contents. It is also important to note that the arbitration
agreement covers only the claims against SEHI. American Dream and the other
defendants below did not seek to take advantage of this agreement and the claims
against them are still pending in the Daviess Circuit Court. Based upon the
undisputed circumstances of this case, I cannot agree with the majority’s
affirmation of the trial court’s holding that the arbitration agreement executed
between the Peays and SEHI was unconscionable, particularly since it was
supported by both privity of contract and consideration, and because the Peays
sought and were provided warranty service by SEHI on at least two occasions.
Finally, I believe it important to note that Lori Peay signed neither the
purchase agreement nor the arbitration agreement. The majority seems to cast
aspersions upon SEHI for seeking to enforce the arbitration agreement against a
non-signatory, holding Lori Peay cannot be bound to an agreement to which she
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did not consent. However, in a twist of logic, the majority gives her the benefit of
the merger clause contained in the purchase agreement—another agreement to
which she cannot be said to have consented in light of her failure to join in the
execution. Taking its reasoning to its logical conclusion, the majority is
sanctioning the Peay’s desire to “have their cake and eat it too.” I believe such a
result is contrary to the letter and spirit of the law and such an interpretation is
flawed. If Lori Peay cannot be bound by the arbitration agreement because she did
not execute it with her husband, it follows that she cannot benefit from the
purchase agreement for the same reason. Under the majority’s analysis, because
she failed to execute any of the documents in question, it becomes doubtful that
Lori Peay has standing to prosecute any claims relating to the purchase of the
modular home.
For the reasons stated, I would reverse and remand this matter to the
trial court with directions to enter an order compelling arbitration.
BRIEFS FOR APPELLANT:
BRIEF FOR APPELLEE:
Elizabeth A. Deener
Larry C. Deener
Lexington, Kentucky
Zack N. Womack
Henderson, Kentucky
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