Michael W. Stutler Kathy Stutler David Stutler v. T.K. Constructors Inc., an Indiana Corporation

448 F.3d 343, 2006 U.S. App. LEXIS 11431, 2006 WL 1223113

• Court: Court of Appeals for the Sixth Circuit
• Decided: May 9, 2006
• Docket: 04-6436
• Status: Published

Opinions

BATCHELDER, J., delivered the opinion of the court, in which SILER, J., joined.

MOORE, J. (pp. 348-349), delivered a separate opinion concurring in the judgment.

OPINION

ALICE M. BATCHELDER, Circuit Judge.

Appellant T.K. Constructors Inc. (“T.K.”), moved in the district court for an order to stay these proceedings pending arbitration. The district court denied the motion, relying on Morrison v. Circuit City Stores, Inc., 317 F.3d 646 (6th Cir. 2003) and Cooper v. MRM Investment Co., 367 F.3d 493 (6th Cir.2004). Because we conclude that the holdings in those cases do not extend to contracts requiring the mandatory arbitration of disputes regarding state law claims only, we VACATE the district court’s order and REMAND the matter for disposition consistent with this opinion.

This case originated in diversity of citizenship under 28 U.S.C. § 1331. The Stutters- are residents of the Commonwealth of Kentucky, and T.K. is a resident of the State of Indiana. Appellee, Michael Stutter, hired T.K. to build a new house, which Kathy and David Stutter used as a residence. T.K. completed the project, and the Stutters provided T.K. with written acceptance of the workmanship. Some time later, the Stutters noticed defects and asked T.K. to perform repairs covered by the home warranty. T.K. performed an initial inspection, but before it could begin any repairs, the Stutters retained an attorney and filed the instant complaint.

The complaint alleges state law claims for negligent misrepresentation, breach of contract, breach of warranty, negligence, negligent hiring, negligent supervision, negligence per se and unjust enrichment arising out of T.K’s construction of the house, and demands damages in excess of $100,000.

The contract entered into by T.K. and the Stutters contains the following arbitration clause:

Any claims or disputes arising out of this contract or the breach thereof shall be settled by arbitration in accordance with the Construction Industry Arbitration Rules of [the] American Arbitration Association unless both parties mutually agree otherwise.

The contract also provides that if a dispute over workmanship cannot be resolved:

Buyer and Builder agree to jointly engage the services of an independent third party inspector to resolve said disputed item(s). The costs and expenses of the independent third party inspector will be shared equally by the Buyer and the Builder and the decision of the independent third party will be binding. Said inspector shall be instructed to evaluate merits of [the] dispute solely in accordance with the terms and conditions of the Agreement.

Relying on the contract, T.K. filed a motion to stay the proceedings in the district court. Despite the contract’s unambiguous arbitration clause, the district court denied T. K.’s motion, finding that the cost of arbitration would be prohibitive to the Stutters. T.K. now appeals the district court’s decision.

An order denying a motion to stay proceedings pending arbitration is immediately appealable. 9 U.S.C. § 16(a)(1)(A). We review de novo the district court’s refusal to enforce an arbitration clause, and we review its factual findings for clear error. Cooper, 367 F.3d at 497.

Our disposition of this appeal is governed by the Federal Arbitration Act, 9 U.S.C. § 1, et seq. (the “FAA”). Congress enacted the FAA in 1925 pursuant to its power to regulate interstate commerce “to ensure judicial enforcement of privately made agreements to arbitrate,” and “to overrule the judiciary’s longstanding refusal to enforce agreements to arbitrate.” Dean Witter Reynolds, Inc. v. Byrd, 470 U.S. 213, 219-20, 105 S.Ct. 1238, 84 L.Ed.2d 158 (1985); see also Circuit City Stores, Inc. v. Adams, 532 U.S. 105, 111-12, 121 S.Ct. 1302, 149 L.Ed.2d 234 (2001). The FAA preempts any contradictory provision of state law. See Circuit City, 532 U.S. at 111-12, 121 S.Ct. 1302; Conseco Finance Servicing Corp. v. Wilder, 47 S.W.3d 335, 341 (Ky.Ct.App.2001).

The 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 .... ” 9 U.S.C. § 2. It sets forth a fundamental rule regarding enforcement of an arbitration clause: a written agreement to arbitrate shall be enforceable “save upon such grounds as exist at law or in equity for the revocation of any contract.” Id. In other words, whether an arbitration clause is enforceable is governed by state law. See Perry v. Thomas, 482 U.S. 483, 492 n. 9, 107 S.Ct. 2520, 96 L.Ed.2d 426 (1987) (“An agreement to arbitrate is valid, irrevocable, and enforceable, as a matter of federal law, ‘save upon such grounds as exist at law or in equity for the revocation of any contract.’ Thus state law, whether of legislative or judicial origin, is applicable if that law arose to govern issues concerning the validity, revocability, and enforceability of contracts generally.”) See also Great Earth Companies, Inc. v. Simons, 288 F.3d 878, 889 (6th Cir.2002) (“state law governs ‘generally applicable contract defenses [to an arbitration clause], such as fraud, duress, or unconscionability.’ ”) (quoting Doctor’s Assocs., Inc. v. Casarotto, 517 U.S. 681, 687, 116 S.Ct. 1652, 134 L.Ed.2d 902 (1996)). If no such defenses apply, an arbitration clause is generally enforceable under the FAA.

The district court erred by applying federal common law rather than considering state law contract defenses. Specifically, the court relied on our holdings in Cooper v. MRM Investment Co. and Morrison v. Circuit City Stores, Inc., supra.

We clearly limited our holdings in Morrison and Cooper to the validity of arbitration clauses in employment agreements where an employee’s statutorily created federal civil rights are at issue. Morrison, a Title VII employment discrimination case, held that an arbitration clause may be unenforceable if the cost of arbitration would undermine “the purposes of federal anti-discrimination legislation” by deterring potential claimants from pursuing their claims. 317 F.3d at 653. According to Morrison, the resolution of an arbitral civil rights dispute must “reconcile the liberal federal policy favoring arbitration agreements with the important rights created and protected by federal civil rights legislation.” Id. at 652-53 (quotation omitted) (emphasis added). Toward that end, Morrison provides that “potential litigants must be given an opportunity, prior to arbitration on the merits, to demonstrate that the potential costs of arbitration are great enough to deter them and similarly situated individuals from seeking to vindicate their federal statutory rights in the arbitral forum.” Id. at 663 (emphasis added). Cooper, a second Title VII employment discrimination case, also upheld a district court’s refusal to enforce an arbitration clause where the cost of arbitration was prohibitive. 367 F.3d at 510-12. Cooper explicitly held that the objective of its cost deterrent analysis was “to serve the underlying functions of the federal statute.” Id. at 511 (quoting Morrison, 317 F.3d at 663).

A third case is relevant. Green Tree Financial Corp. v. Randolph, 531 U.S. 79, 121 S.Ct. 513, 148 L.Ed.2d 373 (2000), a predecessor to Morrison and Cooper, dealt exclusively with the arbitration of federal statutory claims. In that case, the Supreme Court held that invalidation of an arbitration agreement on the basis that arbitration was cost-prohibitive was in error where the agreement was silent as to how the plaintiff and the defendant would share the costs. Id. at 91-92, 121 S.Ct. 513. The Court wrote that the plaintiff in such a case bears the burden of establishing that Congress intended to preclude arbitration of the statutory claims at issue and that the plaintiff is likely to suffer the costs of arbitration. Id. at 92, 121 S.Ct. 513.

Green Tree, Morrison and Cooper are limited by them plain language to the question of whether an arbitration clause is enforceable where federal statutorily provided rights are affected. In this case, no federally protected interest is at stake. The Stutters, through diversity jurisdiction, seek to enforce contractual rights provided by state law. As a result, Morrison and Cooper simply do not apply. Under the FAA, the Stutters must look to contract defenses available in Kentucky rather than those found in federal common law.

Kentucky has a paramount interest in the enforcement of arbitration agreements. The Constitution of Kentucky provides that “[i]t shall be the duty of the General Assembly to enact such laws as shall be necessary and proper to decide differences by arbitrators, the. arbitrators to be appointed by the parties who may choose that summary mode of adjustment.” Ky. Const. § 250. Toward that end, Kentucky has adopted the Uniform Arbitration Act, which mirrors the FAA in several respects. See K.R.S. § 417.050. Furthermore, Kentucky courts take a broad view of the enforceability of arbitration agreements. See Conseco, 47 S.W.3d at 344 (arbitration is presumed to afford the parties “an adequate opportunity to vindicate their substantive claims” even if the arbitration clause is one-sided and the contract is one of adhesion). Kentucky law is thus entirely consistent with and complementary to the provisions of the FAA. To apply Morrison and Cooper as the district court did is, in effect, to preempt these provisions of Kentucky law, despite the lack of any inconsistency that would permit their preemption by the FAA, and despite the explicit provision of § 2 of the FAA itself, which reserves to state law the defenses against enforcement of arbitration agreements.

Even if Morrison and Cooper were not explicitly limited to the arbitration of federal statutory rights, Erie R. Co. v. Tompkins forbids their application to a question governed by state law. 304 U.S. 64, 58 S.Ct. 817, 82 L.Ed. 1188 (1938). Eñe provides that “[ejxcept in matters governed by the Federal Constitution or by acts of Congress, the law to be applied in any case is the law of the state.” Id. at 78, 58 S.Ct. 817. Although the FAA generally preempted states’ laws that are inconsistent with the FAA, Congress explicitly preserved the applicability of state law defenses to arbitration agreements. 9 U.S.C. § 2; Perry, 482 U.S. at 492, n. 9, 107 S.Ct. 2520. Accordingly, the Stutters’ ability to avoid their agreement with T.K. is governed by the generally applicable contract laws of the Commonwealth of Kentucky. We cannot, under Eñe, invalidate that agreement by reference to the federal common law established by Green Tree, Morrison and Cooper.

Finally, if we were to flout Eñe by extending Green Tree, Morrison and Cooper to disputes over purely state law claims, we would, in effect, limit the enforcement of arbitration agreements to situations in which all of the parties to the agreement are wealthy. This absurd result, we think, is not what Congress intended when it enacted the FAA.

Accordingly, we VACATE the district court’s order and REMAND the matter for disposition consistent with this opinion.