State ex rel. Richmond American Homes of West Virginia, Inc. v. Sanders

• Decision Date: 21 November 2011
• Docket Number: No. 11–0770.,11–0770.
• Citation: 717 S.E.2d 909,228 W.Va. 125
• Court: West Virginia Supreme Court
• Parties: STATE of West Virginia, ex rel. RICHMOND AMERICAN HOMES OF WEST VIRGINIA, INC., and M.D.C. Holdings, Inc., et al., Petitioners v. Honorable David H. SANDERS, Judge of the Circuit Court of Jefferson County, West Virginia, Respondent.

228 W.Va. 125

717 S.E.2d 909

STATE of West Virginia, ex rel. RICHMOND AMERICAN HOMES OF WEST VIRGINIA, INC., and M.D.C. Holdings, Inc., et al., Petitioners

v.Honorable David H. SANDERS, Judge of the Circuit Court of Jefferson County, West Virginia, Respondent.

No. 11–0770.

Supreme Court of Appeals of West Virginia.

Submitted Sept. 28, 2011.Decided Nov. 21, 2011.

Syllabus by the Court

1. “Under the Federal Arbitration Act, 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.” Syllabus Point 6, Brown v. Genesis Healthcare Corp., –––W.Va. ––––, ––– S.E.2d ––––, 2011 WL 2611327 (2011).

2. “The purpose of the Federal Arbitration Act, 9 U.S.C. § 2, is for courts to treat arbitration agreements like any other contract. The Act does not favor or elevate arbitration agreements to a level of importance above all other contracts; it simply ensures that private agreements to arbitrate are enforced according to their terms.” Syllabus Point 7, Brown v. Genesis Healthcare Corp., ––– W.Va. ––––, ––– S.E.2d –––– (2011).

3. “Nothing in the Federal Arbitration Act, 9 U.S.C. § 2, overrides normal rules of contract interpretation. Generally applicable contract defenses—such as laches, estoppel, waiver, fraud, duress, or unconscionability—may be applied to invalidate an arbitration agreement.” Syllabus Point 9, Brown v. Genesis Healthcare Corp., ––– W.Va. ––––, ––– S.E.2d –––– (2011).

4. Under the Federal Arbitration Act, 9 U.S.C. § 2, and the doctrine of severability, only if a party to a contract explicitly challenges the enforceability of an arbitration clause within the contract, as opposed to generally challenging the contract as a whole, is a trial court permitted to consider the challenge to the arbitration clause. However, the trial court may rely on general principles of state contract law in determining the enforceability of the arbitration clause. If necessary, the trial court may consider the context of the arbitration clause within the four corners of the contract, or consider any extrinsic evidence detailing the formation and use of the contract.

A.L. Emch, Esq., Rodney Stieger, Esq., Jackson Kelly PLLC, Charleston, WV, for the Petitioners.

Christopher J. Regan, Esq., James G. Bordas, III, Esq., Jason E. Causey, Esq., Bordas & Bordas, PLLC, Wheeling, WV, Andrew C. Skinner, Esq., Laura C. Davis, Esq., Charles Town, WV, for the Respondent.

KETCHUM, Justice:

In this petition seeking a writ of prohibition, we are once again asked to wrestle with the arbitration bear.¹ The Federal Arbitration Act (“the FAA”) ² indicates a congressional intent to protect arbitration agreements, and ensure that courts treat them like any other contract. But the FAA does not require courts to enforce an arbitration clause when the parties never reached a “meeting of the minds” about the clause. A court may submit to arbitration “only those disputes ... that the parties have agreed to submit.” ³

A federal district court claimed that arbitration clauses in adhesion contracts “traditionally have been met with hostility by state courts in West Virginia.” ⁴ The district court misunderstands our case law. This Court is conscious of the “ancient judicial hostility to arbitration” ⁵ that the FAA was intended to correct, and the courts of this State are not hostile to arbitration or to adhesion contracts. We are hostile toward contracts of adhesion that are unconscionable and rely upon arbitration as an artifice to defraud a weaker party of rights clearly provided by the common law or statute.

The petitioner—a new-home constructor—has been sued by 40 adults and children who live in 11 new homes built by the petitioner. The residents claim they have been injured by radon gas leaking into their homes because of improper construction by the petitioner. The petitioner argues that the agreement to purchase the new homes requires the residents to arbitrate their claims—whether they signed the agreement or not. The circuit court hearing the claims read the entire purchase agreement, found the arbitration provision was ambiguous and unconscionable, and refused to compel the residents into arbitration.

The petitioner now seeks a writ of prohibition to compel the residents to arbitrate their claims. As set forth below, we find that the record supports the circuit court's determination that the arbitration provision was ambiguous, unconscionable, and unenforceable. We therefore deny the requested writ.

I.Facts and Background

Petitioner Richmond American Homes of West Virginia, Inc. (and its parent company, M.D.C. Holdings, Inc.), built a number of homes in Jefferson County and Berkeley County, West Virginia.

The respondents are 40 adults and children who lived in homes built by Richmond, and are the plaintiffs in 11 civil actions filed against Richmond on May 12, 2010, in the Circuit Court of Jefferson County. These 11 actions are collectively referred to by the last name of the plaintiffs in the first suit: Thorin.⁶

The plaintiffs' case against Richmond centers on radon, a naturally-occurring, colorless and odorless radioactive gas that comes from the decomposition of uranium in soil, rock, and groundwater. Radon is a carcinogen, causing an aggressive form of small-cell lung cancer. The plaintiffs assert that breathing radon is the second leading cause of lung cancer behind smoking.

The U.S. Environmental Protection Agency has identified Jefferson County as a “high radon area.” The parties have indicated that local building codes require some form of radon mitigation system in newly constructed homes. Further, various industry groups recommend that builders of new residential homes in areas with high radon levels install radon mitigation systems. The plaintiffs take the position that radon mitigation systems are easy and inexpensive to install during the construction of a new home.

Several years after purchasing their homes from Richmond, the plaintiffs allege they discovered excessive levels of radon in their homes. Inspectors hired by the plaintiffs claim that this was because Richmond had failed to install, or improperly installed, or fraudulently installed inoperable, radon mitigation systems.

The plaintiffs brought suit against Richmond on various legal theories. The plaintiffs assert breach of contract, breach of warranty, and breach of implied warranty claims. The plaintiffs also assert theories of negligent construction, fraud, misrepresentation, concealment, and intentional and negligent infliction of emotional distress. The plaintiffs seek compensatory and punitive damages. The plaintiffs also seek damages for future medical monitoring costs, ostensibly because the plaintiffs need future diagnostic testing to screen for radon-caused cancer.⁷

In June 2010, Richmond filed a motion with the circuit court seeking an order dismissing the plaintiffs' complaint, and compelling all 40 of the plaintiffs to participate in arbitration. Richmond argued that some of the plaintiffs had signed Purchase Agreements with Richmond incident to the purchase of their homes, and in Section 21 of those Purchase Agreements the parties had agreed to submit any claims to arbitration. Specifically, 17 of the 40 plaintiffs had signed written agreements and bought their homes directly from Richmond; 18 plaintiffs had not signed an agreement, but were close family members—mainly children below the age of majority—of the signatory plaintiffs; and 5 plaintiffs lived in homes built by Richmond, but purchased the homes from a non-party who entered into a written Purchase Agreement with Richmond. Still, Richmond asserted that both the signatory and non-signatory plaintiffs were bound by the Purchase Agreements and obligated to arbitrate, rather than litigate, their claims.

The plaintiffs responded to Richmond's motion by specifically asserting that the arbitration clause in the Purchase Agreements was unenforceable. The plaintiffs argued that the arbitration clause was vague, contradictory and confusing, and therefore was to be construed against the drafter, Richmond. Further, the plaintiffs argued that the arbitration clause in the Purchase Agreement was a contract of adhesion with numerous terms that were procedurally and substantively unconscionable. Lastly, the plaintiffs contended that the arbitration clause could not be enforced against individuals who did not sign a Purchase Agreement.

In lengthy, detailed orders dated September 3, 2010,⁸ the circuit court denied Richmond's motion and refused to compel any of the plaintiffs to participate in arbitration.

The circuit court examined the arbitration clause in the context of the entire Purchase Agreement, and the circumstances surrounding the execution of the Agreement. Among the numerous reasons supporting its orders, the circuit court applied state contract law and found that the arbitration provision was unconscionable. The circuit court found that the arbitration process created by the Agreement “implicitly or explicitly limited the [plaintiffs'] ability to seek compensatory damages for property damage and bodily injury; limited the [plaintiffs'] ability to seek punitive damages to redress and punish misconduct; improperly relieved [Richmond] from liability for the breach of the implied warranty of habitability;” and limited the plaintiffs' ability to seek damages caused by radon gas in their homes.

The circuit court also found the arbitration provision was unconscionable because it contained a “class action waiver” ⁹ that required the plaintiffs to bring any “action ... by independent action” and precluded the plaintiffs from serving either “as a class representative” or as “a class member to pursue such...