Wright v. Ggnsc Holdings LLC

• Decision Date: 28 December 2011
• Docket Number: No. 25953.,25953.
• Citation: 808 N.W.2d 114,2011 S.D. 95
• Parties: Lewellyn WRIGHT and Della Richards, Special Co–Administrators of the Estate of Katherine G. Wright, Plaintiffs and Appellees, v. GGNSC HOLDINGS LLC d/b/a Golden Horizons and Golden Living, GGNSC–Rapid City Black Hills LLC, d/b/a Golden Living Center–Black Hills, South Dakota–Beverly Enterprises, Inc. d/b/a Beverly Healthcare–Black Hills, Beverly Enterprises, Inc., Jeffery L. Gengler, Frances K. Franke and John Does 1–10, Names Unknown and Addresses Unknown, and John Does 11–30, Names Unknown and Addresses Unknown, Defendants and Appellants.
• Court: South Dakota Supreme Court

2011 S.D. 95
808 N.W.2d 114

Lewellyn WRIGHT and Della Richards, Special Co–Administrators of the Estate of Katherine G. Wright, Plaintiffs and Appellees,
v.
GGNSC HOLDINGS LLC d/b/a Golden Horizons and Golden Living, GGNSC–Rapid City Black Hills LLC, d/b/a Golden Living Center–Black Hills, South Dakota–Beverly Enterprises, Inc. d/b/a Beverly Healthcare–Black Hills, Beverly Enterprises, Inc., Jeffery L. Gengler, Frances K. Franke and John Does 1–10, Names Unknown and Addresses Unknown, and John Does 11–30, Names Unknown and Addresses Unknown, Defendants and Appellants.

No. 25953.

Supreme Court of South Dakota.

Considered on Briefs Nov. 14, 2011.Decided Dec. 28, 2011.

[808 N.W.2d 115]

Carol A. Pahlke, Rapid City, South Dakota and Kyle J. Long of The Robert Pahlke Law Group, Scottsbluff, Nebraska, Attorneys for plaintiffs and appellees.

Jeanelle R. Lust, Kevin R. McManaman of Knudsen, Berkheimer, Richardson & Endacott, LLP, Lincoln, Nebraska, Attorneys for defendants and appellants.

ZINTER, Justice.

[¶ 1.] The parties' arbitration agreement provided that arbitration would occur “in accordance with the National Arbitration Forum Code of Procedure,” but the National Arbitration Forum (NAF) became unavailable to administer its Code and the arbitration. Defendants–Appellants (collectively “GGNSC”) moved the circuit court to appoint a substitute arbitrator under Section 5 of the Federal Arbitration Act (FAA). The circuit court concluded that a substitute arbitrator could not be appointed under Section 5 because the NAF Code of Procedure was integral to the parties' agreement to arbitrate and the NAF was unavailable to administer its Code. Considering the language of the arbitration agreement, the language of the NAF Code, and the federal policy expressed in the FAA, we reverse. We hold that Section 5 applies, and that absent some other defense, Section 5 requires the appointment of a substitute arbitrator.

Facts and Procedural History

[¶ 2.] In October 2004, Katherine Wright was admitted to a GGNSC nursing home in Rapid City. Katherine's husband, Lewellyn Wright, signed a Resident and Facility Arbitration Agreement on Katherine's behalf. Katherine transferred to another nursing home, but returned to the GGNSC facility a few months later. Upon her readmission, Lewellyn signed another Resident and Facility Arbitration Agreement.

[¶ 3.] The agreements were identical. In bold, capital letters, the agreements (the “agreement”) provided:

THE PARTIES UNDERSTAND AND AGREE THAT THIS CONTRACT

[808 N.W.2d 116]

CONTAINS A BINDING ARBITRATION PROVISION WHICH MAY BE ENFORCED BY THE PARTIES, AND THAT BY ENTERING INTO THIS ARBITRATION AGREEMENT, THE PARTIES ARE GIVING UP AND WAIVING THEIR CONSTITUTIONAL RIGHT TO HAVE ANY CLAIM DECIDED IN A COURT OF LAW BEFORE A JUDGE AND A JURY, AS WELL AS ANY APPEAL FROM A DECISION OR AWARD OF DAMAGES.

In accordance with this provision, the agreement provided that all disputes regarding Katherine's care would be resolved “exclusively by binding arbitration ... and not by a lawsuit or resort to court process.” The agreement also provided that the arbitration would occur “in accordance with the National Arbitration Forum Code of Procedure.” ¹ To obtain the NAF Code of Procedure, a footnote informed the reader to contact the NAF. The footnote provided: “Information about the National Arbitration Forum, including a complete copy of the Code of Procedure, can be obtained from the Forum....” The footnote provided the NAF's contact information and website address.²

[¶ 4.] Katherine died while in the nursing home. In April 2008, the special co-administrators of Katherine's estate, Della Richards and Lewellyn Wright (collectively “Wright”), brought this action for wrongful death in circuit court. GGNSC moved to compel arbitration. Wright objected and started discovery regarding the authenticity of Lewellyn's signatures on the arbitration agreement. Almost two years later, Wright abandoned the invalid signature defense and began discovery regarding Katherine's competency and Lewellyn's authority to enter into the agreement.

[¶ 5.] At some point before the arbitration motion was decided by the circuit court, the Minnesota Attorney General filed suit against the NAF. The NAF subsequently entered into a settlement in which it agreed to discontinue arbitrating consumer disputes. Therefore, the NAF became unavailable to administer an arbitration of this dispute.

[808 N.W.2d 117]

[¶ 6.] The circuit court conducted a day-long hearing on the motion to compel arbitration. Six depositions, four live witnesses, and ninety-five exhibits were submitted. The hearing related to Wright's arguments that Lewellyn had no authority to execute the arbitration agreement and that Katherine was not bound by it. The unavailability of the NAF was not an issue. However, after briefing was completed, the circuit court raised the unavailability of the NAF as a potential bar to arbitration.

[¶ 7.] Following further briefing on this new issue, the circuit court denied GGNSC's motion to compel arbitration because the NAF was no longer available. GGNSC appeals the court's order allowing the case to proceed in circuit court.

Decision

[¶ 8.] GGNSC argues that the NAF and its Code of Procedure were not integral to the parties' agreement to arbitrate, and therefore, Section 5 of the FAA required the appointment of a substitute arbitrator. “[W]e review de novo the circuit court's interpretation of an arbitration agreement.” Masteller v. Champion Home Builders, Co., 2006 S.D. 90, ¶ 9, 723 N.W.2d 561, 563.

[¶ 9.] The parties agreed to arbitrate any dispute “arising out of, or in connection with, or relating in any way to ... any service or health care provided” by GGNSC. Wright's complaint involved a dispute about the service and health care Katherine received. Such disputes were to be resolved “exclusively by binding arbitration ... and not by a lawsuit or resort to court process.” The boldface type in the agreement informed the parties that the residential care agreement required binding arbitration and that Wright was giving up the right to have “any claim decided in a court.” The words “arbitration” or “arbitrate” appeared eighteen times in the agreement.

[¶ 10.] But the agreement also provided that the arbitration was to occur “in accordance with the National Arbitration Forum Code of Procedure.” Furthermore, the NAF Code contained a rule that the Code could not be administered by any entity other than the NAF, and the NAF was unavailable to perform its administrative duties. Therefore, the question is whether Section 5 of the FAA requires this dispute to be arbitrated by a substitute arbitrator when the NAF is unable to administer its Code.

[¶ 11.] There is no dispute the FAA applies. The agreement provided that it was to be governed by and interpreted under the FAA. The FAA also governs because the nursing home services were provided as a part of GGNSC's business operating in interstate commerce. See Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395, 401–02, 87 S.Ct. 1801, 1804–05, 18 L.Ed.2d 1270 (1967) (noting that a contract evidencing a transaction in interstate commerce falls within the provisions of the FAA). And because this agreement fell “within the scope and coverage of the Federal Arbitration Act ... [, it] must be enforced in state ... courts.” KPMG LLP v. Cocchi, 565 U.S. ––––, 132 S.Ct. 23, 181 L.Ed.2d 323 (2011).

[¶ 12.] Section 5 of the FAA requires that upon request of a party, the court shall appoint a substitute arbitrator when there is an agreement requiring arbitration and for any reason there is a vacancy or lapse in the naming of an arbitrator.

If in the agreement provision be made for a method of naming or appointing an arbitrator or arbitrators or an umpire, such method shall be followed; but if no method be provided therein, or if a method be provided and any party thereto shall fail to avail himself of such method, or if for any other reason there

[808 N.W.2d 118]

shall be a lapse in the naming of an arbitrator or arbitrators or umpire, or in filling a vacancy, then upon the application of either party to the controversy the court shall designate and appoint an arbitrator or arbitrators or umpire, as the case may require, who shall act under the said agreement with the same force and effect as if he or they had been specifically named therein....

9 U.S.C. § 5 (2010).

[¶ 13.] GGNSC argues that Section 5 fills the gap created by the unavailability of the NAF and requires the appointment of a substitute arbitrator. Wright, however, emphasizes that the arbitration agreement required that the arbitration occur in accordance with the National Arbitration Forum Code of Procedure. Wright argues that Section 5 does not apply because the NAF Code of Procedure was “integral” to the arbitration agreement and that Code cannot be applied by a substitute arbitrator. Courts that have considered identical and analogous arbitration agreements are divided on the issue.

[¶ 14.] Courts applying Section 5 in similar circumstances have utilized two approaches. Most cases apply the approach adopted by the Ninth and Eleventh Circuit Courts of Appeals. Under that approach, if the designated forum becomes unavailable, Section 5 requires the appointment of a substitute arbitrator unless “the choice of forum is an integral part of the agreement to arbitrate” and not merely an “ ‘ancillary logistical concern.’ ” Reddam v. KPMG LLP, 457 F.3d 1054, 1060 (9th Cir.2006) (quoting Brown v. ITT Consumer Fin. Corp., 211 F.3d 1217, 1222 (11th Cir.2000) (quoting Zechman v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 742 F.Supp. 1359, 1364 (N.D.Ill.1990))). Stated conversely, a substitute arbitrator need not be appointed under Section 5 if “it is clear that the failed term is not an ancillary logistical concern but rather is as important a consideration as the agreement to arbitrate itself.” Zechman, 742 F.Supp. at 1364.³ Under the other...