American General Home Equity v. Kestel

• Decision Date: 22 May 2008
• Docket Number: No. 2006-SC-000830-DG.,2006-SC-000830-DG.
• Citation: 253 S.W.3d 543
• Parties: AMERICAN GENERAL HOME EQUITY, INC., Appellant v. Teresa KESTEL, Appellee.
• Court: Supreme Court of Kentucky

253 S.W.3d 543

AMERICAN GENERAL HOME EQUITY, INC., Appellant v.Teresa KESTEL, Appellee.

No. 2006-SC-000830-DG.

Supreme Court of Kentucky.

May 22, 2008.

Bethany A. Breetz, Matthew W. Breetz, Stites & Harbison, PLLC, Louisville, KY, Clark Philip Case, Stites & Harbison, PLLC, Lexington, KY, Counsel for Appellant.

Katherine S. Sanford, Katherine Yunker, Oran Shepherd McFarlan, III, Yunker & Associates, Lexington, KY, Counsel for Appellee.

John E. Spainhour, Jr., Givhan & Spainhour, PSC, Shepherdsville, KY, Counsel for Amicus Curiae, Kentucky Justice Association.

Opinion of the Court by Justice MINTON.

I.INTRODUCTION.

American General Home Equity, Inc., filed a mortgage foreclosure action in circuit court against Teresa Kestel.Kestel counterclaimed, asserting fraud and federal and state statutory claims under the Truth in Lending Act and the Kentucky Consumer Protection Act.The trial court denied American General's motion to compel arbitration on Kestel's counterclaims, finding that no arbitration agreement existed between American General and Kestel.A majority of the Court of Appealspanel hearing the case on appeal disagreed with the trial court about the absence of an arbitration agreement; but the panel upheld the denial of American General's motion to compel arbitration anyway, holding, instead, that American General had waived its arbitration rights through its "nine-month delay in moving for arbitration" following the filing of Kestel's counterclaims.

We granted discretionary review in order to provide guidance to courts and counsel concerning when a party's litigation conduct amounts to an implied waiver of its rights to enforce a contractual right to arbitration.Because we conclude that American General's litigation conduct at issue here was not clearly inconsistent with asserting contractual arbitration rights and that the Court of Appeals erred in determining that American General waived its arbitration rights, we reverse and remand to the trial court for proceedings consistent with this opinion.Our ruling here leaves open on remand the possibility that Kestel may, by proper motion, raise her contention that application of the arbitration provisions could, by cost or otherwise, deprive her of an adequate opportunity to present her claims and defenses.

II.FACTS AND PROCEDURAL BACKGROUND.

On October 31, 2001, John Kestel, the husband of Teresa Kestel, signed a promissory note with American General in Lexington, Kentucky, in the principal amount of $46,701.00.Teresa Kestel was not identified as a borrower on this note, which we will call the October note in this opinion; and she did not sign her name to this note.To secure the debt described in the October note, both John and Teresa signed two real estate mortgage instruments: one encumbering their residence in Lexington and a second encumbering land in Mercer County that Teresa owned individually.

Less than two weeks later, on November 13, 2001, Teresa signed and delivered to American General her separate promissory note in the principal amount of $5,061.21 in consideration for another loan.This note, which we will call the November note in this opinion, contained wording to the effect that either American General or the borrower could elect to have a broad range of disputes called "Covered Claims" submitted to binding arbitration, "even if there is a pending or completed judicial action (up to final judgment and settlement).""Covered Claims" were defined as including "without limitation, all claims and disputes arising out of, in connection with, or relating to your loan today or any previous loan from Lender" and "all documents, actions, or omissions relating to this or any previous loan."According to the arbitration provisions in the November note, covered claims also included "whether the claim or dispute must be arbitrated; the validity of the Arbitration Provisions, your understanding of them, or any defenses to the enforceability of the Loan Agreement."Lastly, the arbitration provisions in the November note specifically listed as "covered claims" that could be submitted to arbitration: any fraud or misrepresentation claims, any claims under federal or state statutes or rules, any contract or tort claims, and any claim for injunctive or equitable relief.

John Kestel defaulted on his obligations under the October note, so American General sued him and Teresa in Fayette Circuit Court and in Mercer Circuit Court to foreclose the two mortgages securing the October note.The Mercer Circuit Court foreclosure was filed in late October 2003, two days after the Fayette Circuit case.When Teresa Kestel defaulted on the November note, American General filed a separate action against her in Fayette Circuit Court to collect on that note.

In January 2004, Teresa Kestel filed an answer and counterclaim against American General in the Mercer Circuit action, alleging fraud and federal and state statutory claims under the Truth in Lending Act and the Kentucky Consumer Protection Act.American General immediately filed a motion for an extension of time to answer the counterclaim, stating it was evaluating its affirmative defenses, "including the right to insist upon arbitration as provided in the loan documents."American General filed its answer in Mercer Circuit Court in late February 2004, raising arbitration as an affirmative defense to the counterclaim.

Within a week of American General's answer, Teresa Kestel moved for partial summary judgment, claiming that the October note had been rescinded.No discovery had occurred at that point.Then, in mid-March 2004, Teresa Kestel moved to strike American General's arbitration defenses, stating she had not signed the October note.In response to Teresa Kestel's motion to strike, American General pointed to the November note, arguing that she had agreed to arbitrate any disputes and that the arbitration provisions in the November note applied to the dispute arising out of the October note.¹It also indicated in the response to the summary judgment motion that the motion was premature because of the possibility of arbitration and the complete lack of discovery.American General filed these responses in mid-April 2004.

Although the trial court ruled from the bench at a hearing in April 2004 that it would grant Kestel's motion to strike the arbitration defenses based on its finding that the arbitration clause in the November note did apply to the dispute over the October note, the trial court did not enter a written order to this effect until August 2004.Meanwhile, the trial court issued a written order denying Kestel's motion for partial summary judgment in late July 2004.

In early November 2004, Kestel made her first discovery requests to American General.About three weeks later, American General moved to compel arbitration and to stay the Mercer Circuit Court action.Among her arguments in response to arbitration, Kestel countered that the arbitration provisions in the November note were not applicable to her and, alternatively, that American General had waived its arbitration rights through its litigation conduct.

In mid-December, the trial court conducted a hearing on American General's motion to compel arbitration and ruled from the bench that the arbitration provisions of the November note did not apply to Kestel's counterclaim because her counterclaim stemmed from the October 2001 loan transaction.The trial court issued a written order denying the motion to compel arbitration in January 2005 but did not state any grounds for its ruling in its written order.American General then filed a timely appeal to the Court of Appeals,² which affirmed the trial court on the alternative ground of litigation-conduct waiver.The majority disagreed with the trial court's finding that the arbitration provisions were not applicable.

American General sought and was granted discretionary review in this Court of the Court of Appeals decision.Kestel did not file a protective cross-appeal concerning the Court of Appeals ruling on the applicability of the arbitration provisions.

III.ANALYSIS.

A.Applicability of Arbitration Agreement Is Law of the Case.

We begin our analysis by acknowledging that the question of whether the arbitration provisions in the November note applied to this dispute — an issue that both lower courts reached but decided in different ways — is not before us.Whether rightly or wrongly, the Court of Appeals decided that the arbitration agreement in the November note applied to this dispute, which arose out of the October note secured by the mortgage on Kestel's Mercer County property.That ruling is now the law of the case because Kestel did not file a cross-motion for discretionary review in this Court of the adverse ruling by the Court of Appeals.³

Kestel argues that we should revisit the issue to avoid a misleading application of the law despite her failure to file a cross-motion.She cites Mitchell v. Hadl.⁴But Mitchell makes clear that ignoring a failure to cross-appeal is outside the normal procedure and appropriate only on "rare occasions."⁵And Mitchell involved the court's deciding the case on the question of the defendant physician's duty, an issue never litigated by the parties in that case, rather than ruling on whether physical contact was required, which was the issue actually resolved by the lower courts.In contrast, in the instant case, Kestel was clearly aware of the arbitration provision applicability issue because she argued it both to the trial court and in the Court of Appeals; but she chose not to challenge the Court of Appeals' adverse finding through a cross-appeal.So we do not believe we should violate the law-of-the-case principle to reach Kestel's issue.⁶

We will not address the applicability of the arbitration agreement in the November note further in this opinion.⁷Instead, we will focus solely on whether the Court of Appeals erred in its...