Coll. Park Pentecostal Holiness Church v. Gen. Steel Corp.

• Decision Date: 19 January 2012
• Docket Number: Civil No. PJM 09–2070.
• Citation: 847 F.Supp.2d 807
• Parties: COLLEGE PARK PENTECOSTAL HOLINESS CHURCH, Plaintiff v. GENERAL STEEL CORP., et al., Defendants.
• Court: U.S. District Court — District of Maryland

847 F.Supp.2d 807

COLLEGE PARK PENTECOSTAL HOLINESS CHURCH, Plaintiff

v.GENERAL STEEL CORP., et al., Defendants.

Civil No. PJM 09–2070.

United States District Court,

D. Maryland.

Jan. 19, 2012.

Timothy Guy Smith, Timothy Guy Smith PC, Glenwood, MD, for Plaintiff.

Michael B. Beard, Stephens & Associates, PC, Rockville, MD, Patrick Donald Frye, Building Services Group Legal Department, Littleton, CO, for Defendants.

MEMORANDUM OPINION

PETER J. MESSITTE, District Judge.

College Park Pentecostal Holiness Church (“the Church”) has sued General Steel Corporation, General Steel Domestic Sales LLC, and Christopher Davis (collectively “Defendants”), alleging that they fraudulently induced the Church to enter into a contract which the Church believed was for the construction of a building to be used as a place of worship, but which in fact was only for the supply of materials and components for the building, not its construction. The Church further alleges that Defendants violated Maryland consumer protection laws.

Defendants filed a Motion to Dismiss or in the Alternative to Compel Arbitration, and after hearing oral argument, the Court issued an Order that denied the Motion to Dismiss and granted the Motion to Compel to the extent that it required the merits of the Church's Complaint to be resolved in arbitration, but deferred consideration of whether one or more terms of the arbitration clause were unenforceable for unconscionability or otherwise. The Court requested additional briefing from the parties, which the parties have now submitted. For the reasons that follow, the Court finds several of the provisions of the arbitration clause unconscionable and unenforceable and will ORDER that the merits of the Church's Complaint be arbitrated in Maryland, minus the offending terms.

I.

The Church alleges that in December 2006 one of its representatives, Pastor Jamil Kahn, entered into discussions by phone with Christopher Davis, an employee of General Steel Corporation, with regard to the possible construction of a building by General Steel on the Church's property in College Park, Maryland. According to the Church, Davis represented to Kahn that General Steel would provide a “turnkey” building ready for occupancy and would handle all zoning, design, site planning, and general contracting work. General Steel faxed the contract to Kahn on January 11, 2007. That same day, based on Davis's representations, Kahn signed and returned the contract.

The cover page of the contract, which was marked “Urgent,” stated that the document was a “standard Purchase Agreement” and directed Kahn to initial the “CONDITIONS” page before faxing the document back to General Steel. The Purchase Agreement outlined the Church's “STEEL BUILDING SPECIFICATIONS,” and a stamp on the page made clear that the “MANAGER PRICE” would only be valid through January 11, 2007, the very day the contract arrived. Farther down the page, in small block print, the Purchase Agreement stated, “BUYER HEREBY ACKNOWLEDGES RECEIPT OF A COMPLETED COPY OF THIS AGREEMENT AND AGREES TO ALL THE TERMS HEREIN CONTAINED.... ALL DISPUTES SHALL BE ARBITRATED PURSUANT TO PARAGRAPH 6 OF THE CONDITIONS PAGE.”

Paragraph Six of the “CONDITIONS” page, which Kahn separately initialed, provided:

Any controversy or claim arising out of or relating to this contract, or the breach thereof, shall be resolved by arbitration before the Judicial Arbiter Group, Inc. in Denver, Colorado. Any challenge relating to the entire agreementor any subpart thereto, arbitration of any controversy, and confirmation of any arbitration award shall be only in Denver, Colorado. Any such challenge that relates to whether claims are arbitrable shall obligate the challenging party to pay the attorney's fees and costs of defense to the non-challenging party. The party initiating arbitration shall advance all costs thereof. This agreement shall be governed by and interpreted in accordance with the laws of the State of Colorado. The Federal Arbitration Act shall govern the interpretation, enforcement, and proceedings pursuant to the arbitration clause in this agreement. The arbitrator will have no authority to award punitive, consequential or other purely non-compensatory damages, except as may be required by statute....

Paragraph Seven of the Agreement, which Kahn also initialed, stated that “[i]f any provision of this agreement or any part thereof is invalid, unlawful or incapable of being enforced, it shall be severed and the remaining provisions given full force and effect.”

Kahn signed and initialed the Agreement on January 11, 2007, the same day he received it, and immediately faxed it back to General Steel. On January 12, Kahn sent General Steel a check for $45,000 as a deposit under the contract. Approximately one year later, in January 2008, Kahn signed a “Building Change Order,” which added a mezzanine level to the planned building, and sent General Steel another check for $50,000. Due to the increased price of the mezzanine, however, the parties later executed a second Change Order that restored the original design of the building. Notably, Defendants never returned the $50,000 following the execution of the second Change Order.

The Church submits that following payment of the deposits, Defendants informed it that they would in fact provide no assistance with site planning, zoning, or construction and would only supply materials for the building. The Church thereupon demanded that Defendants return the deposits, claiming it had no intention of entering into a “materials only” contract, but Defendants refused. The instant lawsuit was filed on August 6, 2009.

As indicated, after hearing oral argument on Defendants' Motion to Dismiss or in the Alternative to Compel Arbitration, the Court denied the Motion to Dismiss but granted their alternative Motion to Compel Arbitration to the extent that it required the merits of the Church's complaint to be resolved in arbitration. The Court held open the issue of whether one or more of the terms of the arbitration clause were enforceable and requested that the parties submit additional briefing on the question of enforceability, given the obvious distance, cost, and inconvenience to the Church of having to arbitrate in Colorado. The Court also directed the Church to file an affidavit and other documentation to substantiate its financial situation and the expected costs of arbitrating the case in Colorado. To this end, the Church submitted the affidavit of Lorraine Ryan, an Elder of the Church with personal knowledge of its financial records.

According to Ryan, as of the time of the affidavit, the Church's assets included a savings account totaling $32,736.00 and a checking account, after deducting outstanding liabilities, consisting of $2,319.00. The Church received an income of approximately $24,000.00 per month in donations but incurred approximately $20,000.00 per month in expenses. Ryan attested that she had confirmed that the Judicial Arbiter Group in Denver, Colorado would charge on average $395.00 per hour for an arbitrator's services. The Church estimated that an arbitrator would spend between twenty-six to thirty-six hours resolving this case—consisting of two days of hearings and ten additional hours of work—for an arbitrator's fee of approximately $14,220.00. Additional costs of arbitration would include the cost of retaining Colorado counsel and transportation and housing expenses for a minimum of three days for at least two individuals representing the Church. To date, the Church's Maryland counsel has charged only expenses for his legal representation, and has stated that he is unable to devote the time necessary to handle arbitration in Colorado. The Church has contacted several attorneys in Denver, all of whom indicated that it would take some 50 hours to handle the arbitration and draft a post-hearing memorandum. These attorneys reported on average a fee of $325.00 per hour, which would bring their fees to a total of about $17,500.00. As for travel and accommodations expenses for two Church representatives, those may be estimated at $700.00 and $1,275.00, respectively, a total of $1,975.00. ¹ Given an approximate total cost of $33,695.00 to arbitrate in Colorado, Ryan has averred that arbitrating the dispute would effectively eliminate all of the Church's remaining assets and likely jeopardize its continued existence.

Defendants argue that the arbitration clause should be fully enforced as written.

II.

The Federal Arbitration Act, 9 U.S.C. §§ 1–16, provides the governing legal framework for this case. Under § 2 of the statute, “[a] written provision in ... a contract evidencing a transaction involving commerce to settle by arbitration a controversy thereafter arising out of such contract ... shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.” Id. § 2 (emphasis added). Thus, an arbitration provision may be found unenforceable where it violates applicable federal common law, see, e.g., Bradford v. Rockwell Semiconductor Sys., Inc., 238 F.3d 549 (4th Cir.2001), or on the basis of “generally applicable contract defenses, such as fraud, duress, or unconscionability....” Doctor's Assocs., Inc. v. Casarotto, 517 U.S. 681, 687, 116 S.Ct. 1652, 134 L.Ed.2d 902 (1996).

In this case, federal common law addressing whether arbitration provisions should be invalidated because of prohibitive cost does not assist the Church.²True, the U.S. Supreme Court in Green Tree Financial Corp.-Alabama v. Randolph ruled that a party challenging an arbitration agreement on the basis of financial hardship might be able to show that the likelihood of incurring prohibitive costs effectively deprives it of its ability to seek redress. 531 U.S. 79, 92, 121 S.Ct. 513, 148 L.Ed.2d 373 (2000); see also Bradford v. Rockwell Semiconductor Systems, 238 F.3d 549, 556–57 (4th Cir.2001). But the...