Cvn Group, Inc. v. Delgado

• Decision Date: 31 December 2002
• Docket Number: No. 01-0682.,01-0682.
• Parties: CVN GROUP, INC, Petitioner, v. Enrique DELGADO and Marjorie Delgado, Respondents.
• Court: Texas Supreme Court

Page 234

95 S.W.3d 234

CVN GROUP, INC, Petitioner, v. Enrique DELGADO and Marjorie Delgado, Respondents.

No. 01-0682.

Supreme Court of Texas.

Argued March 27, 2002.

Decided December 31, 2002.

Elizabeth G. Bloch, Hilgers & Watkins, Gregory Dean Kocian, Austin, for petitioner.

Mitchell Dodd Savrick, Savrick Schumann Johnson & McGarr, Austin, for respondent.

Justice HECHT delivered the opinion for the Court, joined by Chief Justice PHILLIPS, Justice OWEN, Justice JEFFERSON, Justice SCHNEIDER, and Justice SMITH.

The lower courts in this case have refused to foreclose mechanic's liens awarded by arbitration on the ground that the evidence before the arbitrator did not establish that the liens were valid.¹ We hold that the lower courts have exceeded their authority to review an arbitration award. Accordingly, we reverse the judgment of the court of appeals and remand the case to the trial court for further proceedings.

I

CVN Group, Inc. furnished Enrique and Marjorie Delgado labor and materials under a written contract for construction of their home. The contract provided that "[c]laims, disputes or other matters in question between the parties to this Agreement arising out of or relating to this Agreement or breach thereof shall be subject to and decided by arbitration...." Before construction was completed, the Delgados instructed CVN to cease work. CVN asserted that the Delgados had materially breached the contract and demanded arbitration.

An arbitrator was appointed, and the parties submitted their dispute on documents and briefs without live testimony, as they had agreed to do in their contract.² CVN requested $156,865.74 in damages, plus interest and attorney fees, and "an award establishing a valid lien against [the Delgados'] homestead." The Delgados responded that they were not indebted to CVN and that its lien claims were invalid because CVN filed its lien affidavit late and did not record their contract, citing sections 53.052(b) and 53.254(e) of the Property Code.³ CVN replied that its lien affidavit had been timely filed and the contract properly recorded. The Delgados raised no other defenses to CVN's lien claims and did not challenge the arbitrator's authority to decide their validity. The arbitrator awarded CVN $110,925.10 and found "valid statutory⁴ and constitutional⁵ mechanic's liens for the full award".⁶ The parties were entitled to request findings of fact and conclusions of law, but no one did, and none were made.

CVN applied to the district court to confirm the award and foreclose its mechanic's liens.⁷ The Delgados answered that the award should be vacated or modified because, in their words, the award was "manifestly unjust and constituted usury", "there was absolutely no evidence presented by [CVN] that the lien satisfied the necessary constitutional and statutory provisions", and "[t]he lien granted to [CVN] in the arbitration award violates [the Delgados'] constitutional rights, exceeds the Arbitrator's powers, and is unenforceable as an unconstitutional lien on [the Delgados'] homestead." The Delgados also sought a declaration that CVN was not entitled to foreclose its mechanic's liens because the arbitrator had denied that relief. The trial court reviewed the arbitration record and concluded that the award should be reduced to $22,775.10, and that CVN was not entitled to foreclose its mechanic's liens. Regarding CVN's lien claims, the court found that:

• CVN "failed to comply with applicable constitutional and statutory requirements for obtaining a lien on [the Delgados'] homestead, [and therefore] the Arbitrator exceeded his powers and/or authority in granting [CVN] an unconstitutional lien against [the Delgados'] homestead";

• "[i]t was undisputed in the evidence and argument submitted to the Arbitrator that the written contract between [CVN] and [the Delgados] was not acknowledged as required by the Texas Constitution", that "the written contract was not recorded ... as required by applicable law", and that CVN "failed to timely file its lien affidavit as required by applicable law";

• "the constitution and statutory protection afforded homesteads constitutes a fundamental public policy which allows this Court to vacate/modify/correct an arbitration award which is in violation of such fundamental public policy";

• absent evidence supporting an arbitration award creating a lien on a homestead, foreclosure would violate the Texas Constitution.

The trial court rendered judgment accordingly.

CVN appealed. The court of appeals reversed the trial court's reduction of the damages in the arbitration award but affirmed the trial court's refusal to foreclose CVN's mechanic's liens awarded by arbitration.⁸ Noting that the Legislature in the Property Code had imposed a number of requirements for perfecting mechanic's liens on homesteads, the appeals court reasoned:

A mechanic's and materialman's lien may only be foreclosed on, and a sale ordered by, judicial action [citing section 53.154 of the Property Code⁹].... In order to safeguard the homestead protection, and comply with the legislative intent expressed in the Property Code, a court should review the validity of the lien prior to ordering or denying foreclosure.¹⁰

Reviewing the arbitration record, the court concluded that CVN had failed to prove that it had filed an acknowledged contract as required by section 53.254(e) of the Property Code, or timely filed a lien affidavit as required by section 53.052(b) of the Property Code.¹¹ The court went further and concluded that CVN had also failed to prove that its contract with the Delgados had been signed before material was furnished or work performed as required by section 53.254(b) of the Property Code.¹² The Delgados had not argued in their brief to the arbitrator that the contract was not acknowledged, nor had they argued to the arbitrator or the trial court that they had signed their contract after work had begun. The appeals court held that because "the power of foreclosure of a mechanic's and materialman's lien lies exclusively with the judiciary", "[t]he trial court's decision to investigate the validity, and to refuse the foreclosure of CVN's mechanic's and materialman's lien on the Delgados' homestead was proper."¹³

CVN petitioned this Court for review of the court of appeals' refusal to order its mechanic's lien foreclosed.¹⁴ The Delgados have not petitioned for review of the confirmation of the arbitration award of damages.

II

The Delgados do not argue that issues relating to the validity of CVN's claimed mechanic's liens are outside the scope of their agreement to arbitrate, which was clearly broad enough to encompass such issues. Nor do they argue that there are statutory grounds to vacate¹⁵ or modify¹⁶ the arbitration award. Rather, they argue that the "common law allows (and may even require) a court to overturn an arbitrator's award that is unconstitutional or otherwise violates public policy."

In 1936, we held in Smith v. Gladney, that "a claim arising out of an illegal transaction ... is not a legitimate subject of arbitration, and an award based thereon is void and unenforceable in courts of the country."¹⁷ The claim there was for a debt that was incurred trading in futures on the Chicago Board of Trade, what we called "a gambling transaction". We have not had occasion to revisit the subject of when judicial enforcement of arbitration awards must be withheld for reasons of legal or public policy, but two courts of appeals have weighed in. One court refused to uphold an arbitration award upholding the termination of an employee for filing criminal assault charges against a supervisor in violation of a collective bargaining agreement that required exhaustion of grievance procedures before bringing "suit or other action", concluding that the arbitration award was "repugnant to both federal and state public policy to the extent that it forces employees using the grievance procedure to delay the filing of criminal charges growing out of the subject matter of the grievance until the grievance procedure has been exhausted."¹⁸ The other court refused to confirm an arbitration award of damages for unused sick leave in violation of article III, section 53 of the Texas Constitution, which prohibits a grant of extra compensation after service had been rendered.¹⁹ Neither of these courts of appeals was called upon to consider whether common law grounds for refusing to confirm arbitration awards have been preempted by statutes governing arbitration,²⁰ nor have the parties raised that issue here. Accordingly, we assume the law is as we stated it in Smith.

Subject to this assumption, one can readily see that an illegal contract unenforceable by litigation should not gain legitimacy through arbitration. A debt that indisputably arises from gambling, for example, should have no greater claim to judicial enforcement by confirmation of an arbitration award than by litigation. Judicial participation in the collection of the debt by either mechanism is precluded by public policy. On the other hand, it is no more against policy to arbitrate whether a debt has arisen from gambling or some other activity rendering it unenforceable, as opposed to some legitimate activity, than it is to litigate the same issue. It is one thing for a court to refuse to confirm an arbitration award that is expressly based on a legally unenforceable obligation, as we did in Smith; it is quite another thing for a court to re-examine whether an arbitrator has correctly determined that an obligation is not of the sort that is legally unenforceable. These are the clearer ends of a broad spectrum of cases in some of which a court should not ignore the plain character of an award, no matter how the arbitrator characterized it, and in others of which a court should not be permitted to reassess an arbitrator's decision on disputed evidence regarding the character of the obligation.

Subjecting...