Marks v. Bean

• Decision Date: 20 July 2001
• Docket Number: No. 2000-CA-000932-MR.,2000-CA-000932-MR.
• Parties: Ivan D. MARKS and Lois Marks Appellants, v. Robert J. BEAN and Mary Jo Bean, Appellees.
• Court: Kentucky Court of Appeals

57 S.W.3d 303

Ivan D. MARKS and Lois Marks Appellants, v. Robert J. BEAN and Mary Jo Bean, Appellees.

No. 2000-CA-000932-MR.

Court of Appeals of Kentucky.

July 20, 2001.

H. Edwin Bornstein Louisville, KY, for Appellants.

Douglas E. Miller, Radcliff, KY, for Appellees.

Before COMBS, GUIDUGLI, and MILLER, Judges.

COMBS, Judge:

This is an appeal from a ruling of the Jefferson Circuit Court finding that an arbitration clause in a contract for purchase of real estate was not enforceable. Finding no error, we affirm.

Ivan and Lois Marks (the Markses), appellants, sold their home to Robert J. and Mary Jo Bean (the Beans) pursuant to a contract executed by the parties on December 18, 1998. After taking possession of the house, the Beans discovered serious problems with its brick veneer. On December 16, 1999, the Beans filed a complaint alleging that they were fraudulently induced to enter into the contract and seeking compensatory and punitive damages. The Markses appeal from the opinion and order of the trial court entered March 30, 2000, which denied their motion to stay the action and to compel the Beans to arbitrate their claim. Although interlocutory, such an appeal is allowed pursuant to Kentucky Revised Statutes (KRS) 417.220(1)(a). We are not persuaded that the trial court erred in its determination that the arbitration clause is not enforceable pursuant to KRS Chapter 417.050, a section of the Kentucky Uniform Arbitration Act.

In their complaint, the Beans alleged that the Markses fraudulently induced them to enter into a contract for the purchase of their house by misrepresenting and concealing the defects in its brick veneer. They attached a copy of the disclosure form completed by the Markses prior to the sale, which stated that there were no "defects or problems, current or past, to the structure or exterior veneer." The complaint alleged that the Markses' representations were "false, fraudulent, or so recklessly made as to indicate a total disregard for the truth of the contents of the disclosure form" and that the Markses "were aware of the condition of the brick and consciously sought to conceal" the problem from the Beans. The Beans also asserted a claim¹ against Home Inspections, Inc., alleging that it was negligent in performing an inspection of the property. In addition to an amount sufficient to repair the brick veneer, the Beans sought punitive damages.

In response to the complaint, the Markses filed a motion to dismiss the action for lack of subject matter jurisdiction, or, in the alternative, for an order staying the action and compelling arbitration in accordance with paragraph 15 of the "Sales and Purchasing Contract," which provides:

BINDING ARBITRATION: All claims or disputes of Sellers, Buyers, brokers, or agents or any of them arising out of this contract or the breach thereof or arising out of or relating to the physical condition of the property covered by this purchase agreement (including without limitation, claims of fraud, misrepresentation, warranty and negligence) shall be decided by binding arbitration in accordance with the rules for the real estate industry, then in effect, adopted by the American Arbitration Association unless the parties mutually agree otherwise. Notice of the demand for arbitration shall be filed in writing by registered or certified mail with the other parties to the contract and with the American Arbitration Association or other arbitrators which the parties may agree upon and shall be made within one year after the dispute has arisen. An actual oral hearing shall be held unless the parties mutually agree otherwise. The Kentucky Real Estate Commission still retains jurisdiction to determine violations of KRS 324.160. Any proceeding pursuant to KRS 324.420(1) to determine damages shall be conducted by an arbitrator pursuant to this clause and not in court. By signing below, the agents, on behalf of themselves and their brokers, agree to be bound by this arbitration clause, but are not parties to the contract for any other purpose. The terms of this Paragraph 15 shall survive the closing.

The Beans offered two theories in support of their challenge to the validity of the arbitration clause. First, they relied on the merger doctrine discussed in Borden v. Litchford, Ky.App., 619 S.W.2d 715 (1981), arguing that the arbitration clause did not survive the closing as it was not contained in the deed of conveyance. They also asserted that the arbitration clause was not enforceable pursuant to KRS 417.050. The pertinent parts of this statute provide:

A written agreement to submit any existing controversy to arbitration or a provision in a written contract to submit to arbitration any controversy thereafter arising between the parties is valid, enforceable and irrevocable, save upon such grounds as exist at law for the revocation of any contract. (Emphasis added.)

The Beans contend that the emphasized portion of the statute directly applies to their claim of fraud in the inducement of the underlying contract. The Markses argue that the section applies only when the validity of the arbitration clause itself is in question.

Citing authorities from other jurisdictions, the trial court concluded that "the doctrine of merger is a rule of presumed intention." Construing the express language in the contract that paragraph 15 "shall survive the closing," the trial court determined that the merger doctrine did not affect the continued viability of the arbitration provision. However, the trial court refused to enforce the arbitration clause based on its interpretation of KRS 417.050. It concluded:

The Beans allege that the Markses fraudulently concealed or misrepresented the condition of the brick veneer. While the Beans have chosen to affirm the contract and pursue damages, they have alleged a cause of action, fraud, which presents grounds at law for the revocation of their contract. The existence of fraud is a factual question to be determined by the trier of fact. Therefore, the Court finds that the arbitration clause in the parties' sales contract is not enforceable.

The Court notes the language of the arbitration clause purporting to reserve issues of fraud and misrepresentation for arbitration. This language cannot override the public policy embodied in KRS 417.050 which directs that arbitration agreements will not be enforced when grounds exist for the revocation of the contract subject to the arbitration agreement.

The Markses have devoted a considerable portion of their brief to the trial court's ruling with respect to the merger doctrine — a ruling which was favorable to them. We find no reason to address the merger doctrine. The only issue before us is whether the trial court properly construed KRS 417.050 as precluding enforcement of an arbitration clause where the party opposing arbitration, instead of challenging the arbitration clause itself, alleges that the underlying contract was procured by fraud. This issue has not been addressed in a reported decision in Kentucky.

The Markses argue that the trial court misconstrued the statute. They correctly point out that: (1) KRS 417.050 is nearly identical to its counterpart in the Federal Arbitration Act, 9 U.S.C. § 2 (applicable when interstate commerce is involved); and that (2) the majority of federal and state courts in jurisdictions that have adopted the Uniform Arbitration Act (i.e., the exception language of KRS 417.050) have determined the savings clause to apply only where a claim of fraudulent inducement is made with respect to the agreement to arbitrate and not to the underlying contract in general. See e.g., Prima Paint Corporation v. Flood and Conklin Mfg. Co., 388 U.S. 395, 87 S.Ct. 1801, 18 L.Ed.2d 1270 (1967); Quirk v. Data Terminal Systems, Inc., 379 Mass. 762, 400 N.E.2d 858 (1980). See also, Annot., Claim of Fraud in Inducement of Contract as Subject to Compulsory Arbitration Clause Contained in Contract, 11 A.L.R.4th 774 (1982).

Since the proper construction of a statute is a matter of law, it is subject to de novo review on appeal. Bob Hook Chevrolet Isuzu, Inc. v. Commonwealth, Ky., 983 S.W.2d 488, 490 (1998). We must give the statute a reasonable construction consistent with the Legislature's intent. We also note that Kentucky law generally favors arbitration agreements. See Kodak Mining Company v. Carrs Fork Corp., Ky., 669 S.W.2d 917 (1984). The Markses urge us to endorse the majority view that looks to fraud in the inducement to arbitrate as opposed to any fraud attaching to the...