Rich v. Walsh

• Decision Date: 24 November 2003
• Docket Number: No. 3699.,3699.
• Court: South Carolina Court of Appeals
• Parties: Joseph RICH d/b/a Sunshine Recycling, Respondent, v. Gary WALSH and Bank of America, N.A., Appellants.

357 S.C. 64

590 S.E.2d 506

Joseph RICH d/b/a Sunshine Recycling, Respondent, v. Gary WALSH and Bank of America, N.A., Appellants.

No. 3699.

Court of Appeals of South Carolina.

Heard October 9, 2003.

Decided November 24, 2003.

Rehearing Denied January 22, 2004.

David Clay Robinson, of Columbia, for appellant Gary Walsh.

John T. Moore, Steven A. McKelvey, Jr., Elizabeth A. Shuffler, all of Columbia, for appellant Bank of America, N.A.

Jeffrey Scott Holcombe, of Orangeburg, for respondent.

CURETON, A.J.:

Bank of America, N.A., and Gary Walsh appeal an order of the Circuit Court denying their motion to compel arbitration. The trial court held appellants waived their right to arbitration by their use of the trial litigation machinery. We vacate and remand.

FACTS

In September 2000, Joseph B. Rich filed his complaint in this case alleging fraud, breach of fiduciary duty and various other causes of action arising out of a series of loan transactions between him and Bank of America, N.A., and its employee, Gary Walsh. Bank of America and Walsh (collectively "the Bank") each answered the complaint and asserted a counterclaim against Rich for violation of the Frivolous Civil Proceedings Sanctions Act, S.C Code Ann. §§ 15-36-10 to -50 (Supp.2002).

The security agreements Rich executed in connection with the loan transactions contained an arbitration clause providing that "[a]ny controversy or claim between or among the parties... arising out of or relating to this instrument ... shall be determined by binding arbitration in accordance with the Federal Arbitration Act (or if not applicable, the applicable state law)." The Bank first sought an order compelling arbitration on September 24, 2001.

Limited discovery was conducted in the interval between the filing of the complaint and the motion to compel arbitration. The Bank took the deposition of Rich on September 21, 2001. However, the deposition was limited in duration and scope, lasting only 15 minutes, and confined largely to questions regarding Rich's business background and the loan documents at issue. During the deposition, Bank's counsel informed Rich's counsel that the Bank intended to move to compel arbitration. In light of the bank's intentions, the parties agreed to forgo further testimony and concluded the deposition.

Prior to Rich's deposition, the parties each exchanged one set of interrogatories. In response to Rich's interrogatories the Bank refused to answer them in full and only answered the standard interrogatories allowed under Rule 33(b)(1)-(7), SCRCP.¹ Each party also submitted one set of requests for production, and Rich served one set of requests to admit. The Bank also filed a motion to compel discovery responses, but the parties resolved the matter prior to any action by the trial court.

The record does not reveal any further discovery requests were submitted. The Bank did not depose anyone other than Rich. Rich took no depositions of the Bank, and except for the motion to compel arbitration, the parties did not require the intervention of the court.

In its order filed December 4, 2001, the trial court concluded the Bank had waived its right to compel arbitration because of its use of the pretrial litigation process. The Bank and Walsh appeal.

STANDARD OF REVIEW

The denial of a motion to compel arbitration, based on a finding of waiver, is reviewed on appeal de novo. Liberty Builders, Inc. v. Horton, 336 S.C. 658, 664-65, 521 S.E.2d 749, 753 (Ct.App.1999). The appellate court will, however, grant deference to the trial court's factual findings underlying its conclusion if there is any evidence reasonably supporting them. Id.

LAW/ANALYSIS

The trial court ruled the Federal Arbitration Act (FAA) preempts application of the South Carolina Uniform Arbitration Act (SCUAA) in this case because the transactions at issue involve interstate commerce. See 9 U.S.C. §§ 1-2 (2002). This finding is not disputed in the present appeal, so the propriety of the trial court's determination is not before this court. Accordingly, we apply the provisions of the FAA as interpreted under federal law and the laws of this state.²

Under the FAA, "a party may demand a stay of [ ] judicial proceedings pending exercise of a contractual right to have the subject matter of the [ ] action decided by arbitration, unless the party seeking arbitration is `in default' of that right." MicroStrategy, Inc. v. Lauricia, 268 F.3d 244, 249 (4th Cir.2001) (quoting Maxum Found., Inc. v. Salus Corp., 779 F.2d 974, 981 (4th Cir.1985)). "Default" under this statutory scheme has been equated with the contract law principle of "waiver." Id. Although the right to enforce an arbitration clause may be waived, federal and state courts have recognized a strong policy favoring arbitration. See Moses H. Cone Mem'l Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 24-25, 103 S.Ct. 927, 74 L.Ed.2d 765 (1983)

("[A]s a matter of federal law, any doubts concerning the scope of arbitrable issues should be resolved in favor of arbitration, whether the problem at hand is the construction of contract language itself or an allegation of waiver, delay, or a like defense to arbitrability."); Tritech Elec., Inc. v. Frank M. Hall & Co., 343 S.C. 396, 399, 540 S.E.2d 864, 865 (Ct.App.2000) ("The policy of the United States and this State is to favor arbitration of disputes.") (quoting Heffner v. Destiny, Inc., 321 S.C. 536, 537, 471 S.E.2d 135, 136 (1995)).

The Bank's primary argument in this appeal is that the trial court applied the wrong standard for determining whether arbitration has been effectively waived. Some confusion exists in this area because the various federal circuit courts of appeal have adopted different standards to determine whether arbitration rights have been waived under the FAA.

A number of circuits require the party opposing arbitration to demonstrate it has suffered "actual prejudice" as a result of the delay in seeking arbitration. See United Computer Sys., Inc. v. AT & T Corp., 298 F.3d 756, 765 (9th Cir.2002)

(holding that "arbitration rights are subject to constructive waiver if three conditions are met: (1) the waiving party must have knowledge of an existing right to compel arbitration; (2) there must be acts by that party inconsistent with such existing right; and (3) there must be prejudice resulting from the waiving party's inconsistent acts") (citing Hoffman Constr. Co. of Oregon v. Active Erectors and Installers, Inc., 969 F.2d 796, 798 (9th Cir.1992)); Ivax Corp. v. B. Braun of Am., Inc., 286 F.3d 1309, 1315-16 (11th Cir.2002) (finding that "[i]n determining whether a party has waived its right to arbitrate ... we decide if, `under the totality of the circumstances,' the party `has acted inconsistently with the arbitration right,' and... we look to see whether, by doing so, that party `has in some way prejudiced the other party'") (quoting S & H Contractors, Inc. v. A.J. Taft Coal Co., 906 F.2d 1507, 1514 (11th Cir.1990)); MicroStrategy, 268 F.3d at 249 (4th Cir.2001) (finding that "[a] party may waive its right to insist on arbitration if the party `so substantially utiliz[es] the litigation machinery that to subsequently permit arbitration would prejudice the party opposing the stay'"); Wood v. Prudential Ins. Co., 207 F.3d 674, 680 (3d Cir.2000) ("In order to obtain a finding that arbitration is waived, a party seeking to avoid arbitration must demonstrate prejudice."); Hoxworth v. Blinder, Robinson & Co., Inc., 980 F.2d 912, 925 (3d Cir.1992) (holding that "prejudice is the touchstone for determining whether the right to arbitrate has been waived"); Fraser v. Merrill Lynch Pierce, Fenner & Smith, Inc., 817 F.2d 250, 252 (4th Cir.1987) (opining that "[t]he dispositive question is whether the party objecting to arbitration has suffered actual prejudice"); In re Mercury Constr. Co., 656 F.2d 933, 939 (4th Cir.1981) ("[I]t is only when ... delay results in actual prejudice that it may amount to `default' within the [Federal Arbitration] Act."), aff'd sub nom. Moses H. Cone Mem'l Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 103 S.Ct. 927, 74 L.Ed.2d 765 (1983).

Not all of the circuits hold prejudice to be an indispensable requirement. See Ernst & Young LLP v. Baker O'Neal Holdings, Inc., 304 F.3d 753, 756 (7th Cir.2002)

(holding that the court must "determine whether based on all of the circumstances, the [party against whom the waiver is to be enforced] has acted inconsistently with the right to arbitrate") (alteration in original) (quoting Grumhaus v. Comerica Sec., Inc., 223 F.3d 648, 650-51 (7th Cir.2000)); General Star Nat'l Ins. Co. v. Administratia Asigurarilor de Stat, 289 F.3d 434, 438 (6th Cir.2002) (finding that "[a]n agreement to arbitrate may be waived by the actions of a party which are completely inconsistent with any reliance thereon") (quoting Germany v. River Terminal Ry. Co., 477 F.2d 546, 547 (6th Cir.1973)); National Found. for Cancer Research v. A.G. Edwards & Sons, Inc., 821 F.2d 772, 777 (D.C.Cir.1987) ("This circuit has never included prejudice as a separate and independent element of the showing necessary to demonstrate waiver of the right to arbitration."); Southern Sys., Inc. v. Torrid Oven Limited, 105 F.Supp.2d 848, 853 (W.D.Tenn.2000) (holding that "[i]n light of the Sixth Circuit's emphasis on inconsistent conduct and no mention of prejudice, this court will treat prejudice as a significant factor but not a dispositive one").

South Carolina has primarily, though not exclusively, followed the approach adopted by the federal courts of the Fourth Circuit and other jurisdictions which require a showing of actual prejudice before finding waiver. See Sentry Eng'g & Constr., Inc. v. Mariner's Cay Dev. Corp., 287 S.C. 346, 351, 338 S.E.2d 631, 634 (1985)

(finding that "[f]ederal decisions require a showing of prejudice when waiver is asserted .... it is not inconsistency, but the presence or absence of prejudice which is determinative"...