Stites & Harbison, PLLC

The Kentucky Supreme Court issued an important opinion regarding arbitration in foreclosure cases on May 22, 2008.  The case was argued by Stites & Harbison attorney Matthew W. Breetz.

American General Home Equity, Inc. filed foreclosure proceedings against the borrowers, who had defaulted on loans. One of the borrowers counterclaimed, alleging fraud and violations of the Truth In Lending Act and the Kentucky Consumer Protection Act. Following American General's answer, the borrower then filed a motion for partial summary judgment and a motion to strike American General's arbitration defense. The trial court denied the motion for summary judgment, but granted the motion to strike the arbitration defense. After the borrower filed her first discovery request approximately three months later, American General sought to enforce the arbitration clause and filed a motion to compel arbitration. The trial court denied on the grounds that the arbitration clause did not cover the transaction before the court.

American General appealed and the Kentucky Court of Appeals affirmed the trial court on different grounds. The majority of the appeals court disagreed with the trial court's finding that the arbitration provision was not applicable to the transaction, but affirmed on the grounds that American General had waived its arbitration right by its litigation conduct. The Supreme Court of Kentucky granted discretionary review to "provide guidance to courts and counsel concerning when a party's litigation conduct amounts to an implied waiver of its right to enforce a contractual right to arbitrate."

First, the Supreme Court held that the borrower, by failing to file a cross-motion for discretionary review, had failed to preserve the coverage issue. The Court of Appeals holding that the arbitration clause covered the transaction had become the law of the case.

Next, the Supreme Court found that American General had not waived its right to arbitrate. Dismissing the argument that the filing of the foreclosure suit itself constituted a litigation waiver, the Court pointed out that Kentucky is a judicial foreclosure state and a foreclosure complaint is a prerequisite to securing relief. The key inquiry, rather, is "whether the party seeking arbitration has acted in a manner inconsistent with the intent to exercise arbitration rights such that one could reasonably infer that the party has voluntarily relinquished their arbitration rights."

The Court listed the following conduct that should be viewed as indicating a waiver of a right to arbitrate: filing responsive pleadings or pretrial motions while not asserting a right to arbitration; asserting counterclaims; engaging in extensive discovery; and litigation of substantive issues of merit.

The Court observed that other courts have considered a number of factors in determining whether such a waiver has occurred: whether the party's actions are inconsistent with the right to arbitrate; the extent of pre-trial litigation; the length of delay in invoking an arbitration right and seeking a stay; the proximity of the trial date; and any resulting prejudice to the other party. The Court found it so obvious that no litigation waiver had occurred in this case, that it was unnecessary for it to reach the issue of whether prejudice should be an element of the analysis.

This ruling by the Kentucky Supreme Court is helpful in confirming the procedure for arbitration in a foreclosure case in Kentucky . Further, it gives useful guidance in determining whether a litigation waiver has occurred.

Click here to read the Opinion of the Court by Justice Minton.