4th Circuit: Noohi v. Toll Brothers- Mutuality of Arbitration Provisions

Summary:

In this putative class action, prospective luxury home buyers allege that a real estate development company unlawfully refused to return deposits when the prospective buyers could not obtain mortgage financing. Toll Brothers sought to dismiss or stay pending arbitration, but the district court found the arbitration provision to be unenforceable as it only required buyers, and not Toll Brothers, to submit disputes to arbitration.

The Federal Arbitration Act “ is a congressional declaration of a liberal federal policy favoring arbitration agreements”, 9 U.S.C. § 2, and, following AT&T Mobility LLC v. Concepcion, 131 S. Ct. 1740 (2011), courts were prohibited from altering otherwise valid arbitration agreements by applying the doctrine of unconscionability to eliminate a term barring classwide procedures. Id. at 1750-53. Conception, however, found that § 2 permits arbitration agreements to be invalidated by ‘generally applicable contract defenses, such as fraud, duress, or unconscionability,’ but not by defenses that would apply only to arbitration Id. at 1746. The holding in Cheek, while at first blush appearing to apply in violation of the FAA and Conception only to arbitration, only treats “an arbitration provision like any stand-alone contract, requiring consideration.” Further, by requiring mutuality in an arbitration agreement, Cheek serves the purpose of the FAA by encouraging arbitration.

Additionally, where in Conception a class action lawsuit would have interfered with the informality of arbitration and increased risks for defendants, here “it merely requires that for an arbitration provision to be valid, both parties bind themselves to it.”

Accordingly, the Court of Appeals looked to Cheek v. United Healthcare of Mid-Atlantic, Inc., 835 A.2d 656 (Md. 2003), which specifically rejected the argument that consideration for an underlying contract can serve as consideration for an arbitration provision within that contract.

Commentary:

In Tillman v. Commercial Credit Loans, Inc., 362 N.C. 93, 655 S.E.2d 362 (2008), the North Carolina Supreme Court similarly to Cheek held that arbitration provisions without mutuality were also unenforceable.

For a copy of the opinion, please see:

Noohi v. Toll Brothers- Mutuality of Arbitration Provisions.pdf

About

1. Bachelor of Arts degree in English Literature from Washington University, 1993. 2. Juris Doctor degree from George Washington University, 1996. Admissions to Practice of Law: North Carolina Bar, 1996. Federal District Courts for the Eastern and Middle Districts of North Carolina. Specialty Certification: North Carolina State Bar: Certified as a Specialist in Consumer Bankruptcy. Areas of Practice: Practice limited to consumer and business debtor bankruptcy law, 1998 to present. Memberships: National Association of Consumer Bankruptcy Attorneys (NACBA). North Carolina Academy of Trial Lawyers (NCATL). North Carolina Bar Association, Bankruptcy Section. Lectures prepared and presented: North Carolina Academy of Trial Lawyers seminar on bankruptcy; Topic: Counseling the Consumer Debtor Prior to Court - C.Y.A. Forms to Help 'Gird They Loins'; 2001. Middle District Bankruptcy Seminar; Topic: Preparing Chapter 13 Plans; 2002. NACBA National Convention; Topic: Efficient Office Practices; 2003. NACBA National Convention; Topic: Chapter 7 vs. Chapter 13 Debates; 2004. Middle District Bankruptcy Seminar; Topic: Chapter 7 & 13 Hot Issues; 2004. Positions held: NACBA National Convention; Convention Chair; 2008. NACBA National Convention; Panel Moderator: Topic: Basic Bankruptcy Issues; 2008. NACBA National Convention; Panel Moderator; Topic: Chapter 13-Disposable Income and Other Issues; 2007. NACBA National Convention; Panel Moderator; Topic: Representing Members of the Military and Their Families; 2007. NACBA, Member of National Board of Directors, 2006 to present. NCATL, Chair of the Bankruptcy Section, 2003 to 2007. NACBA, Chair of the North Carolina Section, 2003 to 2007. NC Bar Association, Bankruptcy Section, Bankruptcy Council Member, 2004 to present.

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