melissa-a-rhymer-legal-custodian-of-robert-a-trivett-and-wife-maria ( 2006 )

IN THE COURT OF APPEALS OF TENNESSEE
AT KNOXVILLE
November 8, 2006 Session
MELISSA A. RHYMER, Legal Custodian of ROBERT A. TRIVETT and
wife, MARIA TRIVETT, v. 21st MORTGAGE CORPORATION and
SOUTHERN SHOWCASE HOUSING, INC., d/b/a HOMES AMERICA
Direct Appeal from the Chancery Court for Hawkins County
No. 15725 Hon. Thomas R. Frierson, II., Chancellor
No. E2006-00742-COA-R3-CV - FILED DECEMBER 19, 2006
In this case defendants moved to arbitrate the dispute since plaintiff signed a contract to arbitrate.
Plaintiff pled incompetence to contract, but the Trial Court held that issue was subject to arbitration.
We vacate and remand and instruct the Trial Court to decide the issue of incompetency.
Tenn. R. App. P.3 Appeal as of Right; Judgment of the Chancery Court Vacated and
Remanded.
HERSCHEL PICKENS FRANKS, P.J., delivered the opinion of the court, in which CHARLES D. SUSANO ,
JR., J., and SHARON G. LEE, J., joined.
Joseph E. May, Mount Carmel, Tennessee, Timothy E. Scott and Frank A. Johnstone, Kingsport,
Tennessee, for appellants.
Anthony R. Steele, Knoxville, Tennessee, for appellee, 21st Mortgage Corporation.
Daniel M. Gass, Knoxville, Tennessee, for appellees, Southern Showcase Housing, Inc., d/b/a
Homes America.
OPINION
In this action, Melissa Rhymer, legal custodian of Robert Trivett and wife, Maria
Trivett, brought suit against 21st Mortgage Corporation and Southern Showcase Housing, Inc., d/b/a
Homes America, alleging misrepresentation, fraud, negligence, etc., relating to the sale and financing
of a manufactured home.
Plaintiffs alleged that Robert Trivett was a disabled veteran whose sole source of
income was a disability pension from the US Department of Veterans Affairs, and that a custodian
had been appointed over the same due to Trivett’s mental incapacity. They alleged that they
disclosed Trivett’s mental incapacity and the existence of the custodian to the lot manager for
defendant Homes, and were advised since the custodian’s name did not appear on the deed to the
family farm, there was no need for the custodian to become involved. They then entered into an
Installment Contract - Security Agreement with 21st for the purchase of a 2002 Champion mobile
home.
21st filed a Motion to Dismiss, and attached the Installment Contract signed by
Trivett, and its attached Arbitration Agreement. They asserted that the matter was to be resolved in
arbitration, and further, that it was unaware of any conservatorship, guardianship, or other legal
proceeding wherein Rhymer was empowered to act for Trivett. Homes also filed a Motion to
Dismiss and Motion to Enforce Arbitration Agreement, asserting that the purchase contract which
Trivett entered into contained a “notice of arbitration provision”, and that Trivett had executed the
Arbitration Agreement.
Plaintiffs sought summary judgment on the grounds of Trivett’s incompetency, and
while the Court found there were genuine issues of material fact and denied the Motion, the Court
also entered an Order finding that the issues should proceed to arbitration and the case would be
stayed, pending arbitration.
The Court certified the Judgment as final pursuant to Tenn. R. Civ. P. 54.
Plaintiffs appealed and raised these issues:
1. Whether the Trial Court erred in failing to give full faith and credit to the
VA’s determination of incompetency, or in failing to grant partial summary
judgment on this issue?
2. Whether the Court erred in failing to conduct an evidentiary hearing on the
issue of competency before ordering arbitration?
Plaintiffs insist that the Trial Court should have granted partial summary judgment
on the issue of Trivett’s incompetency, based upon the finding of incompetency made by the VA.
We disagree, and affirm the Trial Judge on this issue. It is clear from 38 U.S.C. §5502, that the VA
can appoint a fiduciary for the payment of benefits regardless of whether the beneficiary has a legal
disability or not. Plaintiffs did provide evidence, in the form of an Affidavit from the VA counsel,
who stated that on March 19, 1999, the VA made a determination that Trivett was incompetent to
handle disbursement and management of his funds, pursuant to 38 C.F.R. §3.353, which defines
mental incompetency as “one who because of injury or disease lacks the mental capacity to contract
or manage his or her own affairs, including disbursement of funds without limitation.” She stated
that Trivett continued to be rated as such as of the date of his affidavit. Plaintiffs assert that the
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finding by the VA that Trivett is equivalent to a finding of incompetency and appointment of a
guardian under the Tennessee Uniform Veterans’ Guardianship Act.
The Tennessee Uniform Veterans’ Guardianship Act provides:
Whenever, pursuant to any law of the United States or regulation of the veterans
administration, it is necessary, prior to payment of benefits, that a guardian be
appointed, the appointment may be made in the manner hereinafter provided.
Tenn. Code Ann. §34-5-104. The Act further provides that:
Where a petition is filed for the appointment of a guardian for a mentally
incompetent ward, a certificate of the administrator, or the administrator's duly
authorized representative, that such person has been rated incompetent by the
veterans administration on examination in accordance with the laws and regulations
governing such veterans administration and that the appointment of a guardian is a
condition precedent to the payment of any moneys due such ward by the veterans
administration, shall be prima facie evidence of the necessity for such appointment.
Tenn. Code Ann. §34-5-108.
The Tennessee Acts provides a means by which a guardian can be appointed for a
mentally incompetent veteran for the payment of benefits, but it is not the only means (as
demonstrated by use of the word “may” in Tenn. Code Ann. §34-5-104), and further that a finding
of incompetency by the VA is only prima facie evidence of the need for a guardian, if a guardian is
petitioned for under the Act. The issue thus becomes whether the appointment in this case was
sufficient to mandate a finding by the Trial Court that Trivett was mentally incompetent to contract,
and whether the defendants had sufficient notice of same, or possessed information which would
have put them on notice of Trivett’s status. The record before us creates an issue of material fact.
Byrd v. Hall, 847 S.W.2d 208 (Tenn. 1993). Accordingly, we affirm the Trial Court on this issue.
Next, plaintiffs assert that it was error for the Trial Court to order the parties to
arbitration without first holding an evidentiary hearing to determine whether Trivett had the mental
capacity to enter into the contract in dispute. This precise issue has not been addressed by the courts
of this State, but in this connection, our courts have held that where a party alleges fraudulent
inducement in the making of a contract which contains an arbitration provision, any question
regarding formation of the contract must be decided by the court, unless the parties specifically
agreed to arbitrate those questions. See Taylor v. Butler, 142 S.W.3d 277 (Tenn. 2004); Frizzell
Construction Company, Inc. v. Gatlinburg, L.L.C., 9 S.W.3d 79 (Tenn. 1999); City of Blaine v. John
Coleman Hayes & Assoc., Inc., 818 S.W.2d 33 (Tenn. Ct. App. 1991).
Our Supreme Court has found that where the arbitration provision states that
arbitration shall be pursuant to the Federal Arbitration Act (as opposed to the Tennessee Act), then
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a claim of fraudulent inducement is subject to arbitration, because federal case law requires the same.
See Taylor; Buckeye Check Cashing, Inc. v. Cardegna, 126 S. Ct. 1204 (2006); Prima Paint Corp.
v. Flood & Conklin Mfg. Co., 87 S. Ct. 1801 (1967).
In this case, there are two arbitration provisions at issue. The first is the Arbitration
Agreement which Trivett signed with 21st, which states that the parties agree to submit “any and all
claims or controversies for liability, damages or expenses arising out of or in connection with the
home, the contract, or any warranties, representations, or agreements relating thereto (hereinafter
referred to as “Claims”) by submission of such Claims to binding arbitration pursuant to the Federal
Arbitration Act, 9 U.S.C. Section 1. The second Agreement is between Trivett and Homes, and it
states “all claims, disputes, and controversies arising out of or relating in any way to the sale,
purchase or occupancy of the Home . . . will to the fullest extent permitted by Federal law be
resolved by binding arbitration administered by the American Arbitration Association”. The
Agreement goes on to state that “[a]ny challenges to the validity, legality or enforceability of this
Agreement shall be determined by the arbitrator(s) in accordance with the provisions of the Federal
Arbitration Act and the rules of the AAA.”
Federal cases which have addressed the specific question of whether the court or the
arbitrator should resolve issues regarding whether an agreement exists have construed 9 U.S.C. §41
of the Federal Arbitration Act as requiring judicial resolution of issues that go to the “making” of
an arbitration agreement.
The federal circuits have generally reasoned that there is a difference between
challenging a contract on the basis of a party’s status (i.e. mental incapacity) and challenging a
contract based on behavior/conduct of a party (i.e. fraudulent inducement). In the Buckeye opinion
authored by Justice Scalia, the Court recognized this distinction, acknowledging that the issue of
whether a contract existed at all as being a very different issue and one that the Supreme Court had
not addressed, and would not address in the Buckeye opinion. 126 S. Ct. At 1208. The Court stated
that the issue of the contract’s validity was different “from the issue of whether any agreement
between the alleged obligor and obligee was ever concluded”, such as where the obligor claimed to
not have signed the contract, where the signor lacked authority to bind the principal, and where the
obligor lacked the mental capacity to assent. Id.
The reasoning in Spahr v. Secco, 330 F.3d 1266 (10th Cir. 2003), is persuasive, which
was cited by Justice Scalia in Buckeye. In Spahr, the plaintiff complained that he was mentally
incompetent to enter into the contract, and thus that the contract and the arbitration clause contained
therein were void. Id. The Court found that this was an issue which went to the “making” of the
contract as referred to in 9 U.S.C. §4, and was proper for resolution by the court, and not the
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“The court shall hear the parties, and upon being satisfied that the making of the agreement
for arbitration or the failure to comply therewith is not in issue, the court shall make an order
directing the parties to proceed to arbitration in accordance with the terms of the agreement”. 9
U.S.C. §4.
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arbitrator. Id. The Court reasoned that there was a difference between challenging a contract on the
basis of the party’s status, (i.e., mental incapacity) and challenging a contract based on
behavior/conduct of the party, (i.e., fraudulent inducement). Id. Most circuits have agreed with
Spahr in holding that contracts which are void or nonexistent cannot be the basis for arbitration, and
that the question of whether the contract exists or is void must be determined by the court. See
Sphere Drake Ins. Ltd. v. All Am. Ins. Co., 256 F.3d 587, 590-91 (7th Cir. 2001); Burden v. Check
Into Cash of Ky., LLC, 267 F.3d 483 (6th Cir. 2001); Sandvik AB v. Advent Int'l Corp., 220 F.3d 99,
107 (3d Cir. 2000); Three Valleys Mun. Water Dist. v. E.F. Hutton, 925 F.2d 1136 (9th Cir. 1991);
Chastain v. Robinson-Humphrey Co., Inc., 957 F.2d 851, 855 (11th Cir. 1992); I.S. Joseph Co. v.
Mich. Sugar Co., 803 F.2d 396, 400 (8th Cir. 1986); but cf. Primerica Life Ins. Co. v. Brown, 304
F.3d 469 (5th Cir. 2002), (which holds the issue of incompetency was for the arbitrator). Our holding
is in accordance with the language of the Federal Arbitration Act, that it is for the Court to determine
whether an agreement to arbitrate has been properly made before enforcing the arbitration agreement.
9 U.S.C. § 4.
Tennessee has long recognized that a contract with an incompetent person is void.
Jackson v. Van Dresser, 219 S.W.2d 896 (Tenn. 1949). While there is clearly a preference for
enforcing arbitration agreements, a contract to arbitrate on this issue should be treated no differently
than other contracts under Tennessee case law.
Accordingly, we vacate the Judgment of the Trial Court and remand. The Trial Court
will first determine the mental competency of Trivett to enter into the contract at issue, and either
declare the contract void if Trivett is found to be incompetent to contract, but order arbitration if the
Trial Court finds Trivett was competent to contract.
We remand the case to the Trial Court for further proceedings consistent with this
Opinion and assess the cost of the appeal jointly to 21st Mortgage Corporation and Southern
Showcase Housing, Inc., d/b/a Homes America.
______________________________
HERSCHEL PICKENS FRANKS, P.J.
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