Tim Adams v. CMH Homes, Inc. ( 2016 )

IN THE COURT OF APPEALS OF TENNESSEE
AT KNOXVILLE
January 7, 2016 Session
TIM ADAMS ET AL. V. CMH HOMES, INC.
Appeal from the Chancery Court for McMinn County
No. 2014-CV-195 Jerri S. Bryant, Chancellor
No. E2015-01526-COA-R3-CV-FILED-APRIL 27, 2016
The issue on this appeal is the enforceability of an arbitration agreement. Tim and
Pamela Adams (Plaintiffs) bought a mobile home from CMH Homes, Inc. (Defendant).
As part of the transaction, Plaintiffs signed an arbitration agreement after they were told
by Defendant’s sales manager that they “had to sign the papers in order to get the home
moving.” This statement was false, although the manager testified that he was unaware
of its falsity at that time. Plaintiffs alleged fraudulent inducement with respect to the
arbitration agreement. After a hearing, the trial court ruled that Plaintiffs established
their fraudulent inducement claim. As a consequence, the court set aside the arbitration
agreement. Defendant appeals. We affirm.
Tenn. R. App. P. 3 Appeal as of Right; Judgment of the Chancery Court
Affirmed; Case Remanded for Further Proceedings
CHARLES D. SUSANO, JR., J., delivered the opinion of the court, in which D. MICHAEL
SWINEY, C.J., and JOHN W. MCCLARTY, J., joined.
William S. Rutchow and Jennifer S. Rusie, Nashville, Tennessee, for appellant, CMH
Homes, Inc.
Wilton Marble, Cleveland, Tennessee, for appellees, Tim Adams and Pamela Adams.
OPINION
I.
In October 2013, Plaintiffs decided to buy a manufactured home from Defendant.
They paid a $500 deposit to hold the home they had selected. On November 25, 2013,
Plaintiffs and general manager Mike Hagood completed a sales worksheet that reflected a
sales price of $145,284.84, a payment schedule of two $50,674.71 payments, and a final
payment of $43,435.47. Athens Federal Community Bank (Lender) provided the
financing. On December 23, 2013, Plaintiffs met with Lender’s employee, Richard
Boyd, who had arranged the financing. At that meeting, they signed the documents to
close the loan. After the closing, Lender issued a check payable to Defendant in the
amount of $50,674.71. That same day, Plaintiffs visited Defendant’s East Ridge office,
did a final walk-through of the home, and tendered the check to Defendant. The check
was deposited the next day.
On December 26, 2013, Hagood called the Plaintiffs and told them that he had
“some additional paperwork we need you to sign so we can move this house.” They met,
and Hagood presented Plaintiffs with a packet of papers that included the “binding
dispute resolution agreement.” That document required the parties to submit certain
types of claims to arbitration. The parties did not discuss the contents of the documents,
nor was there any discussion as to how disputes were to be resolved. Mr. Adams would
later testify that he briefly looked over the documents but did not read them. Plaintiffs
testified that, prior to this meeting, they believed the transaction was already completed.
They further testified that they relied on Hagood’s assertion that they had to sign the
documents in order to get the house moved to their property. Plaintiffs signed all of the
documents presented, including the arbitration agreement.
Problems ensued with the delivery and installation of the home. Among other
things, the subcontractor trucker ran the home into an overpass on Interstate 75, causing
roof damage.1 Plaintiffs filed their complaint on June 20, 2014, alleging negligence in
the transport, repair, and installation of the home, breach of contract, and intentional and
negligent misrepresentation. Defendant answered. Later, the parties attempted
mediation, which proved unsuccessful. Plaintiffs moved for a scheduling order and the
setting of the case for trial. On December 5, 2014, Defendant requested that the trial
court deny their motion and stay the case pending a decision from the Supreme Court in
Berent v. CMH Homes, Inc., 466 S.W.3d 740 (Tenn. 2015), arguing that “Berent would
directly impact the instant matter and whether this case should be pursued in arbitration
pursuant to the parties’ agreement.”
The trial court mailed the attorneys for the parties a letter on April 27, 2015,
informing them that the case was set for a jury trial in September 2015. The Supreme
Court released its Berent opinion on June 5, 2015. On June 26, 2015, Defendant filed a
motion to compel arbitration, arguing that Berent “examined an arbitration agreement
that is virtually identical to the Binding Dispute Resolution Agreement [in this case] and
1
In its answer, Defendant admitted that “the roof of the manufactured home sustained
damage during transport to Plaintiffs’ property by an independent contractor.”
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has held that it is not unconscionable as a matter of law and is therefore enforceable.”2
On July 6, 2015, Plaintiffs filed a response alleging that Defendant fraudulently induced
them to sign the arbitration agreement and it was therefore invalid and unenforceable.
Plaintiffs argued, in pertinent part, as follows:
[Plaintiffs] maintain that the property closed on December 23,
2013 when they signed closing paperwork and delivered the
first payment under the Sales Agreement. They note that they
had signed the closing paperwork, had submitted payment
under the contract and [Defendant] had accepted said
payment on December 23, 2013. [Plaintiffs] maintain that
three days later [Defendant] presented “additional
paperwork” (the Binding Dispute Resolution Agreement) to
them and told them they had to sign the “additional
paperwork” so the home could be moved. However this
statement was false as demonstrated by [Defendant’s] sworn
answer [to discovery interrogatories] of “yes” when asked
“Do you maintain that you would have sold the home to the
plaintiffs had the plaintiffs refused to sign the Binding
Dispute Resolution agreement?” . . . [Defendant] had
knowledge of the statement’s falsity or utter disregard for its
truth and an intent to induce reliance on the statement so
[Plaintiffs] would sign the agreement.
(Italics, bold words, and underlining in original; citations to record omitted.) In support,
Plaintiffs filed their affidavits stating that Hagood presented them with the “additional
paperwork” on December 26, 2014, and told them they had to sign it to get the house
moving. They each further said, “I was not informed that we could choose not to sign the
paperwork and still buy the home. In fact I was told the opposite.”
The trial court held a hearing on the issue of fraudulent inducement on July 29,
2015. Mr. Adams, Hagood, and Boyd testified. Hagood did not deny telling the
Plaintiffs that they were required to sign the papers to get the house delivered, and said
that he thought, at the time, that the statement was true. He testified that “[i]n the process
2
As this statement suggests, Berent decided the issue of whether the terms of an
arbitration agreement were so one-sided as to render the agreement unconscionable. 466 S.W.3d
at 756-58. The Berent Court did not address fraudulent inducement except to “leave it for the
trial court on remand to determine whether or to what extent further proceedings should be
conducted to address Mr. Berent’s claims of fraud.” Id. at 758. The present case does not
involve a claim of unconscionability, and therefore the concepts espoused in Berent are of
limited applicability in the present case.
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of this lawsuit, our internal counsel made me aware there were occasions that our
company had sold a home without requiring that document.” On August 6, 2015, the trial
court entered an order in which it found that “Plaintiffs have met their burden of proving
their defense of fraudulent inducement.” The court ruled that “[t]he Binding Dispute
Resolution Agreement is set aside, the Motion to Compel Arbitration filed by the
Defendant is denied and this cause shall continue as scheduled.” The trial court rejected
Defendant’s assertion that Plaintiffs had waived their fraudulent inducement claim by not
raising it earlier in the litigation. Defendant timely filed a notice of appeal.
II.
The issues raised on appeal are (1) whether the trial court erred in finding that
Plaintiffs did not waive their claim of fraudulent inducement, and (2) whether the trial
court correctly held that Plaintiffs proved that they were fraudulently induced to sign the
binding dispute resolution agreement.
III.
“When ruling on the appeal of a denial of a motion to compel arbitration, we
follow the standard of review that applies to bench trials.” Mid-South Maintenance, Inc.
v. Paychex, Inc., No. W2014-02329-COA-R3-CV, 2015 WL 4880855, at *3 (Tenn. Ct.
App. W.S., filed Aug. 14, 2015) (quoting Spann v. Am. Express Travel Related Servs.
Co., 224 S.W.3d 698, 706–07 (Tenn. Ct. App. 2006)). Thus, our review is de novo on
the record of the proceedings below with a presumption of correctness as to the trial
court’s factual findings, a presumption we must honor unless the evidence preponderates
against those findings. Tenn. R. App. P. 13(d). We review the trial court’s legal
conclusions de novo with no presumption of correctness. Oakes v. Oakes, 235 S.W.3d
152, 156 (Tenn. Ct. App. 2007).
IV.
Defendant argues that the trial court erred when it held that Plaintiffs did not
waive their fraudulent inducement claim by failing to raise it in their complaint or in an
amended complaint. Plaintiffs respond by pointing out two facts. First, they assert they
were unaware of the fraudulent inducement, i.e., Hagood’s false statement that they had
to sign the papers to get their home; and that they first became aware of its false nature
when Defendant responded to interrogatories that it “would have sold the home to the
plaintiffs [even if] the [P]laintiffs refused to sign the Binding Dispute Resolution
agreement.” Second, Plaintiffs argue that their response alleging fraudulent inducement
was timely filed shortly after Defendant’s motion to compel arbitration. None of these
facts are in serious dispute. In an order entered on July 24, 2015, the trial court stated,
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Defendant filed the instant Motion to Compel Arbitration and
Stay Proceedings and an accompanying Memorandum of Law
in Support on June 26, 2015, and Plaintiffs timely responded
with a Response and a Memorandum of Law in Support
raising the allegation of fraudulent inducement for the first
time.
* * *
Plaintiffs argued that the issue was not waived as their claim
of fraudulent inducement was based upon discovery
responses from the defendant which plaintiffs did not receive
until February of 2015. Plaintiffs also noted that until
roughly two weeks ago there was not a request to compel
arbitration pending in this action and when Defendant filed
the instant Motion to Compel Arbitration and Stay
Proceedings, Plaintiffs timely filed a response raising the
issue of fraudulent inducement. Plaintiffs also maintained
that the Binding Dispute Resolution Agreement was a
separate agreement. Plaintiffs maintained that, under these
facts, the allegations of fraudulent inducement more closely
resemble a defense (which is properly raised in a response) as
opposed to a stand-alone claim.
Plaintiffs have not waived the issue of fraudulent inducement
and should be given an opportunity to prove said allegation.
(Paragraph numbering in original omitted.) Plaintiffs filed their response on July 6, 2015,
ten days after Defendant’s motion to compel arbitration. Under these circumstances, we
agree with the trial court that Plaintiffs’ claim of fraudulent inducement was not waived.
The parties agree that the issue of fraudulent inducement is not properly subject to
arbitration. The dispute resolution agreement provides that “[n]otwithstanding anything
herein to the contrary, the jurisdiction of the Arbitrator, including objections with respect
to the existence, scope, and validity of this Agreement, shall be determined solely by a
court of competent jurisdiction, and not by the Arbitrator.” As determined by the
Supreme Court,
[g]enerally, whether a valid agreement to arbitrate exists
between the parties is to be determined by the courts, and if a
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complaint specifically challenges the arbitration clause on
grounds such as fraud or unconscionability, the court is
permitted to determine it[s] validity before submitting the
remainder of the dispute to arbitration.
In determining whether there is a valid agreement to arbitrate,
“courts generally . . . should apply ordinary state-law
principles that govern formation of contracts[.]”
Taylor v. Butler, 142 S.W.3d 277, 283-84 (Tenn. 2004) (internal citations omitted);
accord Berent, 466 S.W.3d at 746.
The elements of fraudulent inducement are well established and often stated as
follows:
To prevail on a claim of fraudulent inducement, the party
asserting the claim has the burden of proving that the
defendant:
(1) made a false statement concerning a fact
material to the transaction; (2) with knowledge
of the statement’s falsity or utter disregard for
its truth; (3) with the intent of inducing reliance
on the statement; (4) the statement was
reasonably relied upon; and (5) an injury
resulted from this reliance.
Deal v. Tatum, No. M2015-01078-COA-R3-CV, 2016 WL 373265, at *7 (Tenn. Ct.
App. M.S., filed Jan. 29, 2016) (quoting Baugh v. Novak, 340 S.W.3d 372, 388 (Tenn.
2011)); Regions Bank v. Bric Const., LLC, 380 S.W.3d 740, 763 (Tenn. Ct. App. 2011).
Hagood testified that he was general manager of Defendant’s Athens office,
“responsible for the operation of that home center: sales, service, just the entire
operation.” Regarding the statement at issue, Hagood testified, in pertinent part, as
follows:
Q. You guys told [Mrs. Adams], “Hey, I’ve got some
additional paperwork we need you to sign so we can move
this house,” correct?
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A. Yeah. We had additional ‒ we had the closing papers for
her to sign.
Q. Up until this point, when you meet [Plaintiffs] on the 26th,
had you at any time explained mediation, arbitration, or
alternate dispute resolution to either of the Adamses?
A. No, sir.
* * *
Q. The documents that I’ve just been asking you about, are
they all documents that are part of what you described as the
closing packet?
A. Yes. They all print out together.
Q. They would all be signed at the same time?
A. Yes.
Q. You testified that Mr. Adams came in to sign the
documents; is that correct?
A. That’s correct.
Q. Did he ask any questions about the documents?
A. I’m sure he did. Nothing that I recall out of the ordinary.
Q. Did he refuse to sign any of the documents?
A. No, sir.
Q. In the 60 or 70 closings per year you’ve done, have you
ever had somebody refuse to sign any of the documents?
A. No, sir.
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Q. Have you ever had a situation where somebody told you
they were not going to sign this Binding Dispute Resolution
Agreement?
A. I have not.
Q. Did you ever have occasion to call someone to find out
what you would do in that situation?
A. I haven’t.
* * *
Q. In fact, since it’s part of your closing packet, your standard
practice is to tell them, “You’ve got to sign these papers if
you want the house”? Don’t you?
A. Yes.
As already stated, Defendant responded to Plaintiffs’ interrogatory asking “Do you
maintain that you would have sold the home to the plaintiffs had the plaintiffs refused to
sign the Binding Dispute Resolution agreement?” by saying, “Yes.” This sworn response
demonstrates that Hagood’s statement to the Plaintiffs – that they had to sign all the
documents before the house could be moved – was false, a fact Plaintiffs learned when
they received Defendant’s answers to their interrogatories. Defendant asserts that
Hagood did not know it was false at the time; however, what is obvious to us is that
Hagood took no steps, prior to the sale to Plaintiffs, to ascertain whether the statement
was true or false. We hold that Hagood’s statement was made with “utter disregard for
its truth,” which satisfies the second element of the test for fraudulent inducement.
General manager Hagood, who testified he was selling 60 to 70 homes per year, routinely
told customers that they were required to sign the papers, including the dispute resolution
agreement, to get their home delivered. This statement was totally false. The fact that
Hagood did not know the statement was false when he made it is not the most significant
fact in this case. What is very material is Defendant’s failure to make sure that its general
manager was fully versed in his duty of handling the closing of sales. This suit is against
CMH, not Hagood. CMH’s failure to ensure that its general manager was fully informed
shows utter disregard for the truth.
Regarding the materiality of this statement, Plaintiffs argue that it was enormously
material to them to get their home delivered to their property and set up as soon as
possible. This is because, among other reasons, at the time of the sale, Plaintiffs, along
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with their eleven-year-old daughter, a dog, and a cat, were living in an eight foot by
twenty foot camper trailer for which they had paid $2,000. Most of their personal
property was in a storage unit. Hagood testified that he knew they were living in a trailer
on their property. Moreover, at the time Hagood told them they had to sign the papers to
get the home, Plaintiffs had already paid Defendant $50,674.71 as partial payment for the
home. Defendant characterizes this payment as a “deposit,” an assertion that the trial
court rejected. This assertion prompted the court to observe, “[t]here is even
disagreement on whether [Plaintiffs] would have gotten their money back had they
refused to sign any of it.” Under the particular facts and circumstances of this case, we
hold that the evidence does not preponderate against the trial court’s finding that the
Plaintiffs have established their fraudulent inducement claim.
V.
The judgment of the trial court is affirmed. Costs on appeal are assessed to the
appellant, CMH Homes, Inc. This case is remanded for further proceedings consistent
with this opinion.
_______________________________
CHARLES D. SUSANO, JR., JUDGE
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