Opinion
SC-372-19/CO
01-03-2020
Jill CAPONERA and Matthew Casey, Plaintiffs, v. ATLANTIC BUILDING INSPECTION SERVICE and Anthony D'Agostino, Defendants.
Jill Caponera, plaintiff pro se. Mathew Casey, plaintiff pro se. Kriss, Kriss & Brignola LLP, Albany (Dominick J. Brignola of counsel), for defendants.
Jill Caponera, plaintiff pro se.
Mathew Casey, plaintiff pro se.
Kriss, Kriss & Brignola LLP, Albany (Dominick J. Brignola of counsel), for defendants.
Thomas Marcelle, J. On March 8, 2019, Plaintiffs Jill Caponera and Mathew Casey ("Caponera") entered into a home inspection contract with Defendants Anthony D'Agostino and his company Atlantic Building Inspection Service ("Atlantic"). Things did not turn out so well. Caponera alleges that Atlantic failed to properly perform the inspection. In particular, Caponera says that Atlantic missed a readily visible and substantial defect. Failure to detect this defect, according to Caponera, caused her to suffer damages in excess of $5,000. She sued Atlantic for just $5,000 so that she could invoke the court's small claims jurisdiction ( UCCA § 1801 ).
Upon the return date, Atlantic moved to dismiss the case. More particularly, it maintained that the court lacked jurisdiction because the contract between the parties contained an arbitration clause. The court set a briefing schedule to allow the parties to fully set forth their positions. After a careful review of the arguments, the court reaches the following decision.
Atlantic subsequently filed a formal written motion. The motion sought a dismissal under CPLR § 3211(a)(2) as well as an order directing arbitration under CPLR § 7503.
The arbitration clause in the contract provides: "Any dispute concerning the interpretation of this Agreement or arising from the Inspection, [sic] shall be resolved by binding, non-appealable arbitration conducted in accordance with the rules of the American Arbitration Association, except that the parties shall agree upon an Arbitrator who is familiar with the home inspection industry and the ASHI & NAHI Standards" (defendants' exhibit A). Both state and federal law place mandates upon a court to compel arbitration under the appropriate circumstances. New York law first—under New York law, the court is required to enforce the arbitration clause "without regard to the justiciable character of the controversy" ( CPLR § 7501 ). Upon application, the court must stay the proceeding and grant an order compelling arbitration ( CPLR § 7503 ).
Caponera contends that the Legislature has prohibited mandatory arbitration clauses in consumer contracts. This argument has strength. General Business Law § 399-c(2a),(2b) provides that an arbitration clause shall be null and void in a contract for consumer goods.
General Business Law § 399-c[2a-2b] provides in pertinent part: "No written contract for the sale or purchase of consumer goods, entered into on ... shall contain a mandatory arbitration clause."
Atlantic resists the application of the statute. It argues that Caponera's reliance on § 399-c is "erroneous ... [because] the delivery of license inspection services [is not] akin to a delivery of goods or merchandise" (Brignola Affirmation at ¶16). Of course, what the defendant argues is true and would be perfectly valid if § 399-c limited the concept of consumer goods to "the delivery of goods or merchandise." But it does not. The Legislature was quite explicit about this—consumer goods include "services purchased or paid for by a consumer" ( § 399-c[1b] [emphasis added] ).
The question still remains whether the term services includes license inspection services. If there is a case to be made on this point, it must be premised upon the ground that the statute makes a distinction between licensed and unlicensed services. However, § 399-c makes no distinction between types of services. The court is disinclined to read a distinction into a statute where none exists. It is not the role of the court to add words that the Legislature did not place in the statute ( Sexauer & Lemke v. Luke A. Burke & Sons Co. , 228 N.Y. 341, 127 N.E. 329 [1920] ). Rather, where, as here, a statute is unambiguous, the courts must give effect to its plain meaning ( People v. Brown , 25 N.Y.3d 247, 250, 10 N.Y.S.3d 500, 32 N.E.3d 935 [2015] ). Therefore, the court holds that § 399-c applies to both licensed and unlicensed services.
Moreover, this statutory interpretation is in accord with case law. In Ragucci v. out-of-state suppliersProfessional Constr. Servs. , 25 A.D.3d 43, 803 N.Y.S.2d 139 (2d Dept. 2005), the Second Department held that § 399-c voided a mandatory arbitration clause in an agreement involving architectural services for construction of a home. Architectural services are a close kin to home inspection services, which makes Ragucci a quite compelling precedent. Therefore, the court holds both as a matter of sound statutory construction and as a matter of precedent, GBL § 399-c voids the arbitration clause, at least with respect to state law.
This brings the case to the lurking federal question—whether, the Federal Arbitration Act ("FAA") ( 9 USC § 2 ) trumps General Business Law § 399-c. The FAA was enacted in 1925 in response to widespread hostility to arbitration agreements ( Hall Street Associates, L.L.C. v. Mattel, Inc. , 552 U.S. 576, 581, 128 S.Ct. 1396, 170 L.Ed.2d 254 [2008] ). Thus, the FAA represents a strong "national policy ... plac[ing] arbitration agreements on equal footing with all other contracts" ( Id. [internal citations and quotations omitted] ).
The issue here is whether the New York Legislature can create an exception to the FAA by enacting General Business Law § 399-c. Despite each state being a sovereign power (US Const, Amdt 10) , no state legislature may displace federal law. The United States Constitution is clear on this point: "This Constitution, and the Laws of the United States which shall be made in Pursuance thereof; ... shall be the supreme Law of the Land; and the Judges in every State shall be bound thereby, ... Laws of any State to the Contrary notwithstanding" ( U.S. Const., Art. VI, Cl. 2 ). So, § 399-c cannot, by its own accord, require the court to void an arbitration clause in a contract. Any exception to the FFA, must come from the FAA itself.
The Tenth Amendment provides: "The powers not delegated to the United States by the Constitution, nor prohibited by it to the States, are reserved to the States respectively, or to the people." This reservation of power to the States is vast. "The powers delegated by the proposed constitution to the federal government, are few and defined" and "[t]hose which are to remain in the state governments, are numerous and indefinite." The Federalist No. 45, at 237—238.
The FAA provides:
A written provision in any contract evidencing a transaction involving commerce to settle by arbitration a controversy thereafter arising out of such contract or transaction ... shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract ( 9 USC § 2 ).
The text of the FAA provides two exceptions to its general rule that arbitration clauses are always enforceable. First, for the FAA to apply, the contract must affect interstate commerce ( Matter of Diamond Waterproofing Sys., Inc. v. 55 Liberty Owners Corp. , 4 N.Y.3d 247, 252, 793 N.Y.S.2d 831, 826 N.E.2d 802 [2005] ). Historically, it has not taken much economic activity to trigger Congress's interstate commerce power (see Wickard v. Filburn , 317 U.S. 111, 125, 63 S.Ct. 82, 87 L.Ed. 122 [1942] [holding that "even if appellee's activity be local and though it may not be regarded as commerce, it may still, whatever its nature, be reached by Congress if it exerts a substantial economic effect on interstate commerce"). However, there is some recent (and controlling) case law to suggest that a single home inspection contract does not affect interstate commerce (see Smith v. Nobiletti Builders, Inc. , 177 A.D.3d 807, 810, 110 N.Y.S.3d 747 [2d Dept. 2019] (holding that § 399—c was not preempted by the FAA in a home construction case, even though materials for the "renovation were sourced and secured from out-of-state suppliers, ... [because] this factor alone in the context of a single-family home renovation was insufficient to establish an effect on interstate commerce"] ).
Smith casts doubt on the validity of Johnson v. Ace Home Inspections of Upstate New York , 54 Misc. 3d 1209(A), 2017 WL 1050333 (Cohoes City Ct. 2017) where this court held that a single home inspection facilitated the home's purchase and such activity affects commerce.
Defendant has raised factual issues concerning certain events that transpired in California which are relevant to a decision. The factual issues are raised via Atlantic's counsel's affidavit and an exhibit attached thereto (Brignola at ¶17; exhibit B). Counsel is not a witness and the exhibit is without proper foundation. However, the court will afford Atlantic (and Caponera) a hearing where the parties can develop a factual record on this prong of the FAA. Thus, the court will reserve on the interstate commerce question until after the hearing.
The second exception to the FAA resides in the final phrase of § 2. This exception permits arbitration agreements to be declared unenforceable "upon such grounds as exist at law or in equity for the revocation of any contract" ( 9 USC § 2 ). The term "any contract" is the key that limits and defines the reach of this exception. Thus, a rule of law that seeks to invalidate an arbitration clause must be generally applicable to any and all contracts. Defenses such as duress, fraud, or incapacity may be deployed to defeat arbitration because those defenses universally apply to contracts ( AT & T Mobility LLC v. Concepcion , 563 U.S. 333, 339, 131 S.Ct. 1740, 179 L.Ed.2d 742 [2011] ). However, laws that focus on and apply only to arbitration are impotent to override the FAA's mandate that arbitration clauses must be enforced ( Id. ).
The Supreme Court has been firm in quashing state legislatures' efforts to carve out exceptions to arbitration. In a brigade of cases, the Supreme Court has made it unrelentingly clear that when state law prohibits outright the arbitration of a particular type of claim (like consumers goods and services contracts under § 399-c ), the analysis is straightforward: the conflicting rule is displaced by the FAA ( Marmet Health Care Ctr., Inc. v. Brown , 565 U.S. 530, 132 S.Ct. 1201, 182 L.Ed.2d 42 [2012] [finding that FAA applies despite West Virginia's prohibition of arbitration clauses in wrongful death cases]; Nitro—Lift Techs., L.L.C. v. Howard , 568 U.S. 17, 133 S.Ct. 500, 184 L.Ed.2d 328 [2012] [concluding that Oklahoma may not ignore FAA in deciding that non-compete clauses cannot be subject to arbitration]; DIRECTV, Inc. v. Imburgia , 577 U.S. ––––, 136 S. Ct. 463, 193 L.Ed.2d 365 [2015] ; Kindred Nursing Centers Ltd. P'ship v. Clark , ––– U.S. ––––, 137 S. Ct. 1421, 197 L.Ed.2d 806 (2017) [holding that Kentucky's rule, which required that the attorney-in-fact have explicit authority to waive the principal's state rights to a jury trial for arbitration clause to be effective, was preempted by the FAA] ). Therefore, based upon this string of authority, the FAA preempts § 399-c and the arbitration clause shall be enforced.
The case is not over just yet. Caponera may be able to maintain her small claims action without first filing for arbitration, if the rules of arbitration so provide. In other words, while the arbitration clause must be fully respected, so must the rules that govern the arbitration; and if a rule of arbitration lets a party go to court, then the party can go to court.
Caponera says the arbitration rules carve out an exception for small claims cases. Here, the home inspection contract requires the arbitration to be "conducted in accordance with the rules of the American Arbitration Association ["the Association"]" (exhibit A). The Association applies a special set of rules to consumer cases, the Consumer Arbitration Rules ("Consumer Rules" or "Rules"). A consumer case is one that arises between a consumer and a business and involves "... the purchase of standardized, consumable goods or services [that] are non-negotiable or primarily non-negotiable in most or all of its terms, conditions, features, or choices" (Rule1[a] ). The Association developed these rules "to protect consumers and ensure they are treated equitably in arbitration" ( Jenkins v. First Am. Cash Advance of Georgia, LLC , 400 F.3d 868, 879 [11th Cir. 2005] ). In 2002, the Association introduced the Consumer Supplemental Protocol ("CSP") which provided for reduced fees to arbitrate small claims involving consumer contracts. In 2014, the CSP was replaced by a freestanding set of Consumer Arbitration rules to be used even when a consumer agreement specifies other rules (Judith Resnik, Diffusing Disputes: The Public in the Private of Arbitration, the Private in Courts, and the Erasure of Rights , 124 Yale LJ 2804, 2911 [2015] ).
Although neither parties provided the court with the applicable rules, judicial notice of the Association's Consumer Rules is proper because the contents of the rules are not reasonably subject to dispute and can be accurately and readily determined from sources whose accuracy cannot reasonably be questioned (Lotsoff v. Wells Fargo Bank, N.A. , 2019 WL 4747667, at *3, [Dkt. No. 18-cv-02033-AJB-JLB, S.D. CA. 2019] ).
Moreover, if the Consumer Rules are applicable, then its rules are deemed essential terms to the contract (Rule 1). One benefit of these rules is that they allow either the business or the consumer to file a case in small claims court without having to go through arbitration. Rule 9(a) provides that "[i]f a party's claim is within the jurisdiction of a small claims court, either party may choose to take the claim to that court instead of arbitration without first filing with the [Association]" [emphasis added]. Further, Rule 9(b) allows any party, after a case is filed with the Association, but before the arbitrator is formally appointed, to opt out of arbitration and opt into small claims court.
Rule 1 provides that "When parties have provided for the [Association]'s rules as part of their consumer agreement, they shall be deemed to have agreed that [the Consumer Rules] shall be an essential term of their consumer agreement [emphasis added] ).
Here, Rule 9(a) is relevant to and may be dispositive of Caponera's ability to litigate her claim in City Court under UCCA § 1801. To prevail, she must demonstrate that Atlantic's home inspection contract falls within the definition of a consumer contract. There are two elements to make the necessary showing: (1) most of the contract terms were non-negotiable and (2) the subject of the contract, here a licensed home inspection services, was a standardize consumer service.
The court will review the elements. Initially, the question is whether Atlantic's home inspection contract is a standardize non-negotiable contract. The contract is a pre-printed professionally prepared fill-in the blank agreement (exhibit A)—i.e., a standardized contract. In fact, the bottom of the contract bears an imprimatur that establishes this. It reads "2009 Atlantic Building Inspection Service, LLC Revised 2010 (NYS Standards)" (exhibit A). In other words, Atlantic has been using the identical New York State home inspection contract for nearly a decade. This meets the legal definition of a standardize contract. A standardize contract is a "preprinted contract containing set clauses, used repeatedly by a business or within a particular industry ..." (Black's Law Dictionary [11th ed. 2019] ).
A look at the contract supports this conclusion. The court has seen and is familiar with standardized contracts and the Atlantic's home inspection contract is one.
The fact that a contract is used repeatedly without alteration suggests that it is not negotiable. A basic legal proposition that flows from this observation is that "the more standardized the agreement ..., the less a party may bargain ..." ( Rickard v. Teynor's Homes, Inc. , 279 F. Supp.2d 910, 915 [N.D. Ohio 2003] ). Given Atlantic's impeccably standardized contract, it raises the fair inference that most of the terms of the contract were non-negotiable.
Moreover, home inspection is not typically a service where one commercial entity transacts business and negotiates terms with another commercial entity. Rather, it is a commercial entity, armed with a form contract, dealing with common home buyers (see Lucier v. Williams , 366 N.J. Super. 485, 493, 841 A.2d 907 [App. Div. 2004] ). Indeed, here the "contract [was] for a necessary service, home inspection, where the [home buyer] was ‘at the mercy’ of the drafter" ( Littlejohn v. TimberQuest Park at Magic, LLC , 116 F. Supp.3d 422, 430 [D. Vt. 2015] ). This logic supports the same inference as above—most of the terms of Atlantic's contract were non-negotiable.
Atlantic offers no rebuttal to this. Curiously, it only argues that there is nothing "to ascertain [that] Defendants would not negotiate their [standard] contract terms at the point of hiring" (Brignola at ¶13). If its contracts were negotiable, Atlantic could have sworn to that fact or even more persuasively, Atlantic could have pointed to contracts where it had altered its standardized terms as a result of negotiations. But, it did not; and this is telling. Based upon the evidence presented, the court has no difficulty finding that Atlantic's standardized contract was "primarily non-negotiable in most of its terms" (Rule 1[a] ). Therefore, Caponera has met the first requirement to proceed with her case.
Atlantic also resists the second element of Rule 9(a). It argues that a home inspection contract is not a contract for a consumer service and thus, the Consumer Rules do not apply to its contract. Atlantic's argument might merit some analysis, if it were not for Rule 1(a) which provides examples of contracts that "meet the criteria for personal or household goods or services." Among the examples provided as typical consumer contracts covered by the Consumer Rules are home inspection contracts:
Examples of contracts that typically meet the criteria for application of these Rules, include, but are not limited to the following • Credit card agreements • Telecommunications (cell phone, ISP, cable TV) agreements • Leases (residential, automobile) • Automobile and manufactured home purchase contracts • Finance agreements (car loans, mortgages, bank accounts) • Home inspection contracts • Pest control services (Rule 1[a] [emphasis added] ).
There is no further expository journey required to find that Atlantic's home inspection contract is the type covered by the Consumer Rules—Rule 1 literally says so. Therefore, unless there is some other way to escape the Consumer Rules, Caponera is entitled to have her case heard in City Court by virtue of Rule 9(a).
Atlantic still protests. It contends that the court lacks jurisdiction. The problem, in Atlantic's view, is that Rule 9 cannot confer subject matter jurisdiction which the FAA has taken from the court. This much of Atlantic's reasoning is correct— the court needs subject matter jurisdiction before a plaintiff can take her claim back from the realm of arbitration.
However, Atlantic's logic is ultimately faulty. Atlantic has tangled two separate concepts—subject matter jurisdiction and the FAA's interaction with that jurisdiction. First, subject matter jurisdiction means the power to generally rule on the subject matter, as opposed to the lack of power to act in the particular case or a particular aspect of the case ( Burke v. Aspland , 56 A.D.3d 1001, 1004, 867 N.Y.S.2d 759 [3d Dept. 2008] ). "In other words, subject matter does not mean this case but this kind of case" ( In re Rougeron's Estate , 17 N.Y.2d 264, 271, 270 N.Y.S.2d 578, 217 N.E.2d 639 [1966] [internal quotations omitted] ). Thus, the question is not whether the court can exercise jurisdiction over this particular case as pled (i.e., where a party raises a defense of mandatory arbitration), but the question is whether the court has jurisdiction of this type of claim—a breach of contract—which it does ( UCCA § 1801 ; Johnson v. Timmerman , 92 Misc. 2d 626, 628, 401 N.Y.S.2d 149 [Jefferson County Ct. 1978] ).
Second, the FAA is not a jurisdictional statute and does not divest the court of jurisdiction over a contract claim. The FAA commands that arbitration agreements "shall be valid, irrevocable, and enforceable" ( 9 USC § 2 ). The court is required to stay "the trial of the action until such arbitration has been had in accordance with the terms of the agreement" ( 9 USC § 3 ). Consequently, staying the action "does not oust the court's jurisdiction of the action, though the parties have agreed to arbitrate" ( The Anaconda v. Am. Sugar Ref. Co. , 322 U.S. 42, 44, 64 S.Ct. 863, 88 L.Ed. 1117 [1944] ). In fact, the court can only apply the FAA if the "case[ ] fall[s] within a court's jurisdiction" ( Hall St. Assocs. , 552 U.S. at 582, 128 S.Ct. 1396 ).
This brings the case back to the arbitration clause. "[T]he FAA reflects the fundamental principle that arbitration is a matter of contract" ( Rent-A-Ctr., W., Inc. v. Jackson , 561 U.S. 63, 67, 130 S.Ct. 2772, 177 L.Ed.2d 403 [2010] ). Thus, it is the agreement that makes a court defer its power to arbitration. However, what the agreement takes away, it may give back. Atlantic is a sophisticated commercial enterprise. It drafted the contract. It had the aid of counsel. It is bound by the rules it chose to govern the arbitration clause. As discussed previously, by adopting the Association standards to govern arbitration, Atlantic made the Consumer Rules an essential term of the contract (Rule 1). The court is not ignoring the contract's arbitration clause; it is enforcing it, including Rule 9(a). This rule allows a party to avoid arbitration and instead to go to small claims court. Caponera has exercised her right under the arbitration clause of the contract to do just that.
Consequently, upon exercising her right to opt out of arbitration under the rules established by the contract, there is nothing that mandates the court to stay its jurisdictional authority. This action will proceed to trial in Cohoes City Court. Therefore, it is
ORDERED that defendants' motion to dismiss under CPLR § 3211(a)(2) is denied; and it is further
ORDERED that defendants' motion to compel arbitration under CPLR § 7503 is denied.
The foregoing constitutes the Decision and Order of the Court.