Opinion
NO. 2018-CA-001350-MR
12-06-2019
RTS BUILDERS, LLC APPELLANT v. TANYA WIESE; JASON C. VAUGHN, ESQ.; AND VAUGHN & SMITH, PLLC APPELLEES
BRIEFS FOR APPELLANT: David B. Blandford Louisville, Kentucky BRIEF FOR APPELLEES: Jason C. Vaughn Louisville, Kentucky
NOT TO BE PUBLISHED APPEAL FROM JEFFERSON CIRCUIT COURT
HONORABLE OLU A. STEVENS, JUDGE
ACTION NO. 17-CI-006087 OPINION
AFFIRMING
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BEFORE: CLAYTON, CHIEF JUDGE; JONES AND LAMBERT, JUDGES. CLAYTON, CHIEF JUDGE: RTS Builders, LLC appeals from a Jefferson Circuit Court order denying its motion to vacate an arbitration award and an amended arbitration award and granting judgment in favor of the appellee, Dr. Tanya Wiese. Wiese, who purchased a residence from RTS, was awarded damages for her claim that RTS failed to disclose that retaining walls around the property were inadequate and unsafe. RTS contends the award should be vacated pursuant to Kentucky Revised Statues (KRS) 417.160(1) on the grounds it was procured by undue means and the arbitrator displayed evident partiality towards Wiese. RTS also challenges the arbitrator's award of attorney's fees to Wiese, contending they were obtained in an improper ex parte procedure. Having reviewed the record and applicable law, we affirm.
In 2013, Wiese purchased a residence in the Sanctuary Bluff subdivision from RTS, a construction and development firm. RTS had built the residence the year before, but most of the houses in the subdivision were built between 2007 and 2009. Two limestone boulder retaining walls were constructed during that period as well. In 2012, the owner of the subdivision, Sanctuary Bluff Development, LLC (SBD), commissioned GEM Engineering, Inc. to evaluate the retaining walls. The GEM Report found that they did not comport with the standards for rockeries published by the Federal Highway Administration. The Report described problems with the construction, drainage and height-to-base ratio of the walls and concluded that they were not stable in the long term and were likely to fail without stabilization measures. The GEM Report also warned that the houses built near the walls could be affected if the walls failed. On August 8, 2012, SBD sent a copy of the GEM Report to all members of the Sanctuary Bluff Homeowners Association, Inc.
On December 21, 2012, RAP Properties, LLC purchased the Sanctuary Bluff subdivision. In May 2013, it deeded a lot lying adjacent to a portion of the retaining walls to RTS. Paul Brar, the owner and manager of RTS, became the director and treasurer of the Sanctuary Bluff HOA in June 2013. RTS built a house on the lot which Wiese subsequently purchased for $608,764 in September 2013. The retaining walls and the GEM Report were not mentioned during this transaction.
In the fall of 2014, Wiese married and decided to sell the Sanctuary Bluff home. She initially listed the property at between $725,000 and $750,000 and reduced the price to $650,000 in August 2015. In December 2015, she moved out of the house and hired a new real estate agent, Kelly Hammons. On January 8, 2016, Hammons learned of the GEM Report and informed Wiese there was a problem with the retaining walls lining her property and they could fail and give way at any moment. A few days later, the attorney who represented the original developer in the sale of the subdivision to RAP sent Wiese a copy of the GEM Report. According to Wiese, Hammons told her the problem with the retaining walls could render her property valueless. Wiese pursued legal action against RTS for failure to disclose the dangerous condition of the retaining walls. The matter proceeded to mediation and then arbitration as mandated by the sales contract.
Other experts' evaluations of the retaining walls were entered into evidence during the arbitration process. In February 2016, the original developer of Sanctuary Bluff commissioned James A. Carter, a structural engineer, to evaluate the stability of the retaining walls. Carter opined the walls were stable but cautioned that his analysis was limited by nine different parameters. His conclusion relied in large part on the fact that the retaining walls were still standing ten years after they were built. Wiese hired Haggarty Duffy Engineering, Inc., to evaluate the property. The Haggarty Report, dated January 26, 2017, largely confirmed the GEM Report, stating that the walls presented a significant hazard for persons in the immediate vicinity.
Wiese also hired a licensed real estate appraiser, Otto Spence, who concluded in his report in March 2017, that the value of the property at the time Wiese purchased it, if the condition of the retaining walls had been disclosed to potential buyers, was zero. Without such knowledge, he opined the property was worth $550,000 and with improvements such as the pool, patio and deck Wiese had added, $615,000.
Throughout the mediation and arbitration process, Wiese continued to try to sell the property while disclosing the GEM Report to potential buyers. In August 2016, Chuck and Beth Maggard made an offer on the property of $613,500. Wiese responded with a counter-offer of $630,000 which the Maggards rejected. They did not make any further offers.
Shortly following the arbitration hearing, which was held on April 20, 2017, Ron Dean, a potential buyer who was aware of the GEM Report, offered to purchase the property for $615,000. RTS successfully reopened the arbitration hearing to introduce evidence of the Dean offer. Wiese and Dean entered into a purchase contract. Wiese then provided Dean with a copy of the Haggarty Report and he terminated the contract. The property was eventually sold for $500,000.
On August 10, 2017, the arbitrator issued an order ruling that Wiese was entitled to prevail on all her claims against RTS: breach of contract, fraudulent misrepresentation, fraudulent omission, breach of implied warranty of habitability, and unjust enrichment. The arbitrator awarded $306,777.16 in total damages with interest at 12 percent per annum. This amount included $17,993.15 in attorney's fees.
Wiese filed a motion to alter, amend or vacate asking to amend the attorney's fees award to reflect the higher amount, $55,243, she listed in the itemization schedule she submitted for in camera review. RTS objected to the in camera, ex parte procedure for the arbitrator to review the attorney's fees. RTS also filed a motion to alter, amend or vacate, arguing that the interest rate of 12 percent imposed by the arbitrator was incorrect as the statutory rate had been recently amended to 6 percent. The arbitrator granted both motions, increasing the attorney's fees to the sum of $55,243 and amending the interest rate to 6 percent. The arbitrator also ruled that RTS had implicitly agreed to the in camera, ex parte procedure for determining attorney's fees by failing to make a timely objection. The arbitrator thereafter entered an amended arbitration award reflecting these changes.
Wiese filed a complaint in Jefferson Circuit Court requesting the court to confirm the arbitration award and the amended arbitration award and for entry of judgment against RTS. RTS filed a motion to vacate the arbitration award and the amended arbitration award. Following a hearing, the circuit court found that the arbitrator had duly considered the points raised by RTS before rendering his decision in the matter and held that the rulings of the arbitrator were sound and it saw no basis upon which to disturb them. RTS's motion to vacate was denied and judgment was entered in Wiese's favor. This appeal by RTS followed.
"Generally, much judicial latitude and deference are accorded to an arbitration decision. It will not be disturbed by the courts merely because it was unjust, inadequate, excessive or contrary to law." Swetnam Design Const., Inc. v. Saurer, 382 S.W.3d 73, 75 (Ky. App. 2012) (citation omitted). "[A]n arbitrator's resolution of factual disputes and his application of the law are not subject to review by the courts." Conagra Poultry Co. v. Grissom Transp., Inc., 186 S.W.3d 243, 245 (Ky. App. 2006) (citation omitted). The sufficiency of the evidence supporting an award is not reviewable "because when a court examines the evidence and imposes its view of the case it substitutes the decision of another tribunal for the arbitration upon which the parties have agreed, and in effect sets aside their contract." Taylor v. Fitz Coal Co., Inc., 618 S.W.2d 432, 433 (Ky. 1981) (citation omitted).
The sole means by which an award may be vacated is upon a showing that it meets one of the specific grounds enumerated in Kentucky's Uniform Arbitration Act. KRS 417.160(1); Meers v. Semonin Realtors, 525 S.W.3d 545, 549 (Ky. App. 2017). Essentially, "[o]nly if the arbitrator's decision is alleged to have been tainted by fraud or favoritism does the trial court have the ability to intercede." Ernst & Young, LLP v. Clark, 323 S.W.3d 682, 692 (Ky. 2010) (citations omitted).
RTS contends that the award in this case should be vacated because it meets the following statutory grounds:
(a) The award was procured by corruption, fraud or other undue means;KRS 417.160(1).
(b) There was evident partiality by an arbitrator appointed as a neutral or corruption in any of the arbitrators or misconduct prejudicing the rights of any party[.]
RTS argues that the award was obtained by undue means because Wiese, with the passive or active acquiescence of the arbitrator, manipulated the marketing of her residence in order to enhance her claim for damages and to conceal its true market value. Specifically, RTS claims Wiese concealed the Maggards' offer and the pending sale with Dean in order to keep alive her claim for damages due to the diminished value of the property. RTS argues Wiese was not entitled to damages because she was receiving multiple offers for the residence which exceeded the purchase price she originally paid to RTS.
As evidence for the fair market value of the property, Wiese introduced her appraisal expert Otto Spence's report which opined the property was worth nothing if the retaining wall problems were known and $550,000 if they were not known. RTS presented as evidence the Maggard offer of $613,500. RTS also successfully reopened the arbitration hearing to introduce evidence of the Dean offer of $615,000. RTS claims Wiese prompted the cancellation of Dean's purchase by providing him a copy of the Haggarty Engineering Report and that she did so in order to disguise her failure to mitigate her damages. RTS contends that Wiese manipulated the marketing of the property for resale in order to corrupt the arbitration process and maximize her potential for a double recovery. According to RTS, the arbitrator, faced with the dramatic contrast of competing evidence of fair market value, accepted neither of the positions of the parties and instead fashioned his own valuation methodology with no supporting evidence for his findings.
The arbitrator found that the record did not indicate that Wiese acted unreasonably in rejecting the Maggard offer and therefore she did not breach her duty to mitigate her damages, stating:
Wiese acted in the same manner as many other sellers seeking the best price for whatever it is that they are trying to sell. Wiese's counteroffer was only for $16,500.00 more than the Maggards' first and only offer to purchase the property and was less than the price at which she had most recently listed the property. RTS does not cite any authority in support of the proposition that a person in Wiese's position must accept the first offer that comes her way or else forfeit her right to recover damages.
But the arbitrator also rejected Wiese's argument that the property was valueless, stating:
Dr. Wiese testified herself that in November 2016 she received an offer on her property from the Maggards for more than her purchase price, despite their full knowledge of the GEM Report. Ms. Gilezan [a real estate agent involved in selling Sanctuary Bluff lots] testified that in 2017 alone RAP has sold six lots in the subdivision and that four more sales are pending, even though it has been disclosing the GEM Report to potential buyers since 2015. And, most importantly, Dr. Wiese has now entered a contract to sell her property to Mr. Dean for more than her purchase price, despite his knowledge of the GEM Report. The record simply does not support a finding that Dr. Wiese's property is valueless, and therefore awarding her damages on that basis would be unjust.
The arbitrator's method of calculating Wiese's compensatory damages was based on his finding that the property was not without value but had lost value because of the retaining wall problems. He explained that the compensatory damages of $206,979.76 were 34 percent of her purchase price, with 34 percent representing the discount at which properties in Sanctuary Bluff are now selling after the disclosure of the GEM Report.
RTS's argument that this award was the product of undue means is nothing more than an attempt to circumvent the principle that "the sufficiency of the evidence supporting an arbitration award is specifically nonreviewable." Swetnam, 382 S.W.3d at 75 (citation omitted). RTS's arguments regarding Wiese's manipulation of the process are purely speculative. The arbitrator was in full possession of all the underlying facts and there is no indication that Wiese employed undue means to secure the award.
RTS further argues that the award was procured through evident partiality on the part of the arbitrator, which RTS contends is illustrated by statements in the arbitrator's opinion, such as the following: "In addition to receiving a worthless piece of property, Dr. Wiese testified that she has incurred considerable costs and expenses that she never would have incurred if she had known about the condition of the retaining walls[,]" and "RTS delivered a home to Wiese that was dangerously defective in its 'major structural features.'" RTS also accuses the arbitrator of disparaging the report of Sanctuary Bluff's expert, James A. Carter, while displaying deference and lack of similar criticism toward the report of Wiese's expert Otto Spence.
A negative ruling is not necessarily the product of prejudice or partiality. To reverse an arbitration award, "[t]he alleged partiality must be direct, definite, and capable of demonstration, and the party asserting it must establish specific facts that indicate improper motives on the part of the arbitrator." Meers, 525 S.W.3d at 550 (quoting Dawahare v. Spencer, 210 F.3d 666, 669 (6th Cir. 2000)). Criticizing the methodology of an expert witness is not proof of partiality or improper motives; it is the quintessence of the arbitrator's role to assess the evidence and choose which expert or experts to rely on. RTS's allegation of impartiality is a further attempt to question the sufficiency of the evidence supporting the arbitrator's decision and consequently is not within the scope of our review. RTS "is in reality seeking a review of the arbitrator's findings of fact, which a reviewing court is not permitted to do." Id.
Finally, RTS argues that the award of attorney's fees must be vacated because it was awarded in an ex parte procedure which did not allow RTS to hear or object to the amount. RTS contends that this method of awarding fees further supports a finding that the arbitrator displayed bias and prejudice in his award against RTS. The record before us contains Wiese's itemization of damages, which was sent to RTS and the arbitrator on April 4, 2017. It listed "Reasonable attorney's fees - Reserved and to be determined by the Arbitrator, after a review of Claimant's legal bills, In Camera ex parte, which will occur after the conclusion of testimony[.]"
There is no response or objection to this process from RTS in the record before us. The first objection to this method of awarding fees is found in RTS's motion to alter or amend the award, dated August 21, 2017. The failure of RTS to object prior to the entry of the award means the issue was unpreserved and will not be addressed here.
The order of the Jefferson Circuit Court denying the motion to vacate the arbitration award and the amended arbitration award, and granting judgment in Wiese's favor, is affirmed.
ALL CONCUR. BRIEFS FOR APPELLANT: David B. Blandford
Louisville, Kentucky BRIEF FOR APPELLEES: Jason C. Vaughn
Louisville, Kentucky