GGNSC Holdings Inc. v. Chappel

Cite as 2014 Ark. 545

SUPREME COURT OF ARKANSAS
No. CV-14-138

GGNSC HOLDINGS, LLC, ET AL. Opinion Delivered DECEMBER 22, 2014

APPELLANTS

V. APPEAL FROM THE OUACHITA
COUNTY CIRCUIT COURT, SIXTH
KATHYRN S. CHAPPEL, AS SPECIAL DIVISION
ADMINISTRATOR OF THE ESTATE [NO. CV-2011-121-6]
OF W.C. CHAPPEL, DECEASED, AND
ON BEHALF OF THE WRONGFUL HONORABLE DAVID F. GUTHRIE,
DEATH BENEFICIARIES OF W.C. JUDGE
CHAPPEL, ET AL.
APPELLEES REVERSED AND REMANDED.

PAUL DANIELSON, Associate Justice

This appeal presents a review of an order by the Ouachita County Circuit Court

denying a motion to compel arbitration. Appellants are GGNSC Holdings, LLC, its related

corporate entities, individual Golden LivingCenters located throughout Arkansas, and certain

employees of GGNSC (collectively referred to as “appellants”). Appellees are Dianne Roche,

as attorney-in-fact for Thomas Roche; Nellie Lamb, by and through Richard Williams, as

Guardian of the Estate and Person of Nellie R. Lamb; Betty Huebner, as Special

Administrator of the Estate of Wilma Richey, deceased; Greg Brown, as Special Administrator

of the Estate of Louise Brown, deceased; and Leon Robinson.1 GGNSC argues on appeal

1
Thomas Roche, Nellie Lamb, Wilma Richey, Louise Brown, and Leon Robinson
each resided in a Golden LivingCenter facility. There are additional plaintiffs below who
were not subjects to the motions to compel and, thus, are not parties to the present appeal.
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that the circuit court erred (1) in refusing to enforce the parties’ arbitration agreement; and

(2) in relying on appellees’ additional arguments, that there was a lack of authority to bind

appellees to the arbitration agreement and that the agreement was unconscionable, as grounds

for denying the motion to compel arbitration. As this case is an interlocutory appeal from an

order denying a motion to compel arbitration, our jurisdiction is proper pursuant to Arkansas

Rule of Appellate Procedure–Civil 2(a)(12) (2014). Because the circuit court failed to

expressly rule on the threshold issue of whether there was a valid agreement to arbitrate, we

must reverse and remand this matter to the circuit court.

The facts are these. Kathryn S. Chappel, as Special Administrator of the Estate of

W.C. Chappel, deceased, filed an action alleging claims of negligence and wrongful death, on

behalf of herself and other members of a class of similarly situated persons, against GGNSC,

numerous related corporate entities, several of its nursing-facility centers located throughout

Arkansas, and certain individuals who were employed by GGNSC or one of its related

entities. The complaint alleged that GGNSC operated, managed, and/or maintained its

nursing facilities in a manner that resulted in a failure to adequately staff the facilities to

properly care for patients and did so in order to maximize profits. Appellees alleged violations

of the Arkansas Deceptive Trade Practices Act, violations of the Long-Term Care Residents’

Rights Act, and breach of the admission agreement between residents and appellants.

Appellees requested class certification for a class of all residents of the facilities between

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October 2006, and July 1, 2009; sought actual, compensatory, and punitive damages; and

requested an award of attorneys’ fees and costs.2

In their answers to the complaint, appellants alleged that any claims by appellees were

barred from being litigated in a court of law because of arbitration agreements that were

signed by the residents or their authorized agents. GGNSC subsequently filed motions to

compel arbitration and stay proceedings as to appellees. The motions included identical

allegations, specifically, that the plaintiffs or their agents signed a “Resident and Facility

Arbitration Agreement” that was included in the admissions packet presented to each appellee.

GGNSC asserted that all circuit court proceedings should be stayed pending resolution

through the arbitration process because the arbitration agreements governed the disputes raised

by appellees in their complaint. The relevant language pertaining to arbitration provided as

follows:

It is understood and agreed by [the] Facility and Resident that any and all claims . . .
shall be resolved exclusively by binding arbitration to be conducted at a place agreed
upon by the Parties, or in the absence of such an agreement, at the Facility, in
accordance with the National Arbitration Forum Code of Procedure, which is hereby
incorporated into this Agreement, and not by a lawsuit or resort to court process. This
agreement shall be governed by and interpreted under the Federal Arbitration Act, 9
U.S.C. Sections 1–16.

Appellees filed a response to appellants’ motions to compel arbitration asserting that

they should be denied because appellants could not sustain their burden of proving that the

parties, either personally or through a duly authorized agent, manifested assent to the terms

2
Mrs. Chappel also alleged certain individual claims, but as previously stated she is not
a party to the present appeal.

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of the arbitration agreement. Additionally, appellees argued that the agreement could not be

enforced due to impossibility of performance—a defense to contract enforcement. Appellees

argued that appellants chose the National Arbitration Forum (“NAF”) to serve as the

“exclusive” administrator of arbitration and specifically adopted the NAF Code of Procedure,

which called for arbitration to be conducted “exclusively” by and through the NAF, but the

NAF was no longer available to conduct consumer arbitrations. Finally, appellees also asserted

the contract defense of unconscionability, arguing that the preprinted, fill-in-the-blank form

was an adhesion contract, offered on a take-it-or-leave-it basis and, thus, was unenforceable.

The circuit court held a hearing on the motions to compel arbitration, and the parties

further argued the issues raised in their respective motions and responses. At the conclusion

of the hearing, the circuit court allowed the parties to conduct further discovery.3 Thereafter,

on January 30, 2014, the circuit court entered an order denying the motions to compel

arbitration. Therein, the circuit court concluded that the reference to the NAF and its Code

of Procedure adversely affected the validity of the agreement. In so concluding, the circuit

court noted that the NAF no longer arbitrates consumer complaints and appellants’ choice of

the NAF tainted the validity of the arbitration agreement. Moreover, the circuit court noted

that the contract made the NAF the mandatory and exclusive agent, adopted its Code of

Procedure, and set the fee schedule for the parties and, as such, the choice of the NAF and

3
At the conclusion of the hearing, the circuit court also orally ruled from the bench
and denied a motion to dismiss filed by appellants and granted appellees’ motion for class
certification.

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its Code of Procedure were integral and essential terms of the contract that could not be

severed. The circuit court concluded that it could not supply an alternative arbitrator, an

alternative code of procedure, or an alternative fee schedule because the provisions were so

significant that the court would be rewriting the contract, and it could not do so. This appeal

followed.

At the outset, we note that an order denying a motion to compel arbitration is

immediately appealable under Rule 2(a)(12). This court reviews an order denying a motion

to compel de novo on the record, determining the issue as a matter of law. E.g., Bank of the

Ozarks, Inc. v. Walker, 2014 Ark. 223, 434 S.W.3d 357.

As its first point on appeal, GGNSC argues that the circuit court erred by refusing to

enforce the parties’ valid arbitration agreement because that agreement referenced the NAF

and stated that the arbitration shall be conducted in accordance with the NAF’s Code of

Procedure. In this regard, GGNSC asserts several subpoints, including that (1) the plain

language of the arbitration agreement establishes that the NAF Code of Procedure is not

integral to the agreements; (2) appellees failed to offer any evidence that the NAF Code was

integral to the parties’ agreement; (3) the NAF clause may be severed; and (4) the circuit court

improperly imputed the NAF’s alleged inappropriate conduct to GGNSC.

Appellees counter that the circuit court properly denied the motions to compel

arbitration because the unavailability of the NAF rendered the arbitration agreement invalid.

According to appellees, the agreement was invalid because the designation of the NAF and

the adoption of its Code of Procedure were essential and integral terms of the agreement; that

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those provisions could not be severed; and, the circuit court did not improperly impute the

NAF’s conduct to GGNSC.

Before turning to the merits of the arguments raised by GGNSC, this court must

determine whether the circuit court ruled on the threshold issue of whether there was a valid

agreement to arbitrate. Although an arbitration provision is subject to the Federal Arbitration

Act, courts look to state contract law to decide whether the parties’ agreement is valid. E.g.,

DIRECTV, Inc. v. Murray, 2012 Ark. 366, 423 S.W.3d 555. In Arkansas, the same rules of

construction apply to arbitration agreements as apply to agreements in general. E.g., Alltel

Corp. v. Sumner, 360 Ark. 573, 203 S.W.3d 77 (2005). Thus, the essential elements for an

enforceable arbitration agreement are (1) competent parties, (2) subject matter, (3) legal

consideration, (4) mutual agreement, and (5) mutual obligation. Id.

Although the question of whether the circuit court ruled on the issue regarding the

validity of the agreement itself is not an issue raised by the parties, this court has made clear

that a circuit court may not skip this step of the analysis, nor will this court presume a ruling

on this threshold issue simply because a circuit court rules on an asserted defense. See Bank

of the Ozarks, 2014 Ark. 223, 434 S.W.3d 357. In Bank of the Ozarks, the circuit court denied

the appellant’s motion to compel arbitration after finding that the agreement was

unconscionable. This court reversed and remanded to the circuit court to determine, in the

first instance, whether there was a valid agreement to arbitrate between the parties. Id. We

further instructed that if the circuit court was to find that there is a valid agreement to

arbitrate, then it must determine whether the dispute falls within the scope of the agreement.

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Id. Only then, could the circuit court consider whether the appellees had a defense that may

be applied to invalidate the agreement. Id.

It is true that this court distinguished Bank of the Ozarks in the subsequent appeal of

Asset Acceptance, LLC v. Newby, 2014 Ark. 280, 437 S.W.3d 119. There, a majority of the

court explained the ruling in Bank of the Ozarks but concluded that

[w]hile at first blush it might appear that our holding in Bank of the Ozarks would
require us to reverse and remand this case for the circuit court to rule on the question
of whether a valid arbitration agreement exists, we find that the order in [the] present
case is distinguishable from Bank of the Ozarks and is not controlled by that precedent.

Id. at 6, 437 S.W.3d at 122. There, both parties argued the issues of assent, mutuality, and

waiver to the circuit court, but the circuit court entered a blanket denial of the motion to

compel and further denied a subsequently filed motion for specific findings. This court held

that there was no need to remand the case for a threshold finding on whether a valid

agreement to arbitrate existed because the circuit court’s order constituted a ruling on all of

the issues raised by the parties, including the threshold issue of mutual assent. Id.

Considering the instant case in light of our most recent precedent, it is clearly more

akin to the situation presented in Bank of the Ozarks than that presented in Asset Acceptance.

Here, we simply do not have a blanket denial of the motion to compel. The order that is the

subject of this appeal specifically addresses an issue involving impossibility of performance, a

defense to a contract. After an in-depth discussion on that issue, the circuit court included

a catch-all sentence that read, “The other arguments of Plaintiffs’ counsel against the motion

to compel arbitration are persuasive and contribute to this decision.” Those other arguments

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raised by appellees were that there was no mutual assent because of a lack of authority on the

part of those who signed the arbitration agreement and that the agreement was

unconscionable.4

Clearly, appellees challenged the validity of the arbitration agreement itself and, thus,

it was incumbent on the circuit court to address this threshold issue. We cannot construe the

court’s catch-all sentence to be a ruling on the issue of whether there was a valid agreement

to arbitrate. The circuit court stated that appellees’ other arguments contributed to its

decision to deny the motions to compel. But, it would be illogical for this court to conclude

that appellees’ argument that there was no valid agreement to arbitrate contributed to the

denial of the motions because there would have been no need for the court to consider the

impossibility defenses. In other words, if we were to assume anything about the circuit

court’s ruling, we would have to assume that the court impliedly found that there was a valid

agreement to arbitrate and then considered the contract defense. But, we are not allowed to

presume any such ruling pursuant to our precedent in Bank of the Ozarks. Accordingly, we

reverse and remand this matter to the circuit court.

Reversed and remanded.

BAKER, GOODSON, and HOOFMAN, JJ., concur.

HART, J., concurs without written opinion.

4
Appellees do not assert that there was a lack of authority with regard to Mr.
Robinson.

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COURTNEY HUDSON GOODSON, Justice, concurs. I agree that, pursuant to our

decision in Bank of the Ozarks, 2014 Ark. 223, 434 S.W.3d 357, this case must be remanded

to the circuit court for lack of a ruling on a threshold issue, but I write separately to

underscore my concerns regarding our dramatic shift in legal precedence as a result of that

case, and the regrettable position in which we have now placed the bench and the bar when

handling arbitration claims.

In Bank of the Ozarks, this court held that a circuit court was required to make express

findings on the existence of a valid arbitration agreement as a threshold issue, before reaching

any equitable defenses presented by the parties. This court has refused to recognize this

pronouncement as a marked shift in the law, when it does, in fact, add a new requirement,

and thus a burden on the bench and bar. Bank of the Ozarks represents a clear departure from

our traditional appellate rules governing contract cases, where we have never required a

circuit court to rule on the existence of a contract before addressing any equitable defenses

raised by the parties. See, e.g., K.C. Props. of Nw. Ark., Inc. v. Lowell Inv. Partners, LLC, 373

Ark. 14, 280 S.W.3d 1 (2008) (addressing merits of appeal where the circuit court did not

address the threshold issue of the existence of a valid contract, but instead ruled on the defense

of waiver of damages).

Additionally, in applying the Bank of the Ozarks rule, the cases following that decision

have further muddled the legal landscape of what is required of a circuit court in addressing

a motion to compel arbitration. In Asset Acceptance, LLC v. Newby, 2014 Ark. 280, 437

S.W.3d 119, we held that a blanket denial can serve as an implicit ruling on all threshold

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issues, and in Alltel Corp. v. Rosenow, 2014 Ark. 375, we held that the court was not required

to rule on all threshold issues if it ruled on one. Thus, the principles that arise from those

three cases are that if the circuit court gives no justification at all for its ruling, that is

sufficient; or, if it rules on only one threshold issue but not all, that will suffice. But if the

circuit court reaches the right result on a defense but does not expressly address contract

formation, we will reverse and remand the circuit court’s decision. This rubric defies logic

and will only continue to grow more nonsensical as this court struggles to apply the new Bank

of the Ozarks rule in future cases.

At a time when this court has a goal of streamlining our rules for the benefit of

practitioners and our circuit courts, Bank of the Ozarks moves in the wrong direction by

adding another layer of complexity to an already complicated area of the law. While I am

constrained to follow precedent, I feel compelled to point out that the course we have

embarked on is unwise.

BAKER and HOOFMAN, JJ., join.

Hardin, Jesson & Terry, PLC, by: Kirkman T. Dougherty, Jeffrey W. Hatfield, and Kynda

Almefty, for appellant.

Campbell Law Firm, P.A., by: H. Gregory Campbell; Ludwig Law Firm, PLC, by: Gene

A. Ludwig; and Reddick Moss, PLLC, by: Brian D. Reddick, for appellees.

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