THE STATE OF SOUTH CAROLINA
In The Supreme Court
Lynn W. Bazzle and Burt A. Bazzle, in a representative capacity on behalf of a class and for all others similarly situated, Respondents,
Green Tree Financial Corp. a/k/a Green Tree Acceptance Corporation a/k/a Green Tree Financial Services Corporation n/k/a Conseco Finance, Inc., Appellant.
Daniel B. Lackey, George Buggs, and Florine Buggs, in a representative capacity on behalf of a class and for all others similarly situated, Respondents,
Green Tree Financial Corp., a/k/a Green Tree Financial Services Corp., a/k/a Green Tree Acceptance Corp., n/k/a Conseco Finance, Inc., Appellant.
Appeal From Dorchester County
Patrick R. Watts, Special Circuit Court Judge
Rodney A. Peeples, Circuit Court Judge
Opinion No. 25523
Heard March 21, 2002 - Filed August 26, 2002
Herbert W. Hamilton, of Kennedy Covington Lobdell & Hickman, L.L.P., of Rock Hill; Wilburn Brewer, Jr. and Robert C. Byrd, of Nexsen Pruet Jacobs Pollard & Robinson, LLP, of Charleston; and Alan S. Kaplinsky and Mark J. Levin, of Ballard Spahr Andrews & Ingersoll, LLP, of Philadelphia, PA, all for appellant.
Steven W. Hamm, of Richardson Plowden Carpenter & Robinson, P.A., of Columbia; D. Michael Kelly, Bradford P. Simpson and B. Randall Dong, all of Suggs & Kelly Lawyers, P.A., of Columbia; Mary Leigh Arnold, of Mary Leigh Arnold, P.A., of Mt. Pleasant; Charles L. A. Terreni, of Terreni Law Firm, of Columbia; and T. Alexander Beard, of Beard Law Offices of Mt. Pleasant, all for respondents.
Christopher R. Lipsett, Eric J. Mogilnicki, Christopher J. Mead, all of Wilmer, Cutler & Pickering, of New York, NY; and John T. Moore, B. Rush Smith, III and Thad H. Westbrook, all of Nelson, Mullins, Riley & Scarborough, L.L.P., of Columbia, all for Amicus Curiae American Bankers Association, American Financial Services Association, Consumer Bankers Association, South Carolina Bankers Association, and South Carolina Merchants Association, in support of appellant.
John F. Hardaway, of Columbia; and Michael D. Donovan, of Donovan Searles, LLC, of Philadelphia, PA, both for Amicus Curiae National Association of Consumer Advocates, in support of respondents.
CHIEF JUSTICE TOAL:
Two classes of plaintiffs, represented by Lynn and Burt Bazzle, et. al. (“Bazzles”)
and by Daniel Lackey, et. al. (“Lackey”), were awarded damages pursuant to their
respective class action arbitrations against Green Tree Financial Corporation
(“Green Tree”) for violations of the South Carolina Consumer Protection Code.
(1) Green Tree appeals the arbitrator’s
(2) awards in both cases, on grounds that class-wide arbitration of
the plaintiffs’ claims was not authorized by the arbitration agreement.
On February 22, 2001, this Court entered an Order
withdrawing Green Tree’s appeal from the Court of Appeals. By that order,
this Court assumed jurisdiction and consolidated the Bazzle and Lackey
cases for appeal. Although each case proceeded through arbitration independently,
resolution of each appeal involves the same novel issue: whether class-wide
arbitration is permissible when the arbitration agreement between the parties
is silent regarding class actions.
The Bazzles (like their fellow class members) were
approached by Patton General Contracting (“Patton”), a non-exclusive Green Tree
dealer, in 1995, to perform home improvements. Patton provided the Bazzles
with a Green Tree application for financing. The Green Tree application
contained no attorney or insurance agent preference notice. On May 20,
1995, the Bazzles executed a Retail Installment Contract and Security Agreement
for $15,000 which contained the arbitration clause at issue.
(3) The same day the Bazzles executed a number of other documents
identifying Green Tree as the lender, including a mortgage stamped with directions
to return it to Green Tree once executed. The Bazzles were never given
an attorney or insurance preference form and no attorney was involved in the
transaction or closing on their behalf.
On March 25, 1997, Lynn and Burt Bazzle commenced
an action against Green Tree in the Dorchester County Court of Common Pleas
based on Green Tree’s alleged violations of the attorney and insurance agent
preference provisions of the South Carolina Consumer Protection Code
(4) arising out of their home improvement financing agreement with
On April 21, 1997, the Bazzles filed an amended
complaint incorporating class allegations and a Motion for Class Certification.
A month later, Green Tree filed a Motion for Stay and to Compel Arbitration.
On December 5, 1997, the trial court heard both motions. It granted the
Motion for Class Certification. After the court granted class certification,
Green Tree pursued its Motion to Compel Arbitration, and the trial court granted
The trial court issued two separate orders memorializing
its rulings on December 5, 1997: (1) an order granting class certification;
and (2) an order compelling arbitration. In its order compelling arbitration,
the trial court stated that the order applied to the Bazzles and all members
of their class who elected to be part of the action. In a supplemental
order issued January 7, 1998, the trial court ordered that the class action
in arbitration proceed on an opt-out basis.
On January 20, 1998, Green Tree filed a Motion
for Reconsideration of the trial court’s order granting class certification.
After a hearing, the trial court denied Green Tree’s Motion for Reconsideration,
and Green Tree filed an appeal. On April 28, 1998, the Court of
Appeals dismissed Green Tree’s appeal on grounds that granting or denying class
certification is interlocutory and non-appealable. Green Tree filed a
Petition for Rehearing. The Court of Appeals denied rehearing and Green
Tree filed a petition for certiorari with this Court. This Court denied
Green Tree’s petition and remitted the case to the trial court.
On February 24, 1999, the Bazzles filed a Motion
to Compel Appointment of an Arbitrator. On May 6, 1999, Green Tree filed
a Motion to Dismiss on grounds that the Bazzles were not the proper parties
to pursue the claims asserted, as their interests were contrary to the interests
of the class members. On May 20, 1999, the trial court heard both motions.
The trial court appointed the Honorable Thomas Ervin as arbitrator and declined
to hear the Motion to Dismiss for lack of jurisdiction.
All class action proceedings were thereafter administered
by the arbitrator, without further involvement of the trial court. The
arbitrator handled several motions by the parties before holding the final hearing
on May 31, 2000. On July 24, 2000, the arbitrator issued a Final Order
and Award, finding Green Tree liable for violating the attorney and insurance
preference statute, S.C. Code Ann. § 37-10-102(a). The arbitrator found
the remedies for such a violation to be in S.C. Code Ann. § 37-10-105 (Supp.
1996 & 1997) and awarded relief to the class of 1,899 individuals in the
amount of $10,935,000, and an additional $3,645,500 in attorney’s fees and $18,242
On July 25, 2000, the Bazzles filed a Motion to
Confirm the Award in the trial court. On August 24, 2000, Green Tree filed
a Motion to Remand the Award for Amendment and Clarification, an objection to
the Motion to Confirm, and a Motion to Vacate the Award. On September
15, 2000, the trial court confirmed the award and denied Green Tree’s motions
to remand and vacate. Green Tree appealed and this Court assumed jurisdiction
to hear the consolidated appeals.
Daniel Lackey (and his fellow class members) entered
into preprinted consumer installment contracts and security agreements with
Green Tree for the purchase of mobile homes. These transactions were secured
by real property and were subject to the South Carolina Consumer Protection
Code. In each of these transactions, the consumer completed a Green Tree
application for financing through a Green Tree dealer. The applications
contained no attorney or insurance preference notice and no preference form
was provided at any other time during the transaction.
Green Tree, not its dealers, notified the consumer
whether credit had been granted or denied. If granted, Green Tree set
the terms, including the interest rate, and prepared a mortgage and note.
The mortgages were delivered to the consumer through the dealer, but were
returned directly to Green Tree. The notes and mortgages were assigned
to Green Tree. Green Tree funded the transaction after the consumer reported
satisfaction with the set up of the mobile home and then issued checks to the
On May 28, 1996, Daniel Lackey and George and Florine
Buggs commenced a class action against Green Tree in the Barnwell County
Court of Common Pleas. The Lackey plaintiffs, like the Bazzles, alleged
violations of the attorney and insurance preference provisions of the South
Carolina Consumer Protection Code.
Green Tree filed its answer and the Lackey plaintiffs
proceeded to file a Motion for Class Certification. Green Tree moved to
Stay the Matter and to Compel Arbitration. The trial court denied Green
Tree’s Motion to Compel Arbitration, finding Green Tree’s contract was an adhesion
contract with an unconscionable and unenforceable arbitration clause.
Green Tree appealed and the Court of Appeals reversed. Although the Court
of Appeals agreed that the contracts were ones of adhesion, it found that the
arbitration clause within them was not unconscionable. Lackey, et.
al. v. Green Tree Fin. Corp., 330 S.C. 388, 498 S.E.2d 898 (Ct. App. 1998).
Following remand, the parties entered into a Consent
Order appointing the Honorable Thomas Ervin as arbitrator. Apparently,
the arbitrator raised the issue of class action arbitration and held a hearing
to determine whether a class action could proceed under Green Tree’s arbitration
clause. (5) The Lackey Plaintiffs claim
Green Tree sought a decision by the arbitrator at the hearing that the class
action could not proceed in arbitration. Green Tree, however, claims its
involvement was limited to vigorous objection that the arbitrator did not have
authority to order class arbitration under the Federal Arbitration Act
(6) (“FAA”) and the arbitration agreement. After a hearing on
the matter, the arbitrator issued an order permitting class action arbitration
and scheduled a class certification hearing.
On September 22, 1998, Green Tree initiated a declaratory
judgment action in federal district court, seeking to enjoin the arbitrator
from certifying a class. After a hearing, the district court denied the
injunction and dismissed the declaratory judgment action for lack of subject
matter jurisdiction. (7)
On November 28, 1998, the arbitrator held the hearing
on class certification. Green Tree’s counsel was present but refused to
participate in the argument of the motion. The arbitrator found the requirements
for class certification were met. In December 1998, Green Tree filed an
action for Declaratory Judgment and Preliminary Injunction in state court and
a Motion to Stay the arbitration proceedings. After a hearing, the trial
court denied the stay on the ground it lacked jurisdiction to interfere with
the arbitration. (8)
After a hearing in May of 1999, the arbitrator
approved a class notice that was sent to the class members on May 12, 1999.
On January 28, 2000, the arbitrator held a pre-trial conference. At the
conference, the parties entered into a Consent Agreement redefining the Lackey
class to include all mobile home transactions and placing all home improvement
class members in the Bazzle class.
The arbitrator heard the Lackey claims on March
6-8, 2000. Green Tree participated, offering witnesses and evidence.
At the conclusion, the arbitrator ruled orally that Green Tree had violated
the attorney and insurance agent preference requirements of the Consumer Protection
Code. The arbitrator awarded $9,200,000 for violation of the attorney
and insurance preference statute, and an additional $3,066,666 in attorney’s
fees and $18,252 in costs. On May 31, 2000, the same arbitrator heard
the Bazzle home improvement claims and again held Green Tree violated the attorney
and insurance preference provisions. At this hearing, the arbitrator
established the procedures for Green Tree to address its offset claims in both
Bazzle and Lackey.
On July 24, 2001, the Lackey Plaintiffs filed a
motion to confirm the award in trial court. In response, Green Tree filed
a Motion to Remand and a Motion to Vacate the award. In December 2001,
the trial court confirmed the award. Green Tree appealed and this Court
withdrew the appeal from the Court of Appeals and assumed jurisdiction to hear
the consolidated Bazzle and Lackey appeals.
Although the Bazzle and Lackey cases
involve financing for different purposes, Green Tree structured and conducted
the transactions in the same manner. The consumers in both classes were
bound to arbitration by the same clause which appeared in their Retail Sales
Agreements. Procedurally, however, the two cases differ in how class certification
was granted. As discussed, in Bazzle, the trial court certified
the class and then granted Green Tree’s Motion to Compel Arbitration.
The Lackey suit was filed as a class action in trial court, but arbitration
was compelled before the motion to certify the class was considered although
the Lackey plaintiffs did make a Motion to Certify the Class. Thus, the
arbitrator authorized class certification within the arbitration. The
cases have been consolidated and Green Tree appeals the following issues:
- Did Green Tree waive its ability to object to class-wide arbitration in Bazzle and Lackey by manifesting consent to the class-wide arbitration?
- Did the trial court in Bazzle and the arbitrator in Lackey have contractual or legal authority to authorize the respective arbitrations to proceed on a class action basis?
- If so, were the due process rights of the absent class members sufficiently protected?
The Bazzle and Lackey plaintiffs argue this Court
can avoid addressing the broad issue of whether class-wide arbitrations were
permissible by affirming on the alternate ground that Green Tree manifested
consent to class-wide arbitration and may not now object to it. We are
not convinced by this waiver argument.
The courts of this state have recognized that a
party cannot complain when it receives the relief for which it has asked.
See McKissick v. J.F. Cleckley & Company, 325 S.C. 327, 479 S.E.2d
(Ct. App. 1996); Estes v. Gray, 319 S.C. 551, 462 S.E.2d 561 (Ct. App.
1995). Specifically, a party that by its conduct consents to arbitration
of a dispute waives any subsequent judicial challenge to its arbitrability.
See Rock-Tenn Co. v. United Paperworkers Int’l Union, 184 F.3d 330 (4th
Cir. 1999). Although this is an accurate statement of the law, Green Tree
did not consent to class-wide arbitration by defending itself in the arbitration.
As discussed, Green Tree protested class-wide arbitration vigorously in both
cases, receiving adverse rulings every time, before defending itself on the
In Bazzle, Green Tree requested arbitration
and received it after the motion to certify the class was granted by the trial
court. Even after the trial court certified the Bazzle class, Green
Tree continued to push for arbitration, and the trial court granted Green Tree’s
Motion to Compel arbitration. The Bazzles therefore contend that Green
Tree got what it asked for and cannot now complain that the court abused its
discretion by granting the relief it requested. Although Green Tree did
object to the class-wide arbitration before the arbitrator, the Bazzles contend
it waived its ability to object by manifesting consent to proceed through some
of its subsequent actions. For example, the Bazzles point to Green Tree’s
Motion to Decertify the class before the arbitrator on substantive grounds as
evidence that Green Tree manifested consent to the arbitrator’s authority to
certify or decertify the class. The Bazzles claim that by placing the
decertification issue squarely before the arbitrator, Green Tree manifested
acceptance of the arbitral forum as sufficient to resolve the issue.
In Lackey, the plaintiffs argue similarly
that Green Tree waived its right to object to class-wide arbitration by moving
to compel arbitration when it knew of the class allegations being asserted.
They argue that moving to compel arbitration without insisting that the trial
court address the class certification motion manifested consent for the arbitrator
to decide the certification issue. The Lackey plaintiffs assert that Green
Tree did not object with motions and stays until after the arbitrator ruled
against Green Tree on the general issue of whether this action could possibly
proceed as a class-wide arbitration. The Lackey plaintiffs claim Green
Tree was obligated to force the trial court to decide the Lackey plaintiffs’
motion before it granted Green Tree’s Motion to Compel because Green Tree was
aware of the class allegations and knew the arbitrator would decide the issue
if the trial court did not.
We are not persuaded by the plaintiffs arguments
for waiver in Bazzle or Lackey. In Bazzle, Green Tree argued
against the Motion to Certify before the trial court, lost, and then filed a
Motion for Reconsideration of the issue. The Motion for Reconsideration
was denied and Green Tree appealed the denial all the way to this Court.
In Lackey, although Green Tree did not insist the trial court decide
the issue before arbitration was compelled, it objected vigorously to the possibility
of class certification at the first hearing on the matter before the arbitrator
and filed actions to enjoin class certification in federal and state court.
Green Tree’s motions in both cases were entirely unsuccessful, but, nonetheless,
manifested Green Tree’s objection to class-wide arbitration sufficiently to
counter the plaintiffs’ waiver argument.
II. Class Action
II. Class Action Arbitration
In these consolidated cases, Green Tree argues
the trial court and the arbitrator failed to enforce Green Tree’s arbitration
clause in accordance with its terms, in violation of the FAA, when they imposed
The parties do not dispute that the FAA applies
to the arbitration agreements in both cases. (9)
The arbitration agreements expressly state that they are made pursuant to transactions
in interstate commerce and are governed by the FAA. Although they agree
the FAA applies, the parties dispute how the FAA impacts the class-wide arbitration
The United States Supreme Court has not addressed
the FAA’s impact on class-wide arbitration, although it was presented with an
opportunity to do so in Southland Corp. v. Keating, 465 U.S. 1, 104 S.
Ct. 852, 79 L. Ed. 2d 1 (1984). (10) Thus,
there is no binding precedent that this Court is obligated follow. Courts
in other jurisdictions have addressed the issue, and have taken two different
approaches. Several federal circuits have precluded class-wide arbitration
when the arbitration agreement is silent based on their interpretation of section
4 of the FAA. (11) Representing the opposing
view, the California courts have permitted class-wide arbitration on a case
by case basis when the arbitration agreement is silent.
A. Seventh Circuit Approach
Green Tree urges the Court to adopt the reasoning
employed by the Seventh Circuit, holding courts lack authority to order class-wide
arbitration under section 4 of the FAA. 9 U.S.C. § 4. Section 4
requires arbitration in “accordance with the terms” of the agreement.
If the arbitration agreement in question is silent on the issue, these courts
reason that authorizing class-wide arbitration would not be in “accordance with
the terms” of the agreement. See Champ v. Siegel Trading Co., Inc.
; McCarthy v. Providential Corp., et. al.,1994 WL 387852 (N. D. Cal.); Gammaro
v. Thorp Consumer Discount Co., 828 F.Supp. 673 (D. Minn. 1993). These
courts support their decisions by drawing an analogy between ordering class-wide
arbitration and ordering consolidation in arbitration.
(13) Id.; Med Ctr. Cars, Inc. v. Smith, 727 So.2d 6 (Ala.
1998) (finding the federal authority persuasive and applying the consolidation
analogy to class-wide arbitration in Alabama state courts).
In Champ, a class action alleging violations
of the Commodity Exchange Act, RICO, and other state laws, the Seventh Circuit
found “no meaningful basis to distinguish between the failure to provide for
consolidated arbitration and class arbitration.” Id. at 275. Based
on this comparison, the Champ court adopted “the rationale of several other
circuits and [held] that section 4 of the FAA forbids federal judges from ordering
class arbitration where the parties’ arbitration agreement is silent on the
matter.” Id.; Boeing; National Cas.; Baesler. In reaching
their decision in the consolidation cases, the various courts placed strict
enforcement of the terms of the agreement above the policy favoring expeditious
resolution of claims. Champ.
Citing a decision by the Second Circuit, the Champ
court noted that the FAA’s overriding goal was to place private arbitrations
on the same footing as other contracts negotiated between private parties.
Champ (citing United Kingdom v. Boeing, 998 F.2d 68 (2d Cir. 1993)).
In furtherance of this goal, the Second Circuit held the duty to enforce the
agreement as the parties wrote it to be tantamount, regardless of “possible
inefficiencies created by such enforcement.” Champ, 55 F.3d at
275 (citing Boeing, 998 F.2d at 72). The Champ court, however,
failed to discuss whether the arbitration agreement was one of adhesion
or was truly negotiated by the parties, and failed to discuss the differences
between consolidation and class-action on a practical level.
B. California Approach
The California Supreme Court, on the other hand,
did consider whether a trial court could order class-wide arbitration under
adhesive but enforceable franchise contracts in Keating, 31 Cal.3d 584,
645 P.2d 1192, rev’d in part on other grounds in Southland Corp. v. Keating,
465 U.S. 1, 104 S. Ct. 852, 79 L. Ed. 2d 1 (1984). (14)
The California court concentrated on the negative implications of refusing to
allow class-wide arbitration when arbitration has been made mandatory through
an adhesion contract:
If the right to a classwide proceeding could be automatically eliminated in relationships governed by adhesion contracts through the inclusion of a provision for arbitration, the potential for undercutting these class action principles, and for chilling the effective protection of interests common to a group, would be substantial. Arbitration proceedings may well provide certain offsetting advantages through savings of time and expense; but, depending upon the nature of the issues and the evidence to be presented, it is at least doubtful that such advantages could compensate for the unfairness inherent in forcing hundreds or perhaps thousands, [sic] of individuals asserting claims involving common issues of fact and law to litigate them in separate proceedings against a party with vastly superior resources.
Keating, 31 Cal.3d at 609.
The California Supreme Court, like the Seventh
Circuit, drew an analogy between ordering consolidation and class-wide arbitration
to support its decision. In 1982, when Keating was decided, the
Second Circuit permitted consolidation where the agreement was silent.
Compania Espanola de Pet., S.A. v. Nereus Ship, 527 F.2d 966 (2d Cir.
1975), cert. denied 426 U.S. 936, 96 S. Ct. 2650, 49 L. Ed. 2d 387 (1976).
The Second Circuit has reversed itself on this issue since Keating, however,
and now holds that ordering consolidation when the arbitration agreement is
silent violates section 4 of the FAA. United Kingdom v. Boeing.
Nonetheless, the California court’s analysis remains viable; although it drew
an analogy between permitting consolidation and class-wide arbitration when
the contract is silent, it also distinguished the two, making its case for class-wide
arbitration even stronger.
The California court pointed out that consolidated
arbitration often involves a “tripartite relationship in which the parties in
dispute each have a contract with a third party, but not with each other,” as
opposed to class-wide arbitrations in which all plaintiffs had a contract directly
with the defendant. Keating, 31 Cal.3d at 612. Highlighting
the greater burden likely to result from ordering consolidation, the California
Thus, a party may be forced into a coordinated arbitration proceeding in a dispute with a party with whom he has no agreement, before an arbitrator he had no voice in selecting and by a procedure he had not agreed to.
In these respects, an order for classwide arbitration in an adhesion context would call for considerably less intrusion upon the contractual aspects of the relationship.
Id. Unlike parties subjected to consolidation,
“the members of a class subject to classwide arbitration would all be parties
to an agreement with the party against whom their claim is asserted.”
Id. Balancing the potential inequities and inefficiencies against
resulting prejudice to the drafting party, the California court held that it
was not beyond the court’s authority to order class-wide arbitration in the
appropriate case. The court thus left the question for the trial court
to answer on a case by case basis, in its discretion, upon consideration of
certain factors. (15)
More recently, the California Court of Appeal for
the second district reaffirmed the California Supreme Court’s holding in Keating.
Blue Cross v. Superior Court, 67 Cal. App. 4th 42 (Cal. App. 1998), cert.
denied 527 U.S. 1003, 119 S. Ct. 2338, 144 L. Ed. 2d 235 (1999). The
Court of Appeal discussed the rationale employed by the California Supreme Court
in Keating extensively, and upheld the court’s ruling in Keating
on state and federal law grounds. Blue Cross. Going
further than the California Supreme Court, the Court of Appeal addressed the
impact of the FAA on this issue, concluding that it does not preclude application
of California’s class-wide arbitration rule. Id.
First, the Court of Appeal held that section 4
of the FAA does not apply to state courts at all. For support, the court
cited the legislative history of the FAA and several decisions of the United
States Supreme Court. Id. (citing Volt Info. Sciences v. Leland
Stanford Jr. U.,489 U.S. 468, 109 S. Ct. 1248, 103 L. Ed. 2d 488 (1989)
(stating that the Court has never held that sections 3 and 4 of the FAA apply
to state courts). The Court of Appeal reasoned that the language of section
4 contemplated a petition before a district court and application of the federal
rules of civil procedure. Id. at 60 (citing Rosenthal v. Great
Western Financial Securities Corp., 14 Cal.4th 394 (Cal. 1996)). The
court recognized the FAA would prevail over a state procedural rule if in direct
conflict, but found that a state procedure that furthers “the effectuation of
the federal law’s objectives” would not conflict and should be followed.
Id. at 61 (quoting Rosenthal, 14 Cal.4th at 410). The court
concluded that following state precedent allowing class-wide arbitration can
further rather than defeat the FAA’s goal of enforcing agreements to arbitrate
and is, therefore, not preempted by section 4 of the FAA. Blue Cross.
C. Relevant South Carolina
This Court has not considered whether or not class-wide
arbitration may be ordered when the arbitration agreement is silent.
Generally, however, this Court favors arbitration of disputes. Heffner
v. Destiny, Inc., 321 S.C. 536, 471 S.E.2d 135 (1995). Further, our
courts resolve any doubts concerning the scope of arbitrable issues in favor
of arbitration. See Towles v. United Health Care Corp., 338 S.C.
29, 524 S.E.2d 839 (Ct. App. 1999). This Court examined the arbitration
clause at issue last year in Munoz v. Green Tree Financial Corp, 343
S.C. 531, 542 S.E.2d 360, (2001). In Munoz, this Court held “general
principles of state law apply to arbitration clauses governed by the FAA.”
343 S.C. at 539, 542 S.E.2d at 364 (2001) (citing Doctor’s Assoc., Inc. v.
Casarotto, 517 U.S. 681, 116 S. Ct. 1652, 134 L. Ed. 2d 902 (1996)).
Generally, if the terms of a contract are clear
and unambiguous, this Court must enforce the contract according to its terms
regardless of its wisdom or folly. Ellis v. Taylor, 316 S.C. 245,
449 S.E.2d 487 (1994). Ambiguous language in a contract, however, should
be construed liberally and interpreted strongly in favor of the non-drafting
party. Myrtle Beach Lumber Co., Inc. v. Willoughby, 276 S.C. 3,
274 S.E.2d 423 (1981). After all, the drafting party has the greater opportunity
to prevent mistakes in meaning. It is responsible for any ambiguity and
should be the one to suffer from its shortcomings. Id.
The United States Supreme Court has applied this
common-law rule of contract construction, construing ambiguous language against
the drafting party in a case involving arbitration issues. In Mastrobuono
v. Shearson Lehman Hutton, Inc., a suit brought by customers of a
securities brokerage firm, the Court permitted an arbitration panel to award
punitive damages although the arbitration agreement was silent regarding punitive
damages, but contained a choice of law provision which the brokerage firm claimed
prohibited the arbitrator from awarding punitive damages. 514 U.S. 52,
115 S. Ct. 1212, 131 L. Ed. 2d 76 (1995). The Court framed the question
presented in broad terms, asking whether the award of punitive damages was consistent
with the FAA’s purpose of ensuring arbitration agreements are “enforced according
to their terms.” Mastrobuono, 514 U.S. at 54, 115 S. Ct. at 1214,
131 L. Ed. 2d at 82. The Court found the choice of law provision introduced
an ambiguity into an agreement that would otherwise permit punitive damage awards.
The Court then resolved the ambiguity against the brokerage firm as the drafting
party, based on the federal policy favoring arbitration
(17) and the common law rule of contract interpretation construing
ambiguous language against the drafting party. Mastronbuono.
Although this Court has not addressed whether class-wide
arbitrations are permissible when the agreement is silent, this Court has considered
whether consolidation of arbitration is permissible. In Episcopal
Housing Corp. v. Federal Ins. Co.,this Court authorized consolidation of
the claims of plaintiff (owner of an apartment complex) against an architect
and builder absent contractual or statutory authority. 273 S.C. 181, 255
S.E.2d 451 (1979). In sum, this Court held, “[w]hile we recognize that
arbitration is a creature of contract, appellant would not be denied its contracted-for
right to arbitration; rather the consolidation would provide a logical, expeditious
method by which to enforce that right.” Episcopal Housing, 273
S.C. at 183-84, 255 S.E.2d at 452. Significantly, the Court considered
whether the objecting parties had demonstrated any prejudice which would result
from consolidated proceedings and found that they had not. Id.
The Court of Appeals applied Episcopal Housing’s prejudice analysis in
a more recent decision, and this Court has not revisited the issue. Plaza
Development Services v. Joe Harden Builder, Inc., 294 S.C. 430, 365 S.E.2d
231 (Ct. App. 1988).
D. Application to Bazzle
As a preliminary matter, we find Green Tree’s arbitration
clause was silent regarding class-wide arbitration. Certainly,
the clause does not mention class-wide arbitration, but Green Tree argues that
the language limits arbitration to claims by individuals. Green Tree relies
on the portion of the clause providing for arbitration of “disputes, claims,
or controversies arising from or relating to this contract, or the relationships
which result from this contract.” (18)
In our opinion, this language does not limit the arbitration to non-class arbitration.
At best, it creates an ambiguity, and should, therefore, be construed against
the drafting party, Green Tree.
Still, Green Tree contends this Court must follow
the federal precedent established by the Seventh Circuit in Champ.
Green Tree argues that this Court is obligated to follow Champ, as a
matter of federal substantive law, mandated by section 4 of the FAA. We
disagree. The United States Supreme Court has not addressed this issue
and the precedent set by the federal circuit courts is not binding on this Court.
Although Green Tree asserts that the Fourth Circuit recognizes that the
FAA requires non-class arbitration, we believe Green Tree is incorrect.
The Fourth Circuit has not addressed the issue directly; the Fourth Circuit
has cited Champ, but only in dicta, and the question of class-wide arbitration
resolved in Champ has not been before the Fourth Circuit. See
Deiulemar Compagnia Di Navigazione S.p.A. v. M/V Allegra, 198 F.3d 473 (4th
Cir. 1999). (19)
Moreover, whether section 4 of the FAA applies
in state court is debatable. Section 4 provides, “[a] party aggrieved
by the alleged failure . . . of another to arbitrate under a written agreement
for arbitration may petition a United States district court . . . .”
9 U.S.C. § 4. As noted by the California Court of Appeal in Blue Cross,
this language contemplates enforcement in the federal district court, not state
court, and the United States Supreme Court has not held that section 4 applies
in state courts to counter the plain meaning of the statute. See Volt,489
U.S. 468, 109 S. Ct. 1248, 103 L. Ed. 2d 488 (1989) (stating that the Court
has never held that sections 3 and 4 of the FAA applied to state courts).
In any case, this Court can rely on independent
state grounds to permit class-wide arbitration, in the trial court’s discretion,
where the agreement is silent. First, under general principles of contract
interpretation, we construe Green Tree’s omission of any reference to class
actions against them. “As a matter of pure contract interpretation it
is striking, and rather odd, that so many courts have interpreted silence in
arbitration agreements to foreclose rather than to permit arbitral class actions.”
(20) No case law or statute in South Carolina prohibits class-wide
arbitration. To the contrary, this Court strongly favors arbitration and
has held that a state court may order consolidation of claims subject
to mandatory arbitration without any contractual or statutory directive to do
so. Episcopal Housing Corp. v. Federal Insurance Co.; Plaza Development
Services v. Joe Harden Builders (holding that a court has authority to order
consolidation when it would serve to expedite the parties contracted-for right
of arbitration and the parties have not demonstrated prejudice would result).
The rationale employed by Champ that Green
Tree urges this Court to adopt is based on an analogy between ordering consolidation
and class-wide arbitration where the agreement is silent. Champ
grounds its decision to prohibit class-wide arbitration almost entirely on the
precedent of other courts prohibiting consolidation of arbitration absent an
explicit right to consolidate within the written agreement. Applying this
precedent in South Carolina results in the opposite outcome. Since this
Court permits consolidation of appropriate claims where the arbitration agreement
is silent, it follows that this Court would permit class-wide arbitration, as
ordering class-wide arbitration calls for “considerably less intrusion upon
the contractual aspects of the relationship.” 42 Wm & Mary L. Rev.
1, 86-87. As the California Court noted in Keating, the members
of a class would be parties to an agreement with the defendant, as opposed to
consolidated parties, who each have a contract with a third party but not with
each other. Id.; Keating.
Today, we adopt the approach taken by the California
courts in Keating and Blue Cross, and hold that class-wide arbitration
may be ordered when the arbitration agreement is silent if it would serve efficiency
and equity, and would not result in prejudice. (21)
If we enforced a mandatory, adhesive arbitration clause, but prohibited class
actions in arbitration where the agreement is silent, the drafting party could
effectively prevent class actions against it without having to say it was doing
so in the agreement. Following the federal approach risks such a result
where arbitration is mandated through an un-negotiated adhesion contract.
Under those circumstances, parties with nominal individual claims, but significant
collective claims, would be left with no avenue for relief and the drafting
party with no check on its abuses of the law. (22)
Further, hearing such claims (involving identical issues against one defendant)
individually, in court or before an arbitrator, does not serve the interest
of judicial economy.
In South Carolina, a trial court’s ruling on whether
an action is properly maintainable as a class action is within the court’s discretion.
Tilley v. Pacesetter Corp., 333 S.C. 33, 508 S.E.2d 16 (1998).
Therefore, a court’s decision whether or not to certify a class is reviewed
under an abuse of discretion standard. Id. Neither the trial
court nor the reviewing court may look to the merits when determining whether
to certify a class. Id. (citing Curley v. Cumberland Farms Dairy,
728 F. Supp. 1123 (D.N.J. 1990).
The permissible scope of review of arbitral decisions
is far more limited. Section 10 of the FAA provides extremely limited
grounds for vacating an arbitrator’s award. Only where (1) the award was
procured by corruption, fraud, or undue means; (2) there was evident partiality
or corruption in the arbitrators; (3) the arbitrators were guilty of misconduct
in refusing to postpone a hearing, or in refusing to hear pertinent evidence,
or any other misconduct by which parties’ rights have been prejudiced; or (4)
the arbitrators exceeded their powers, or so imperfectly executed them that
a mutual, final, and definite award upon the subject matter submitted was not
made. 9 U.S.C. § 10. If an arbitrator acted even arguably
within the scope of his authority, even a serious error on his
part does not warrant overturning his decision. Major League Baseball
Players Assoc. v. Garvey, 532 U.S. 1015, 121 S. Ct. 1724, 149 L. Ed. 2d
South Carolina courts have interpreted this standard
narrowly. “Factual and legal errors by arbitrators do not constitute an
abuse of their powers . . . . A party may not attempt to relitigate the merits
of the arbitrators’ resolution of the arbitrable issues under the guise of questioning
the arbitrators’ power.” Pittman Mortgage Co. v. Edwards, 327 S.C.
72, 76-77, 488 S.E.2d 335, 338 (1997) (citations omitted). The Fourth
Circuit has interpreted the fourth justification in section 10 of the FAA (that
the arbitrator exceeded his power) to mean that an arbitrator must act in manifest
disregard of the law for his decision to be overturned. See Gallus
Investments, L.P. v. Pudgie’s Famous Chicken, Ltd., 134 F.3d 231 (4th Cir.
In light of the narrow standards of review in both
cases, we uphold the arbitrator’s awards in Bazzle and Lackey.
Green Tree did not allege any fraud, corruption, or other misconduct by the
arbitrator that would warrant vacating his decision to certify the class or
his award under the first three justifications listed in section 10 of the FAA.
9 U.S.C. § 10. That leaves manifest disregard of the law as the only possible
justification for overturning the arbitrator’s awards. In our opinion,
the arbitrator did not act in manifest disregard of the law. As Green
Tree noted in its brief, manifest disregard of the law occurs when the arbitrator
knew of a governing legal principle yet refused to apply it, and
the law disregarded was well defined, explicit, and clearly applicable to the
case. (App. Br. p. 12) (citing Trident Technical College v. Lucas Stubbs,
Ltd., 286 S.C. 98, 333 S.E.2d 781 (1985), cert. denied 474 U.S. 1060
As discussed, the issue of whether class-wide arbitration
is permissible when the agreement is silent was not settled in this state at
the time of the Bazzle and Lackey arbitrations. Therefore,
the arbitrator did not act in manifest disregard of the law by permitting it
to proceed. (23) Accordingly, we uphold
the arbitrator’s awards.
III. Due Process Rights
of Absent Class Members
Green Tree and the Amici argue that the absent
class members’ due process rights were violated by the class-wide arbitration
of their claims. The Bazzle and the Lackey plaintiffs, on
the other hand, claim the rights of the absent class members were adequately
protected through proper notice. Regardless, both classes of plaintiffs
argue that this issue is not preserved for review because Green Tree failed
to raise it in a timely fashion. We agree that the issue was not preserved
for review, and, further, find no evidence that the rights of the class members
were not protected in this case.
It is well-settled that an issue may not be raised
for the first time on appeal. In order to preserve an issue for appellate
review, the issue must be (1) raised to and ruled upon by the lower court, (2)
by the appellant, (3) in a timely manner, and (4) with sufficient specificity.
See I’On, L.L.C. v. Town of Mt. Pleasant, 338 S.C. 406, 526 S.E.2d 716
(2000); Wilder Corp. v. Wilke, 330 S.C. 71, 497 S.E.2d 731 (1998); Toal,
Vafai, & Muckenfuss, Appellate Practice in South Carolina at 66 (S.C.
In Bazzle, Green Tree first raised the issue
of the absent class members’ due process rights in its motion to vacate the
arbitrator’s final award. Green Tree argued vaguely that “the Arbitrator
violated certain due process protections afforded by the Fourteenth Amendment
and the South Carolina Constitution.” To be preserved, the issue must
have been raised and ruled upon by the trial court at the time the class was
certified. I’On, L.L.C. v. Town of Mt. Pleasant. As Green
Tree gave the trial court no opportunity to address this issue, it is procedurally
Similarly, in Lackey, Green Tree did not
raise the due process rights of the absent class members when it moved to decertify
the class before the arbitrator. Green Tree raised this issue for the
first time when it argued that the arbitrator’s final award should be vacated.
Because it did not give the arbitrator an opportunity to rule upon this issue,
Green Tree failed to preserve it for review before this Court. I’On;
Green Tree has not articulated precisely how it
believes the class members’ due process rights have been violated. In
any case, the class members’ rights appear to have been properly protected by
the notice given to all of them. (24)
Green Tree was given the opportunity to review and comment on the notice sent
and did not voice an objection to it at that time. Although protection
of the due process rights of absent class members is an essential component
in all class actions, and one which may necessitate particular attention in
class-wide arbitrations, Green Tree has not presented the Court with the means
to address it properly. (25)
For the foregoing reasons, we AFFIRM
the arbitrator’s awards in both cases.
MOORE, WALLER, BURNETT, JJ., and Acting Justice
George T. Gregory, Jr., concur.
1. S.C. Code Ann. §§ 37-10-102; 37-10-105 (Supp. 1997).
2. The same arbitrator heard both cases separately.
3. The arbitration clause does not mention class actions in arbitration or otherwise, but Green Tree argues the singular language of the clause stating claims relating to “this contract . . . will be resolved by binding arbitration by an arbitrator selected by us with the consent of you” precludes class-wide arbitration. (emphasis added). Green Tree does not concede that the agreement is “silent.”
4. S.C. Code Ann. §§ 37-10-102; 37-10-105 (Supp. 1997).
5. Although the Lackey plaintiffs moved for class certification in the trial court before Green Tree moved to compel arbitration, the trial court never addressed the motion because it refused to compel arbitration. As discussed, its decision was reversed and the matter was remanded for arbitration before the motion to certify the class was ever considered.
6. 9 U.S.C. §§ 1-208 (1994).
7. Significantly, the district court noted that even if it had jurisdiction, it would decline to intervene in the proceeding before the arbitrator as section 4 of the FAA only authorizes a party to petition a federal court when it has been aggrieved by the refusal of another to arbitrate.
8. The trial court noted in its order that it found class actions and arbitration to be compatible.
9. In a separate action against Green Tree, this Court previously held Green Tree’s arbitration clause was governed by the FAA. Munoz v. Green Tree Fin. Corp., 343 S.C. 531, 542 S.E.2d 360 (2001). The same arbitration clause is at issue here.
10. This was an appeal from an opinion of the California Supreme Court in which, among other things, the California Court held class-wide arbitration permissible under state law when the arbitration agreement was silent regarding class action arbitration. Keating v. Superior Court, 31 Cal.3d 584, 645 P.2d 1192 (Cal. 1982).
11. This federal approach was first enunciated by the Seventh Circuit in Champ v. Siegel Trading Co., Inc., 55 F.3d 269 (7th Cir. 1995).
12. The California approach was first enunciated in Keating v. Superior Court.
13. Several federal circuits have refused to order consolidation of arbitration when the agreement is silent regarding consolidation. See Government of United Kingdom v. Boeing, Co., 998 F. 2d 68 (2d Cir. 1993); American Centennial Ins. v. National Cas. Co., 951 F.2d 107 (6th Cir. 1991); Baesler v. Continental Grain Co., 900 F.2d 1193 (8th Cir. 1990).
14. The United States Supreme Court declined to reach this issue, finding that the California Supreme Court’s decision was based entirely on state law and raised no federal question for them to review (e.g., whether or not the FAA prohibited class-wide arbitration in these circumstances). Southland, 465 U.S. 1, 104 S. Ct. 852, 79 L. Ed. 2d 1.
15. The factors that should be considered include efficiency, equity, and prejudice to the drafting party likely to result from class-wide arbitration. Keating.
16. The court also addressed the consolidation argument and drew an analogy to consolidation despite the Second Circuit’s reversal of its decision relied upon by the California Supreme Court in Keating. The Court of Appeal cited a decision by the First Circuit permitting consolidation where the agreement was silent, finding its reasoning to be more persuasive than those circuits (Second, Fifth, Sixth, and Eleventh) that prohibit consolidation where the agreement is silent. Blue Cross (citing New England Energy Inc. v. Keystone Shipping Co., 855 F.2d 1 (1st Cir. 1988) cert. denied 489 U.S. 1077, 109 S. Ct. 1527, 103 L. Ed. 2d 832 (1989)). The Third Circuit has adopted Champ since Blue Cross was decided. Johnson v. West Suburban Bank, 225 F.3d 366 (3d Cir. 2000).
17. The Mastrobuono Court cited its opinion in Volt Info. Sciences v. Leland Stanford Jr. U. for the proposition that ambiguities as to the scope of the arbitration clause should be resolved in favor of arbitration. Volt, 489 U.S. 468, 109 S. Ct. 1248, 103 L. Ed. 2d 488 (1989)
18. The arbitration agreements contained in the Retail Sales Agreements in Bazzle and Lackey are identical except for one word. The Bazzle clause says the arbitrator will be selected by Green Tree “with the consent of you” and the Lackey clause says “with the consent of Buyer[s].” (Emphasis added).
19. In Deiulemar Compagnia, the Fourth Circuit cited Champ in its discussion of the application of Rule 81 of the Federal Rules of Civil Procedure (“FCRP”) in determining arbitrability. Specifically, the court held, “[t]he lesson of Champ . . . is that Rule 81(a)(3) does not affirmatively authorize application of the federal rules to matters that are incident to an arbitrable dispute.” Deiulemar Compagnia, 198 F.3d at 483. Class-wide arbitration was not an issue in Deiulemar Compagnia, and this Court is still free to adopt the position that the FAA does not prohibit a state court from ordering class-wide arbitration where the agreement is silent.
20. Jean R. Sternlight, As Mandatory Binding Arbitration Meets the Class Action, Will the Class Action Survive?, 42 Wm & Mary L. Rev. 1, 83 (Oct. 2000).
21. Although this present case does not raise this question, we note that preclusion of class-wide or consolidated arbitration in an adhesion contract, even if explicit, undermines principles favoring expeditious and equitable case disposition absent demonstrated prejudice to the drafter of the adhesive contract.
22. Apparently, even the courts which prohibit class-wide arbitration when the agreement is silent acknowledge that class-wide arbitration can be accomplished as a practical matter. See Johnson v. West Suburban Bank, 225 F.3d 366, 377 (3d Cir. 2000) (stating that it appears impossible for a class action to be pursued in an arbitral forum “unless the arbitration agreement contemplates such a procedure”).
23. In addition, Green Tree argues that the arbitrator exceeded his powers when he awarded statutory penalties under S.C. Code Ann. § 37-10-102(a). The Bazzle and Lackey plaintiffs argue that the attorney preference statute upon which their allegations are based authorizes class actions filed before May 2, 1997 to proceed. South Carolina Code Ann. § 37-10-102 requires creditors of loans secured by real estate to ascertain the buyer’s preference as to legal counsel prior to closing. The creditor complies with this requirement as long as it gives notice to the buyer of the preference information in a manner specified in the statute. Section 37-10-102 does not provide the penalties for violation of this requirement; penalties are provided in section 37-10-105. This section was amended in 1997 and now prohibits class actions. In its amendment, however, the legislature provided specifically that “any actions filed as class actions, without regard to certification, prior to May 2, 1997, may proceed, but with remedies pursuant to section 37-10-105 as amended.” 1997 Act No. 99, § 1. As such, the arbitrator did not act in manifest disregard of the law by awarding penalties provided for in the amended section 37-10-105.
24. See Phillips Petroleum Co. v. Shutts, 472 U.S. 797, 105 S. Ct. 2965, 86 L. Ed. 2d 628 (1985) (holding procedure followed whereby descriptive notice sent to by first-class mail to each class member with explanation of right to opt-out fully satisfied due process).
25. For a discussion on protection of due process rights, see Phillips Petroleum v. Shutts; 42 Wm & Mary L. Rev. 1.