Case Handyman and Remodeling Services, LLC v. Schuele

GRAEFF, Judge. Appellants, Case Handyman and Remodeling Services, LLC, and Case Design/Remodeling, Inc. (collectively, “Case Handyman”), appeal from an order of the Circuit Court for Baltimore County denying their motion to compel arbitration with appellees, Judith and Albert Schuele (“the Schueles”). On appeal, Case Handyman presents the following two issues for our review, which we have reworded and reorganized as follows: 1. Did the circuit court err in denying the motion to compel arbitration where the Schueles are suing Case Handyman in connection with a contract containing a mandatory arbitration clause that covers “[a]ny controversy/claim” arising from or related to the contract? 2.

Did the circuit court err in denying the motion to compel arbitration without holding a hearing? 1 ⁴⁹ For the reasons that follow, we hold that the trial court erred in denying the motion to compel arbitration. FACTUAL AND PROCEDURAL BACKGROUND On November 21, 2006, the Schueles entered into a home improvement contract with Shaun Arnold, a Baltimore County contractor and franchisee of Case Handyman. 2 Both Case Handyman and the Schueles refer to Mr. Arnold’s home improvement company as Professional Home Repair, Inc. (PHR). 3 PHR signed the contract as “Case Handyman Services.” At the bottom of each page of the contract was a street address in Hunt Valley, Maryland, and the phrase “Independently Owned and Operated.” Pursuant to the agreement, PHR agreed to perform “remodeling and/or repair work” on the Schueles’ home in Tow-son, Maryland, which included the construction of “a second story structure” containing “two bedrooms [and] two full bathrooms____” For this work, the Schueles agreed to pay $165,000, of which they paid 20 percent, or $39, 800, at signing. The Schueles wrote two checks to Case Handyman, one in the amount of $39,800 for the down payment, and the other for $2,700 for “written plans.” The former check was made out to “Case Handyman Remodeling,” while the latter was payable to “Case Handyman Services.” Case Handyman Services endorsed and deposited both checks. The eight-page contract set forth a payment draw schedule and described the work to be performed by the contractor.

It also incorporated a “General Conditions” section, which contained an arbitration clause providing as follows: ⁵⁰ 2. CLAIMS — Any controversy/claim arising out of or relating to this contract or its breach thereof, shall be settled by final and binding arbitration before a single arbitrator in the Baltimore metropolitan area in accordance with the Construction Industry Arbitration Rules of the American Arbitration Association and judgment upon the award rendered by the arbitrator may be entered in any court having jurisdiction thereof. (Emphasis in original.) In March, 2007, Arnold informed the Schueles that “he no longer had their funds, and that he would not begin work.” He added that he was considering filing for bankruptcy protection. The Schueles assert in their complaint that Arnold later filed a “personal bankruptcy, but no corporate franchise with the ‘Case’ name is listed as a party in that bankruptcy matter.” On June 6, 2007, after PHR failed to commence work on the project, and after Arnold filed for personal bankruptcy, the Schueles filed a class action complaint against Case Handyman in the Circuit Court for Baltimore County. 4 The complaint alleged breaches of contract (Counts I and II); fraud (Counts III through V); violations of the Maryland Consumer Protection Act (Count VI); and negligence (Count VII).

In response, on August 15, 2007, Case Handyman filed a “Motion to Dismiss, or in the Alternative, to Compel Arbitration and Stay Proceedings,” along with a memorandum of law in support of its motion, and a request for a hearing. The circuit court, in an order dated September 7, 2007, granted Case Handyman’s motion to dismiss or compel arbitration, without explanation. The order stated that it was issued “[u]pon consideration of ... any hearing,” and noted that “[n]o response [was] filed” by the Schueles. The record indicates, however, that the Schueles filed an opposition to Case Handyman’s motion on August 31, 2007, and, according to Case Handyman, the court held no hearings on its motion. ⁵¹ The docket entries reflect that, on September 17, 2007, the circuit court struck its September 7 order and denied Case Handyman’s motion to dismiss or compel arbitration.

No September 17, 2007 order is in the record, and Case Handyman stated in its Motion to Alter or Amend Judgment that “[t]here is no written order” explaining the basis for the September 17 ruling. The docket entries reflect the following: 0007000 Open Court Proceeding 09/17/07 09/17/07 000 JGT September 14, 2007 Hon. John G. Turnbull, II Order dated 9/7/07 to be stricken, answer was filed. Motion to dismiss or Compel (Paper 4000) - Denied. 0008000 Ruling from Judge Turnbull - Strike 9/14/07 09/18/07 000 TBA Order of 9/7/07 (Answer[ ] was filed) Motion to dismiss or compel, Denied.

Notices sent The parties agree that, despite the language referring to an “Open Court Proceeding,” no hearing was held. On September 24, 2007, Case Handyman filed a Motion to Alter or Amend Judgment and a Request for Hearing, and the Schueles filed an Opposition to Defendants’ Motion to Alter or Amend Judgment on October 11, 2007. By order filed on October 18, 2007, the circuit court denied Case Handyman’s motion. It further denied Case Handyman’s request for a hearing, citing Maryland Rule 2-311. 5 This appeal followed. ⁵² DISCUSSION I. The issue presented in this appeal is whether the circuit court erred in denying Case Handyman’s motion to dismiss or compel arbitration.

Case Handyman offers several reasons why the circuit court erred in denying its motion. Initially, it argues that the arbitration provision in the home improvement contract is enforceable against the Schueles under the doctrine of “equitable estoppel,” for two reasons: (1) their claims are predicated on the contract; and (2) the claims raise allegations of “‘substantially interdependent and concerted misconduct’ ” by PHR and Case Handyman. Moreover, Case Handyman maintains that the court’s ruling denying the motion to compel arbitration contravenes Maryland’s public policy favoring the enforcement of arbitration agreements. Finally, Case Handyman contends that the court erred by “completely dispos[ing] of a claim” after Case Handyman had requested a hearing, in violation of Maryland Rule 2-311(f).

In response, the Schueles argue that the circuit court correctly denied Case Handyman’s motion because they “never agreed to arbitrate any disputes with Case, and Case never entered into any agreement with the Schueles.” In their view, Case Handyman is not entitled to enforce the arbitration provision under the doctrine of equitable estoppel because Case Handyman’s liability is premised upon “its duties under Maryland common law and statutes, not by PHR’s contractual duties.” Moreover, the Schueles argue that Case Handyman has not shown detrimental reliance, a required element of equitable estoppel. Additionally, the Schueles contend that the arbitration provision is unenforceable on the ground that it violates “the provisions of the Code of Maryland Regulations specifically addressing arbitration clauses in home improvement contracts.” With respect to the argument that the circuit court erred in denying the motion without a hearing, the Schueles maintain that Case Handyman “had an adequate opportunity to be heard” in the proceedings below, as the ⁵³ “ ‘hearing’ required under Rule 2-311 need not include oral argument.” We hold that the doctrine of equitable estoppel is applicable here because the Schueles’ claims against Case Handyman are predicated on the contract, which contains a broad arbitration clause, requiring arbitration for “[a]ny controversy/claim arising out of or relating to the contract or its breach thereof....” Accordingly, the Schueles are estopped from refusing arbitration with Case Handyman. We also hold that the contract was in substantial compliance with the Code of Maryland Regulations (“COMAR”) 09.08.01.25, and that, given the state policy favoring arbitration agreements, any deviation from the requirements in COMAR does not defeat the arbitration provision of the contract here. A. Appealability/Standard of Review Maryland Code (2006 Repl.Vol.), § 12-301 of the Courts and Judicial Proceedings Article (“C.J.”), authorizes an appeal of a final judgment. “ ‘[A] trial court’s order either compelling or denying arbitration is a final judgment under C.J. § 12-301.’ ” Harris v. Bridgford, 153 Md.App. 193, 201 , 835 A.2d 253 (2003) (quoting RTKL Assocs. v. Balt.

County, 147 Md.App. 647, 655 , 810 A.2d 512 (2002)). Accordingly, it is an appealable order. See Essex Corp. v. Susan Katharine Tate Burrowbridge, LLC, 178 Md.App. 17, 30 , 940 A.2d 199 (2008) (denial of petition to compel arbitration “is a proper subject of appeal at this juncture”). With respect to the standard of review to be applied, the theory of arbitrability is critical.

Generally, courts review the grant or denial of arbitration de novo. See Questar Homes of Avalon, LLC v. Pillar Const., Inc., 388 Md. 675, 684 , 882 A.2d 288 (2005) (“The trial court’s conclusion as to whether a particular dispute is subject to arbitration is a conclusion of law, which we review de novo.”); Patten Grading & Paving, Inc. v. Skanska USA Building, Inc., 380 F.3d 200, 204 (4th Cir.2004) (denial of a “motion for stay and to compel arbitration is reviewed de novo”). ⁵⁴ When the application of equitable estoppel is involved, however, courts are not in agreement on the appropriate standard of review. Some courts continue to apply de novo review. See JLM Industries, Inc. v. Stolt-Nielsen SA, 387 F.3d 163, 169 (2nd Cir.2004); MS Dealer Service Corp. v. Franklin, 177 F.3d 942, 946 (11th Cir.1999); Peach v. CIM Ins.

Corp., 352 Ill.App.3d 691, 694 , 287 Ill.Dec. 701, 704 , 816 N.E.2d 668, 671 (2004). Other courts hold that, when the decision to compel or deny arbitration is based on principles of equitable estoppel, the decision should be reviewed for abuse of discretion. See Am. Bankers Ins.

Group Inc. v. Long, 453 F.3d 623, 629 (2006); Grigson v. Creative Artists Agency L.L.C., 210 F.3d 524, 528 (2000). 6 And one court has held that the standard of review depends on whether a factual dispute needs to be resolved to determine if equitable estoppel principles compel arbitration. Metalclad Corp. v. Ventana Envtl. Organizational P’ship, 109 Cal.App.4th 1705, 1716 , 1 Cal. Rptr.3d 328 (2003).

In Metalclad, the court held that, if the determination on equitable estoppel is based on the resolution of disputed facts, the decision is reviewed for substantial evidence, but if there is no dispute of facts, but only a dispute on the legal effect of those facts, de novo review is appropriate. Id. at 1716 , 1 Cal.Rptr.3d 328 . We adopt the approach taken in Metalclad. Here, there is no dispute of facts regarding the issue of equitable estoppel.

Rather, the issue is whether the Schueles’ complaint is sufficiently predicated on the contract such that equitable estoppel prevents them from refusing to arbitrate their claim against Case Handyman. We will review this issue de novo. B. Applicable Law In determining whether the circuit court erred in denying the motion to compel arbitration, we begin with the threshold inquiry of whether the Federal Arbitration Act (FAA), 9 U.S.C. §§ 1 et. seq., or the Maryland Uniform ⁵⁵ Arbitration Act (MUAA), C.J., §§ 3-201 et seq., applies to this case. “When an agreement’s choice of law clause provides that disputes will be resolved in accordance with state law ... the selected state’s arbitration act governs issues concerning arbitration under the agreement’s arbitration clause.” Rourke v. Amchem Products, Inc., 153 Md.App. 91, 119 , 835 A.2d 193 (2003). Here, however, the home improvement contract contained no choice of law provision, so we look to the general rule regarding the applicable law for interpreting arbitration provisions.

The FAA provides that a written provision in a “contract evidencing a transaction involving commerce to settle by arbitration a controversy ... shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.” 9 U.S.C. § 2 . In Southland Corp. v. Keating, 465 U.S. 1, 16 , 104 S.Ct. 852 , 79 L.Ed.2d 1 (1984), the United States Supreme Court observed that, in enacting the FAA, Congress declared a policy in favor of arbitration and foreclosed state legislative attempts to require a judicial forum for the resolution of claims that the parties agreed to resolve by arbitration. As this Court has explained, the FAA “is applicable to private contracts made and enforced in Maryland when ... the contract affects interstate commerce.” Mattingly v. Hughes Electronics Corp., 147 Md.App. 624, 632 , 810 A.2d 498 (2002). Case Handyman contends that home improvement contracts, which involve the purchase of materials and payment of taxes, necessarily involve interstate commerce.

The Schueles have not argued otherwise, and there is support for a broad interpretation of the requirement that the contract “affects interstate commerce.” See Walther v. Sovereign Bank, 386 Md. 412, 423 , 872 A.2d 735 (2005) (“FAA applies to nearly all arbitration agreements.... ”). There was, however, no evidence presented as to how the contract “affects interstate commerce,” presumably because there was no hearing on the motion to compel arbitration. But, even if the present record does not permit a finding ⁵⁶ that the FAA applies in this case, application of the MUAA provides the same result. The MUAA states, in nearly identical language to the FAA, that “[a] written agreement to submit any existing controversy to arbitration or a provision in a written contract to submit to arbitration any controversy arising between the parties in the future is valid and enforceable, and is irrevocable, except upon grounds that exist at law or in equity for the revocation of a contract.” C.J., § 3-206.

Indeed, the MUAA has been called the “ ‘State analogue ... to the Federal Arbitration Act.’ ” Walther, 386 Md. at 424 , 872 A.2d 735 (quoting Holmes v. Coverall North America, Inc., 336 Md. 534, 541 , 649 A.2d 365 (1994)). Both the state and federal acts establish a policy favoring enforcement of arbitration agreements. Holmes , 336 Md. at 541 , 649 A.2d 365 (“The same policy favoring enforcement of arbitration agreements is present in both our own and the federal acts”). Accordingly, the Maryland appellate courts “rely on decisions interpreting the Federal Arbitration Act____” Walther, 386 Md. at 424 , 872 A.2d 735 .

The Schueles contend, however, that application of equitable estoppel principles to an arbitration agreement issue is governed by state, not federal, law. In Walther, 386 Md. at 423 , 872 A.2d 735 , the Court of Appeals noted that, although Section 2 of the FAA pre-empts a state law that “withdraws the power to enforce arbitration agreements,” state courts are not bound by the procedural provisions of the FAA. Indeed, the Supreme Court has stated that state law determines questions “concerning the validity, revocability, and enforceability of contracts generally.” Perry v. Thomas, 482 U.S. 483 , 492 n. 9, 107 S.Ct. 2520 , 96 L.Ed.2d 426 (1987). Thus, “[generally applicable contract defenses, such as fraud, duress, or unconscionability may be applied to invalidate arbitration agreements without contravening § 2.... ” Doctor’s Associates, Inc. v. Casarotto, 517 U.S. 681, 682 , 116 S.Ct. 1652 , 134 L.Ed.2d 902 (1996).

The FAA, however, creates a “body of federal substantive law of arbitrability.” Moses H. Cone Memorial Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 24 , 103 S.Ct. 927 , 74 L.Ed.2d 765 (1983). And, as noted, Maryland ⁵⁷ appellate courts rely on decisions interpreting the FAA. Walther, 386 Md. at 424 , 872 A.2d 735 .

In this case, there is no issue regarding the contract’s validity. And, given the breadth of the arbitration provision, providing for arbitration of “[a]ny controversy/claim arising out of or relating to this contract or its breach,” the question is not what is covered by the agreement, but rather, who may invoke it. To resolve the issue whether a non-signatory can enforce a contract’s arbitration provision under the doctrine of equitable estoppel, courts look to the federal substantive law of arbitrability. See R.J. Griffin & Co. v. Beach Club II Homeowners Ass’n, 384 F.3d 157 , 160 n. 1 (4th Cir.2004); International Paper Co. v. Schwabedissen Maschinen & Anlagen GMBH, 206 F.3d 411 , 417 n. 4 (4th Cir.2000); Metalclad Corp., 109 Cal.App.4th at 1712 , 1 Cal.Rptr.3d 328 .

C. Principles of Equitable Estoppel The Schueles argue that they are not bound by the arbitration provision in the contract because they never entered into any agreement to arbitrate disputes with Case Handyman. Case Handyman agrees that it is a non-signatory to the contract, but it argues that it may enforce the contract’s arbitration provision as a non-signatory under the doctrine of equitable estoppel. We agree with Case Handyman that principles of equitable estoppel preclude the Schueles from avoiding the arbitration requirement in the contract. “Generally, ‘arbitration is a matter of contract and a party cannot be required to submit to arbitration any dispute which [it] has not agreed’ to arbitrate.” R.J. Griffin & Co., 384 F.3d at 160 (quoting International Paper Co., 206 F.3d at 416 ). “The obligation and entitlement to arbitrate,” however, “‘does not attach only to one who has personally signed the written arbitration provision,’ ” and “ ‘[w]ell-established common law principles dictate that in an appropriate case a nonsignatory can enforce, or be bound by, an arbitration provision within a contract executed by other parties.’ ” Washington Square Securities, Inc. v. Aune, 385 F.3d 432, 435 (4th Cir.2004) (quoting International Paper Co., 206 F.3d at ⁵⁸ 416-17). The principle underlying the theory of equitable estoppel “rests on a simple proposition: it is unfair for a party to rely on a contract when it works to its advantage, and repudiate it when it works to its disadvantage.” Am.

Bankers Ins. Group, Inc., 453 F.3d at 627 (quoting Wachovia Bank, Nat. Ass’n v. Schmidt, 445 F.3d 762, 769 (4th Cir.2006)). Several federal courts have held that principles of equitable estoppel allow non-signatories to a contract to compel arbitration.

In MS Dealer Service Corp., 177 F.3d at 944-47 , the United States Court of Appeals for the Eleventh Circuit considered whether Franklin, an automobile purchaser, was equitably estopped from avoiding arbitration with MS Dealer Service Corporation (“MS Dealer”), pursuant to an arbitration provision in a buyers order to which only Franklin and the car dealership were signatories. The buyers order incorporated by reference a “Retail Installment Contract,” in which Franklin was charged $990 for a service contract through MS Dealer. Id. at 944-45 . The buyers order contained an arbitration clause providing, in part, that “ ‘all disputes and controversies of every kind and nature between buyer and [the dealership] arising out of or in connection with the purchase of this vehicle will be resolved by arbitration ...”’ pursuant to the provisions of the FAA.

Id. at 944 . Problems with the vehicle ensued, and Franklin filed suit in state court against the dealership and MS Dealer, alleging breach of contract, breach of warranty, fraud, and conspiracy. Id. at 944-45 . Franklin claimed that MS Dealer and the dealership conspired to charge an excessive amount for the service contract.

Id. at 945 . MS Dealer filed a petition in federal court to compel arbitration, which the district court dismissed on the ground that MS Dealer was not a signatory to the buyers order, and, therefore, lacked standing to compel arbitration. Id. at 945-46 . The Eleventh Circuit reversed and remanded, finding that MS Dealer could compel arbitration under the doctrine of equitable estoppel.

The court stated: Existing case law demonstrates that equitable estoppel allows a nonsignatory to compel arbitration in two different ⁵⁹ circumstances. First, equitable estoppel applies when the signatory to a written agreement containing an arbitration clause “must rely on the terms of the written agreement in asserting [its] claims” against the nonsignatory. When each of a signatory’s claims against a nonsignatory “makes reference to” or “presumes the existence of’ the written agreement, the signatory’s claims “arise[] out of and relate[] directly to the [written] agreement,” and arbitration is appropriate. Second, “application of equitable estoppel is warranted ... when the signatory [to the contract containing the arbitration clause] raises allegations of ... substantially interdependent and concerted misconduct by both the nonsignatory and one or more of the signatories to the contract.” Id. at 947 (citations omitted).

The court noted that both of the circumstances giving rise to equitable estoppel existed in that case. Id. Each of Franklin’s claims against MS Dealer depended on her contractual obligations under the service contract. Id. at 947-48 .

Acknowledging that Franklin “cast all of her claims against MS Dealer as tort claims rather than contract claims,” the court explained that “ ‘a party may not avoid broad language in an arbitration clause by attempting to cast its complaint in tort rather than contract.’ ” Id. at 948 , n. 4 (quoting Sunkist Soft Drinks, Inc. v. Sunkist Growers, Inc., 10 F.3d 753, 758 (11th Cir.1993)). The court further noted that the arbitration clause in the buyers order “specifically requires arbitration of ‘[a]ll disputes and controversies of every kind and nature ... arising out of or in connection with this contract, its subject matter or its negotiation, as to ... any claim alleging fraud in fact [or] fraud in the inducement....’ ” Id. With respect to the second circumstance permitting equitable estoppel, the court found that Franklin’s claims against the car dealership and MS Dealer were based on the same facts and were “ ‘inherently inseparable.’ ” Id. at 948 (quoting Sunkist Soft Drinks, 10 F.3d at 757 ). Accordingly, the Eleventh Circuit held that Franklin was estopped from avoiding arbitration with MS Dealer, and it reversed the lower court’s ⁶⁰ order and remanded with instructions to grant MS Dealer’s petition to compel arbitration.

Id. Accord Sunkist Soft Drinks, 10 F.3d at 757 (licensor-signatory was equitably es-topped from avoiding arbitration with non-signatory parent corporation because its claims were ‘“intimately founded in and intertwined with the underlying contract obligations’ ”) (quoting McBro Planning & Dev. Co. v. Triangle Elec. Constr.

Co., Inc., 741 F.2d 342, 344 (11th Cir.1984)). Similarly, in Am. Bankers, 453 F.3d at 630 , the United States Court of Appeals for the Fourth Circuit held that a signatory to an agreement containing an arbitration clause was equitably estopped from denying that it was bound to arbitrate with a non-signatory. There, the Longs purchased a $75,000 promissory note, which promised a ten-percent return, from Thaxon Life Partners (TLP).

Id. at 625 . The parties executed a Subscription Agreement with TLP containing an arbitration clause providing that “ ‘any dispute, controversy or claim arising out of or in connection with, or relating to, any subscription of the Note’ ... shall be subject to arbitration.” Id. TLP filed for bankruptcy, and notified the Longs and others that their investments were effectively lost. Id.

The Longs filed suit against American Bankers Insurance Group (ABIG), TLP’s underwriter and a non-signatory to the Subscription