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Application of Arbitration Clauses
By Latif Zaman

The drafting of arbitration clauses and consistent reading of their provisions is crucial to avoiding litigation. A Louisiana court recently heard a case regarding how broadly to apply an arbitration clause.

Salvador DePaula sold a rental property he owned for $93,000 and mortgaged a second rental property to raise the cash needed to pay his divorce settlement. Employees of Allied Home Mortgage Capital Corporation prepared the closing documents for the sale of the first rental property and brokered the mortgage loan on the second rental property.

After the sale of the first rental property, DePaula’s ex-wife brought him into court to explain why the sale transaction records stated that the sale price was $140,000 – not $93,000. DePaula claimed that an Allied employee provided him with closing documents reflecting a $93,000 purchase price while simultaneously providing the lender fraudulent documents reflecting a $140,000 sale price. DePaula also claimed that an Allied employee recorded fraudulent documents showing the $140, 000 sale price and that Allied pocketed the difference. DePaula and his ex-wife sued Allied claiming that they suffered irreparable harm and embarrassment as a result of Allied’s negligence.

In response, Allied asked the court to dismiss the lawsuit and claimed that DePaula agreed to submit any dispute arising out of the lending/mortgage transactions for disposition through arbitration. Allied argued that Louisiana law favors enforcing arbitration agreements, pointing to an earlier Louisiana Supreme Court decision stating that:

[E]ven when the scope of an arbitration clause is fairly debatable or reasonably in doubt, the court should decide the question of construction in favor of arbitration. The weight of this presumption is heavy and arbitration should not be denied unless it can be said with positive assurance that an arbitration clause is not susceptible of an interpretation that could cover the dispute at issue.

Because of the arbitration agreement and Louisiana law favoring the enforcement of arbitration provisions, Allied argued that the litigation was premature because the parties should be required to arbitrate the dispute. The trial court agreed and dismissed DePaula and his ex-wife’s claims without prejudice.

DePaula appealed to the Court of Appeal of Louisiana and added additional claims against Allied, including fraud. The appellate court reversed the trial court’s decision.

The appellate court pointed out that the arbitration agreement referred only to a mortgage loan on a third rental property owned by DePaula that was not related to the lawsuit. As a result, the arbitration agreement did not apply to DePaula’s claims against Allied related to the first and second rental properties.

The appellate court also pointed out that because DePaula’s ex-wife was not a party to the agreement with Allied she would not be bound by the arbitration agreement, even if the arbitration agreement applied to DePaula’s claims.

Finally, the appellate court explained that by its own terms the arbitration agreement was not effective unless it was signed by both parties. The agreement stated that it was “effective and binding on you and your heirs, successors and assigns and us when it is signed by both parties.” Although DePaula signed the agreement, no employee of Allied had signed. As a result, the agreement was not effective.

The court’s refusal to apply the arbitration clause shows that parties cannot simply expect a court to adopt an expansive interpretation of arbitration clauses.

DePaula v. Allied Home Mortgage Capital Corporation, 2013 La. App. LEXIS 548 (La. App. March 21, 2013)

Latif Zaman is an associate in the Maryland office of Hudson Cook, LLP. He can be reached at 410-782-2346 or by email at lzaman@hudco.com.

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