Elliott v. KB Home North Carolina, Inc.
752 S.E.2d 694
N.C. Ct. App.2013Background
- KB Home Raleigh-Durham, Inc. (KB Home) built homes for the named plaintiffs and allegedly provided two written contracts for each sale: a New Home Purchase Agreement and a New Home Limited Warranty Agreement, each containing arbitration clauses.
- Plaintiffs filed a putative class action in Dec. 2008 alleging improper installation of HardiPlank siding caused water intrusion and asserted multiple state-law claims.
- KB Home answered, participated extensively in litigation and discovery for over three years, filed a third-party complaint against the siding subcontractor, and did not promptly move to compel arbitration.
- The trial court certified a class in Feb. 2012; KB Home appealed and pursued various stays and petitions, but did not move to compel arbitration until April 12, 2012.
- The trial court found KB Home waived its arbitration rights as to both the named plaintiffs and the unnamed class members because KB Home delayed asserting arbitration, litigated the case, and the plaintiffs incurred substantial costs and prejudice.
- The Court of Appeals affirmed, holding competent evidence supported the waiver finding and that prejudice (approx. $100,000 in fees and related litigation conduct) was sufficient to bar enforcement of arbitration against the class.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether KB Home waived its contractual right to arbitrate with named plaintiffs | KB Home waited >3 years, litigated, and plaintiffs incurred substantial litigation expenses and discovery unavailable in arbitration, so waiver occurred and arbitration is barred | KB Home could and should be permitted to compel arbitration under the contracts; any waiver analysis must consider federal FAA standard | Court held KB Home waived arbitration as to named plaintiffs because its prolonged litigation conduct and delay caused prejudice (significant expenses) and was inconsistent with arbitration rights |
| Whether KB Home waived arbitration as to unnamed (absent) class members | Named plaintiffs’ litigation efforts benefitted the class; allowing arbitration now would strand class counsel effort and expense and negate class certification | KB Home argued it could not have compelled arbitration against unnamed members before class certification and so had no accrued right to waive | Court held waiver applies to unnamed class members too: KB Home’s delay and litigation conduct prejudiced the class and gamesmanship cannot be rewarded |
| Whether federal FAA default standard (9 U.S.C. §3) governed waiver analysis | Plaintiffs relied on state law waiver standard under NCRUAA and Cyclone; public policy favors arbitration but waiver is question of fact | KB Home urged court to apply FAA default/"not in default" standard, citing federal cases | Court held FAA §3 does not apply in state-court proceedings; state law (Cyclone and related North Carolina precedent) governs waiver analysis |
| Whether trial court needed to rule on subcontractor Stock’s arbitration obligation | Plaintiffs: Stock’s arbitration was moot because KB Home waived arbitration rights and was not compelling arbitration | KB Home: trial court should decide Stock’s obligation to arbitrate as relevant to third-party claims | Court declined to separately reach Stock’s obligation because KB Home’s waiver foreclosed compelling arbitration; related argument fails with waiver ruling |
Key Cases Cited
- Cyclone Roofing Co. v. LaFave Co., 312 N.C. 224 (N.C. 1984) (waiver of contractual arbitration is a question of fact; waiver requires prejudice from delay or inconsistent litigation conduct)
- Nucor Corp. v. General Bearing Corp., 333 N.C. 148 (N.C. 1992) (discussing public policy favoring arbitration as an efficient alternative to litigation)
- Prime South Homes v. Byrd, 102 N.C. App. 255 (N.C. Ct. App. 1991) (order denying arbitration is immediately appealable where a substantial right would be lost)
- Estate of Sykes v. Marcaccio, 213 N.C. App. 563 (N.C. Ct. App. 2011) (trial-court findings that litigation expenses and delay support waiver; appellate review of factual waiver findings)