Clear Arbitration Provision, Negotiated By Sophisticated Party While Represented By Counsel Deemed Enforceable

by: Peter J. Gallagher (@pjsgallagher) (LinkedIn)

The headline of this post is a little like "Dog bites man." But, given the recent trend in New Jersey of "man bites dog" type cases where courts have invalidated arbitration provisions that once seemed unambiguous (look here, here, and here for examples), the headline should make more sense.

In Columbus Circle NJ LLC v. Island Construction Co., LLC, the Appellate Division enforced an arbitration provision contained in a construction contract. Plaintiff was a single-member LLC that retained defendant to build a $1.9 million home on the bay in Avalon, New Jersey. Plaintiff's representative circulated an initial draft contract for the project that used the standard American Institute of Architects (AIA) forms. These forms contain a provision entitled "BINDING DISPUTE RESOLUTION," which, as the name suggests, requires the parties to choose "the method of binding dispute resolution" for any claims between them that are not resolved by mediation. In the draft it circulated, plaintiff's representative checked off "Arbitration pursuant to Section 15.4 of AIA Document A201-2007," rather than "Litigation in a court of competent jurisdiction." Before it was signed, the attorney for the LLC's sole member reviewed the draft and proposed changes, as did defendant, but none of these changes appear to have altered the dispute resolution provision.

During construction, disagreements arose between the parties regarding the cost of the project, leading both parties to terminate the contract. When mediation apparently failed, defendant filed a demand for arbitration. Three months later, plaintiff sued in state court. Defendant successfully moved to dismiss plaintiff's complaint and compel arbitration, and Plaintiff appealed.

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Employer May Be Able To Enforce Arbitration Agreement That Employee Never Signed

In its recent Seriki v. Uniqlo New Jersey, LLC opinion, the Appellate Division faced the following question: "if an employee does not sign an arbitration agreement, can it still be enforced against him"? (Not quite as philosophical as the famous, "if tree falls in a forest and no one is around to hear it, does it make a sound?" but more relevant to my daily life.) The Appellate Division's answer was a resounding "maybe."

In Seriki, plaintiff worked as a loss-prevention associate for defendant, a retail department store. A few months after he started the job, plaintiff attended a training session at defendant's human resources office. During the meeting, plaintiff and the other attendees received a revised copy of plaintiff's employee handbook. They also received a four-page agreement entitled, "Mutual Agreement to Arbitrate Claims" (the "Agreement"). As the name suggests, the Agreement was a broad agreement to arbitrate all claims between plaintiff and its employees. It also contained the following provision:

Should Employee not sign this Agreement, continuing Employee's employment for a period of [thirty] days after Employee's receipt of this Agreement constitutes mutual acceptance of the terms of the Agreement commencing upon completion of that [thirty]-day period.

Defendant claimed that it explained the Agreement to plaintiff and the other attendees at the meeting. Plaintiff disagreed, claiming that the Agreement was never discussed. Plaintiff did not sign the Agreement, but continued to work for defendant for four months after the meeting.

After plaintiff was fired, he sued, alleging wrongful discharge. Defendant moved to compel arbitration. The trial court denied the motion, concluding that plaintiff was not bound by the Agreement because he did not sign it. Defendant appealed.

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“Get Your Priorities Straight!” Refinanced First Mortgage Maintains Priority Over Junior Liens

by: Peter J. Gallagher (@pjsgallagher)

New Jersey is a "race-notice" jurisdiction when it comes to mortgage priority. What this means, in its simplest terms, is that if Party A obtains a mortgage on a piece of property before Party B does, but Party B records its mortgage first (i.e., it wins the "race" to the clerk's office), then Party B's mortgage has priority unless Party B had "actual knowledge" of Party A's previously-acquired interest. But what happens when a first mortgage is refinanced? The original mortgage is technically paid off and replaced with the refinanced mortgage. Does this "newly-recorded," refinanced mortgage maintain the first priority status of the original mortgage or does it go to the back of the line? The answer to this question — as discussed in a recent decision from the Law Division, Wells Fargo Bank, NA v. Kim — is that the refinanced mortgage generally takes the original mortgage's first priority position.

In Kim, defendant borrowed $328,000 from Washington Mutual Bank, FA ("WaMu") to buy a home and secured repayment of this loan with a purchase money mortgage on the home. Later, defendant obtained a home equity loan from Plaintiff, Wells Fargo Bank, N.A. ("Wells Fargo") that was also secured by a mortgage on defendant's home. Defendant then refinanced her original, purchase money mortgage with WaMu. Defendant used the entire amount of the refinance loan, which was secured by a mortgage on defendant's home, to pay off the original purchase money mortgage (i.e., she did not borrow and more money through the refinance) and the purchase money mortgage was discharged of record. WaMu did not obtain a subordination of the Wells Fargo mortgage in connection with the refinance.

Approximately three years after the refinancing, defendant defaulted on the Wells Fargo home equity loan, and Wells Fargo moved to foreclose. Defendant did not file a contesting answer and the court entered default against her. However, U.S. Bank Trust, N.A. ("U.S. Bank"), the successor to WaMu's interest in the refinance loan and mortgage, filed a contesting answer claiming that its mortgage stood in first priority position ahead of Wells Fargo's mortgage.

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