In Green Tree Servicing LLC v. Phelps, No. 2005-CA-001666-MR, 2007 WL 625077 (Ky. App. March 2, 2007), an unpublished opinion, the Kentucky Court of Appeals affirmed a circuit court's refusal to enforce an arbitration agreement between the parties because Green Tree sat too long on its arbitration rights, thereby waiving them.
Green Tree, according to the unanimous three-judge panel opinion, delayed for four years in moving to compel arbitration. The court also held that Green Tree was equitably estopped from enforcing its arbitration rights because the litigation–initiated by Green Tree to foreclose on two promissory notes-- had moved sufficiently far along so that removal from the court to another forum would be unfairly prejudicial to the Phelpses.
Green Tree, a financial services corporation, brought an action against appellees Scott and Pam Phelps on the notes, which secured by real properties in Kentucky’s Pulaski County. After the Phelpses filed an answer and counterclaim, Green Tree moved to compel enforcement of an arbitration agreement between the parties.
The circuit court overruled the motion to compel arbitration, and Green Tree brought an interlocutory appeal as a matter of right.
The issue for the appeals court was whether the arbitration agreement was binding. The court reviewed the circuit court's arbitration decision de novo.
The panel cited the controlling precedent as Conseco v. Wilder, 47 S.W.3d 335 (Ky.App. 2001), which held that a lender could seek to collect on a defaulted loan in the courts, yet later remove the matter to arbitration when the borrower countersued regarding the same loan. The appellate panel, however, pointed out that the Conseco ruling was qualified, and the Phelpses’ matter is factually distinguishable.
The Conseco ruling restricted lenders from unduly delaying an arbitration agreement’s enforcement to the prejudice of the borrower. Thus, once a lender initiates a foreclosure action and moves sufficiently far into litigating a loan dispute in the courts, “at some point, removal from the courts to arbitration is deemed to be waived or is equitably estopped.”
In Conseco, a three-month delay in seeking arbitration was not too long, particularly because there was very little activity in the case during the three months.
But the panel easily distinguished Conseco on a number of points. Beyond the four-year delay in the request for arbitration, there had been considerable activity. Green Tree had initiated the litigation in courts, and the parties were well into the litigation in the circuit court.
Both parties had made numerous filings and amendments. In addition to the initial filing, Green Tree also had moved for default judgment, moved to strike the Phelpses' counterclaim, answered the Phelpses' request for admissions, and answered the interrogatories propounded by the Phelpses.
The Phelpses had answered the Green Tree complaint, filed a counterclaim against Green Tree, moved for summary dismissal, and had requested admissions and interrogatories from Green Tree.
The panel concluded that “judicial economy would be better served by denying Green Tree's belated attempt at forum shopping.” It upheld the lower court’s refusal to compel arbitration, invoking equitable estoppel.
–Lauren Gray, CPR Intern