Court Opinion

ID: 6498654
Source: CourtListenerOpinion
Date Created: 2022-07-08 14:05:28.46352+00
Date Added: 2024-06-11T08:51:06.991603
License: Public Domain

RENDERED: JULY 1, 2022; 10:00 A.M.
                        NOT TO BE PUBLISHED

                Commonwealth of Kentucky
                          Court of Appeals

                             NO. 2021-CA-0532-MR

TOTAL HOME PROTECTION                                               APPELLANT

                APPEAL FROM JEFFERSON CIRCUIT COURT
v.                HONORABLE MARY M. SHAW, JUDGE
                        ACTION NO. 19-CI-001489

ANDREW J. SCHEUMANN AND
CHAPIN E. SCHEUMANN                                                 APPELLEES

                               OPINION
                       REVERSING AND REMANDING

                                  ** ** ** ** **

BEFORE: CETRULO, DIXON, AND LAMBERT, JUDGES.

CETRULO, JUDGE: Appellant Total Home Protection (“THP”) appeals the

Jefferson Circuit Court order denying its motion to dismiss and to compel

arbitration. Upon review of the record and relevant caselaw, we reverse and

remand for findings of fact and conclusions of law.
               BACKGROUND AND PROCEDURAL HISTORY

             In June 2018, Appellees Andrew and Chapin Scheumann (together,

the “Scheumanns”) purchased their home in Louisville and entered into a Platinum

Home Warranty Agreement (“Agreement”) with THP. The Agreement stated that

THP would cover the costs to repair or replace covered systems outlined in the

plan (e.g., the water heater, heating system, refrigerator, etc.). Section IX of the

Agreement provided that the parties would resolve all disputes arising under the

contract through mandatory arbitration; the Scheumanns would waive certain types

of damages; limit their recovery to $1,500; waive their right to a jury trial; and

waive their right to litigate any disputes arising under the contract in the courts. In

pertinent part, the Agreement stated:

             IX. MEDIATION

             ...

             A.     Any and all disputes, claims and causes of action
                    arising out of or connected with this Agreement
                    shall be resolved individually, without resort to
                    any form of class action, and exclusively by the
                    American Arbitration Association under its
                    Commercial Mediation Rules. Controversies or
                    claims shall be submitted to arbitration regardless
                    of the theory under which they arise, including
                    without limitation contract, tort, common law,
                    statutory, or regulatory duties or liability.

             B.     Any and all claims, judgments and awards shall be
                    limited to actual out of pocket costs incurred to a

                                          -2-
                   maximum of $1500 per claim, but in no event
                   attorneys’ fees.

             C.    Under no circumstances will you be permitted to
                   obtain awards for, and you hereby waive all rights
                   to claims, indirect, punitive, incidental and
                   consequential damages and any other damages,
                   other than for actual out-of-pocket expenses, and
                   any and all rights to have damages multiplied or
                   otherwise increased. . . .

             ...

             D.    . . . THE PARTIES UNDERSTAND THAT
                   THEY WOULD HAVE HAD A RIGHT TO
                   LITIGATE THROUGH A COURT, TO HAVE A
                   JUDGE OR JURY DECIDE THEIR CASE AND
                   TO BE PARTY TO A CLASS OR
                   REPRESENTATIVE ACTION, HOWEVER,
                   THEY UNDERSTAND AND CHOOSE TO
                   HAVE ANY CLAIMS DECIDED
                   INDIVIDUALLY, THROUGH ARBITRATION.

             In January 2019, the Scheumanns’ heating system stopped working

properly, so they alerted THP of the issues and requested that THP repair it under

the Agreement. In accordance with the Agreement, THP assigned a contractor to

address the Scheumanns’ request. After some apparent poor communication and

incompetent work on the part of the contractor, the contractor failed to resolve the

issues. As a result, the Scheumanns were without a functioning furnace for a week

and bought a space heater to keep their residence warm.

             After two months of disagreements and miscommunication between

the parties, on March 8, 2019, the Scheumanns filed a complaint against THP and

                                         -3-
the contractor1 in Jefferson Circuit Court, despite the arbitration agreement. The

first amended complaint,2 amended on March 21, 2019, alleged THP transacted

business without authority; violated the Consumer Protection Act; breached the

Agreement; committed two counts of fraudulent misrepresentation; negligently

hired or retained the contractor; committed negligence; committed gross

negligence; and that Section IX of the Agreement, including the arbitration clause,

was unconstitutional.

               After alleged difficulties serving process to THP – in which THP later

filed affidavits arguing it was never properly served – the Scheumanns filed an

affidavit claiming THP was properly served on March 26, 2019. Therefore, the

Scheumanns claimed a responsive pleading was due no later than April 15, 2019.

When they did not receive as much, they moved for default judgment on April 17,

2019. The circuit court then granted default judgment on April 19, 2019.

               In pertinent part, the tendered order said, “Default Judgment is entered

in favor of [the Scheumanns] and against [THP] on Count XVI of [the

Scheumanns’] First Amended Complaint, Constitutionality of Section IX of

[Agreement].” It further detailed that it would issue a subsequent order concerning

1
  As the claims against the contractor are not before us, we will focus only on the claims
involving THP.
2
 The first amended complaint updated THP’s address after service to the original address was
unsuccessful.

                                               -4-
a hearing on damages. After the damages hearing, the circuit court issued an order

in October 2019 that awarded the Scheumanns a total of $108,901.12, detailed as

follows: $665.17 in actual damages (the maximum allotted); $25,000 for mental

and physical pain and suffering of Andrew Scheumann; $25,000 for mental and

physical pain and suffering of Chapin Scheumann; $50,000 in punitive damages;

$998 for violating KRS3 14A.9-0104 (the maximum allotted); and $7,237.95 for

legal fees and expenses.5

                At some point thereafter, with that damages award in hand, the

Scheumanns filed the judgment in THP’s home state to recover the listed damages.

At that point, THP claimed it first became aware of the Scheumanns’ case against

it. As such, THP filed a motion to set aside and vacate the default judgment in

April 2020. In that motion, THP argued, in pertinent part, that it was not properly

served and that the circuit court did not have proper jurisdiction because the

Scheumanns agreed to mandatory arbitration. Further, THP argued that the

judgment awarding damages should be vacated because the court made no findings

of fact and conclusions of law to support the award and the vast majority of the

3
    Kentucky Revised Statute.
4
 This statute, titled “Authority to transact business required; certificate of authority required for
award of state contract; exception for foreign insurer[,]” governed THP’s business transactions in
Kentucky.
5
 Although the Scheumanns are pro se appellees, and were pro se plaintiffs below, Chapin
Scheumann is a licensed and practicing attorney in Kentucky and billed her hours accordingly.

                                                -5-
award – aside from $665.17 in actual damages – was specifically prohibited by the

Agreement.

                 The next month, in May 2020, the circuit court entered an order

setting aside and vacating the default judgment, in part (“Order Vacating in Part”).

It ordered “that the 4/19/19 Order Granting Default Judgment stands, however, the

Order of Judgment entered in this proceeding on October 18, 2019, as to damages,

in favor of the [Scheumanns] is set aside, and vacated and declared null and void.

IT IS FURTHER ORDERED that [THP] is hereby granted a new hearing on

damages.” The Order Vacating in Part did not contain “final and appealable”

language.

                 THP then filed a motion to dismiss and to compel arbitration in

February 2021.6 THP asked the circuit court to dismiss the case and compel the

parties to arbitrate as required under KRS 417.060(1). In April 2021, the circuit

court denied THP’s motion, stating it had previously held in its default judgment

that the arbitration provision in the Agreement was unconstitutional. In so

concluding, the circuit court determined the “procedural posture of this action

compels denial of THP’s motion.”

                 THP now appeals the denial of its motion to compel arbitration,

arguing that the circuit court erred when it (1) failed to enforce a valid arbitration

6
    The status of the new hearing on damages is not clear in the record.

                                                 -6-
agreement; (2) found the arbitration provision was unconstitutional; and (3) failed

to provide appropriate findings of fact and conclusions of law.

                              STANDARD OF REVIEW

                [A]n order denying a motion to compel arbitration is
                immediately appealable. KRS 417.220(1). See also
                Conseco Finance Servicing Corp. v. Wilder, 47 S.W.3d
                335, 340 (Ky. App. 2001). The enforcement and effect
                of an arbitration agreement is governed by the Kentucky
                Uniform Arbitration Act (KUAA), KRS 417.045 et seq.,
                and the Federal Arbitration Act, (FAA) 9 U.S.C.[7] §§ 1 et
                seq. “Both Acts evince a legislative policy favoring
                arbitration agreements, or at least shielding them from
                disfavor.” Ping v. Beverly Enterprises, Inc., 376 S.W.3d
                581, 588 (Ky. 2012).

                       But under both Acts, a party seeking to compel
                arbitration has the initial burden of establishing the
                existence of a valid agreement to arbitrate. Id. at 589.
                That question is controlled by state law rules of contract
                formation. Id. at 590. The FAA does not preempt state
                law contract principles, including matters concerning the
                authority of an agent to enter into a contract and which
                parties may be bound by that contract. Arthur Andersen
                LLP v. Carlisle, 556 U.S. 624, 630-31, 129 S. Ct. 1896,
                1902, 173 L. Ed. 2d 832 (2009). Since this matter is
                entirely an issue of law, our standard of review is de
                novo. Conseco, 47 S.W.3d at 340.

New Meadowview Health and Rehab. Ctr., LLC v. Booker, 550 S.W.3d 56, 58 (Ky.

App. 2018) (footnote omitted).

7
    United States Code.

                                            -7-
                                         ANALYSIS

               As an initial matter, the Scheumanns argue that this Court does not

have the requisite jurisdiction to review this claim under Pavkovich v. Shenouda,

280 S.W.3d 584 (Ky. App. 2009). We do not agree. Alternatively, THP argues

this appeal is properly before this Court and that the circuit court’s denial of its

motion to compel arbitration did not comply with Kentucky law. We agree.

               A.     Jurisdiction

               Before we analyze THP’s claims regarding the circuit court’s denial

of it motion to compel arbitration, we will address the Scheumanns’ argument that

this Court does not have proper authority to review such claims. Citing to this

Court’s decision in Pavkovich, the Scheumanns claim THP forfeited its

opportunity to challenge the circuit court’s findings regarding the arbitration clause

when it failed to appeal the Order Vacating in Part. Therefore, the Scheumanns

argue that the arbitration issue is not properly before this Court. We find the

Scheumanns’ argument to be unconvincing under Pavkovich.

               In Pavkovich, the plaintiffs filed a motion to amend their complaint in

hopes of invalidating an arbitration clause the circuit court had previously upheld.8

Id. at 586. After hearing the motion, the circuit court denied it and confirmed its

8
  The plaintiffs learned they needed to submit a claim for fraud in the inducement of the contract
in order to attack the validity of the arbitration agreement. Id. A standard fraud claim would not
suffice, as they had previously attempted. Id.

                                               -8-
referral to arbitration. Id. The plaintiffs did not appeal that order. Id. About a

week later, the circuit court “ORDERED AND ADJUDGED that the Plaintiffs’

Complaint be and hereby is DISMISSED WITH PREJUDICE.” Id. The judge

then wrote in the order that the parties were referred to arbitration. Id. This Court

explained that such order “was a final and appealable judgment” under CR9 54.01.

Id. Therefore, when the plaintiffs failed to “file a motion to alter, amend or vacate

th[at] judgment within ten (10) days as required by CR 59.05[ ] [n]or . . . file a

notice of appeal of th[e] judgment within thirty (30) days . . . as required by CR

73.02(1)(a)[,]” the circuit court “no longer had subject matter jurisdiction.” Id.

                Instead, the plaintiffs waited a few months then filed a motion asking

the circuit court “to order the parties to commence arbitration[,]” toll the

“contractual requirement for notice of arbitration[,]” and amend its previous order

to say the same. Id. However, the circuit court explained that it had already

referred the claims to arbitration; therefore, the circuit court “no longer [had]

jurisdiction over any of the issues outlined in [the] action and, accordingly,

w[ould] refer all claims to arbitration.” Id. at 586-87. The plaintiffs then appealed

that order. Id. at 587.

                In the meantime, the plaintiffs finally provided arbitration notice to

the appropriate parties; however, by that time, three and a half years had passed

9
    Kentucky Rule of Civil Procedure.

                                            -9-
since the plaintiffs discovered their claim, so the arbitrator dismissed the

proceedings. Id. The plaintiffs then tried to vacate that arbitration award with the

circuit court instead of filing a new action under KRS 417.160.10 Id. This Court

found that the matter involving the circuit court was already final by that point;

therefore, as it had stated, it no longer had subject matter jurisdiction. Id. By

extension, “this Court did not obtain jurisdiction to address that dismissal.” Id.

Further, this Court found:

                     “[T]he source of the court’s jurisdiction to act in
              arbitration matters is wholly derived from the Uniform
              Arbitration Act.” Artrip v. Samons Const., Inc., 54
              S.W.3d 169, 172 (Ky. App. 2001). And so we look to
              the Act.

              KRS 417.060(3) and (4) contemplate the situation the
              [plaintiffs] faced in August 2004.

                      (3) If an issue referable to arbitration under the
                      alleged agreement is involved in an action or
                      proceeding pending in a court having jurisdiction
                      to hear applications under subsection (1) of this
                      section [to compel arbitration], the application
                      shall be made therein. Otherwise and subject
                      to KRS 417.210, the application may be made in
                      any court of competent jurisdiction.

                      (4) Any action or proceeding involving an issue
                      subject to arbitration shall be stayed if an order for
                      arbitration or an application therefor has been
                      made under this section; or if the issue is
                      severable, the stay may be with respect thereto

10
   KRS 417.160 “provides that a Court may vacate the decision of an arbitrator under specific
circumstances.” Pavkovich, 280 S.W.3d at 587.

                                              -10-
                    only. When the application is made in such action
                    or proceeding, the order for arbitration shall
                    include such stay.

                    Unfortunately, the [plaintiffs] did not seek
             application to compel arbitration while the Jefferson
             Circuit Court still retained jurisdiction. Had they done
             so, the court would have had to comply with KRS
             417.060(3) and (4). Instead, the court ordered all claims
             dismissed with prejudice, and no appeal was taken from
             the order. This left the [plaintiffs] in the same position
             with regard to the arbitration as if no litigation had ever
             been filed. Consequently, when they were displeased
             with the arbitrator’s determination, they were required to
             invoke the jurisdiction of the Jefferson Circuit Court all
             over again.

Id.

             Citing Pavkovich, the Scheumanns claim the circuit court here also

lost its jurisdiction, thereby removing this Court’s jurisdiction to review the claims.

However, Pavkovich is clearly distinguishable from the case before us. Here, the

circuit court neither dismissed the claims nor referred the claims to arbitration. In

fact, the record does not suggest that the circuit court ever reviewed the Agreement

or arbitration clause at all. Instead, the circuit court granted default judgment on

the Scheumanns’ claims wholesale and failed to address the specific issue of

arbitrability at any point throughout the proceedings below.

             Because the circuit court did not refer the claims to arbitration nor

dismiss the claims, the attempted comparison to Pavkovich is unconvincing.

                                         -11-
Therefore, the circuit court retained its jurisdiction over the Scheumanns’ claims

when it denied THP’s motion to compel arbitration.

               B.      Lawfulness of Appeal

               Now, we turn to THP’s claims. First, THP argues that it properly

appealed the denial of its motion to compel arbitration; and second, that the circuit

court’s denial did not comply with Kentucky caselaw. Alternatively, the

Scheumanns argue that THP should not have appealed the motion to compel

arbitration and instead should have appealed the Order Vacating in Part.

               Generally, for this Court to review an order, it must be final and

appealable. CR 54.02.11 Typically, those “magic words” – final and appealable –

must be present in the order. Id. However, “[t]he magic words required by CR

54.02 for finality” are not required when the order is final in spirit and leaves

“nothing to adjudicate regarding the rights and priorities of the parties.” Security

Federal Sav. & Loan Ass’n of Mayfield v. Nesler, 697 S.W.2d 136, 138-39 (Ky.

1985).12 While the Scheumanns insist THP should have appealed the Order

11
   In pertinent part, CR 54.02 states, “The judgment shall recite such determination and shall
recite that the judgment is final. In the absence of such recital, any order or other form of
decision, however designated, which adjudicates less than all the claims or the rights and
liabilities of less than all the parties shall not terminate the action as to any of the claims or
parties, and the order or other form of decision is interlocutory and subject to revision at any time
before the entry of judgment adjudicating all the claims and the rights and liabilities of all the
parties.”
12
  There, our Supreme Court determined the order was final and appealable because it “set out
the validity, amount and priority of each of the claims of the parties . . . .” Id. at 138.

                                                -12-
Vacating in Part, THP argues that that order was not final and appealable.

Therefore, THP argues it was proper to file a motion to compel arbitration and then

appeal its denial. We agree.

             Not only did the Order Vacating in Part not contain the “final and

appealable” language, but it also did not resolve all of the claims and liabilities in

the lawsuit. The order specifically stated the “Order Granting Default Judgment

stands, however, the Order of Judgment entered in this proceeding on October 18,

2019, as to damages, in favor of the [Scheumanns] is set aside, and vacated and

declared null and void. IT IS FURTHER ORDERED that [THP] is hereby granted

a new hearing on damages.” (Emphasis added.) In Chittum v. Abell, 485 S.W.2d

231, 237 (Ky. 1972), this Court held that an order was not “final” where the circuit

court reserved the issues of damages for a later trial, even when the magic “final

and appealable” language was used. Therefore, we do not agree with the

Scheumanns’ argument that the Order Vacating in Part, which reserved the issue of

damages for a later hearing, was appealable under CR 54.02. This is especially so

because the damages hearing would require analysis of the same Agreement that is

under scrutiny for the arbitration issue. Therefore, THP was not permitted – much

less required – to appeal the Order Vacating in Part as the Scheumanns suggest.

             Consequently, it was not improper for THP to file the motion to

compel arbitration. And, as our caselaw has long emphasized, a circuit court’s

                                         -13-
denial of a motion to compel arbitration is appealable. American General Home

Equity, Inc. v. Kestel, 253 S.W.3d 543, 547 n.2 (Ky. 2008) (citing Fayette County

Farm Bureau Federation v. Martin, 758 S.W.2d 713, 714 (Ky. App. 1998) (“an

order denying a motion to compel arbitration . . . is explicitly held to be appealable

under KRS 417.220(1)(a)”)); New Meadowview Health, 550 S.W.3d at 58 (citing

KRS 417.220(1) (“[A]n order denying a motion to compel arbitration is

immediately appealable.”)); Conseco, 47 S.W.3d at 340 (“[B]ecause an ordinary

appeal at the close of litigation will not often provide an adequate remedy for the

wrongful denial of a right to arbitrate, KRS 417.220 provides in pertinent part

that . . . [a]n appeal may be taken from . . . [a]n order denying an application to

compel arbitration made under KRS 417.060[.]”). Therefore, the order denying

THP’s motion to compel arbitration is properly before this Court.

             Next, we must address whether the circuit court’s order denying

THP’s motion to compel arbitration was lawful. Our Supreme Court explained the

role of the circuit court when faced with a motion to compel arbitration in Jackson

v. Legacy Health Services, Inc., 640 S.W.3d 728, 732 (Ky. 2022) (citations and

footnotes omitted) (emphasis added):

                    Arbitration agreements, as with any other valid
             contract, are generally enforceable. State courts must
             compel arbitration when there is a valid, written
             arbitration agreement between the parties.

                                         -14-
                     Disputes concerning arbitration agreements may
             implicate both the Kentucky Uniform Arbitration Act
             (KUAA), and the Federal Arbitration Act (FAA). Under
             both Acts, “a party seeking to compel arbitration has the
             initial burden of establishing the existence of a valid
             agreement to arbitrate.” When the burden has been met,
             the party seeking to avoid the agreement must then rebut
             the presumption that the agreement is valid. “[T]he
             existence of a binding agreement to arbitrate is
             necessarily a threshold consideration for a trial court
             faced with a motion to compel arbitration. Disposition
             of that issue, as both the United States Supreme Court
             and this Court have long recognized, implicates state law
             contract principles.”

             The first step, our Supreme Court explained, is for the circuit court to

determine whether the arbitration agreement is binding using state contract

principles. Id. See also General Steel Corp. v. Collins, 196 S.W.3d 18, 20 (Ky.

App. 2006) (“the existence of a valid arbitration agreement is a threshold matter to

be resolved by court.”). Then, the circuit court “may deem arbitration agreements

invalid due to ‘generally applicable contract defenses,’ but not because of

‘defenses that apply only to arbitration or that derive their meaning from the fact

that an agreement to arbitrate is at issue.’” Jackson, 640 S.W.3d at 732 (quoting

Epic Sys. Corp. v. Lewis, __ U.S. __, 138 S. Ct. 1612, 1622, 200 L. Ed. 2d 889

(2018)).

             Here, the circuit court made no determination concerning whether

there was a binding agreement to arbitrate using state law contract principles.

Instead, the circuit court – contrary to the overwhelming preference to enforce

                                        -15-
arbitration agreements – found the arbitration clause to be “unconstitutional” based

solely on the fact of a default judgment alone, i.e., without conducting any legal

analysis of its own. However, as we have earlier stated, the Order Vacating in Part

was not final and appealable, leaving THP no option but to then file the motion to

compel arbitration. It is clear the circuit court did not properly apply Kentucky

precedent regarding arbitration agreements and failed to make any actual

determination regarding this Agreement. The circuit court simply believed it was

bound by the language in its “default judgment,” even though that was set aside, in

part, by the Order Vacating in Part.

             The circuit court failed to follow the first step of the required analysis.

In so doing, it failed to comply with Kentucky precedent and CR 52.01, which

requires the circuit court to conduct a proper review of the record and to provide

specific findings of fact and conclusions of law. Skelton v. Roberts, 673 S.W.2d

733, 734 (Ky. App. 1984) (citing Elkins v. Elkins, 359 S.W.2d 620 (Ky. 1962)).

             Therefore, the circuit court is directed to vacate the judgment below

and enter specific findings of fact and conclusions of law as to validity and

enforceability of the Agreement and upon THP’s motion to compel arbitration.

                                  CONCLUSION

             We hereby REVERSE and set aside the Jefferson Circuit Court order

denying THP’s motion to compel arbitration. These matters are hereby

                                         -16-
REMANDED to the circuit court to enter specific findings of fact and conclusions

of law as to the arbitration agreement consistent with this Opinion and the

authorities cited herein.

             LAMBERT, JUDGE, CONCURS.

             DIXON, JUDGE, DISSENTS AND FILES SEPARATE OPINION.

             DIXON, JUDGE, DISSENTING: I must respectfully dissent with the

majority’s decision herein. I believe the majority has misinterpreted Appellees’

basis for reliance upon Pavkovich. I see this case as a procedural issue, not

necessarily a jurisdictional one. Lost in the majority’s analysis is the fact the trial

court herein granted a default judgment to Appellees. Appellant eventually sought

to vacate that judgment as provided procedurally under our Civil Rules. However,

rather than appeal that judgment, it filed a wholly separate motion to dismiss.

Were it not for the default judgment already entered, and made final by the trial

court’s denial of Appellant’s motion to vacate – which was not appealed – the

motion to dismiss may have been proper. This case presents an unusual procedural

posture.

 BRIEFS FOR APPELLANT:                      BRIEF FOR APPELLEES:

 Scott P. Zoppoth                           Andrew J. Scheumann, pro se
 Louisville, Kentucky                       Chapin Elizabeth Scheumann, pro se
                                            Louisville, Kentucky

                                          -17-