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Noohi v. Toll Bros. - 708 F.3d 599 (4th Cir. 2013)

Rule:

Under Maryland law, an arbitration provision must be supported by consideration independent of the contract underlying it, namely, mutual obligation.

Facts:

The Plaintiffs-Appellees were buyers ("Plaintiffs"), a husband and wife; Defendants-Appellants were a real estate development company ("Toll Brothers") and several of its subsidiaries (collectively, "Toll Brothers"). Plaintiffs contracted with a subsidiary of Toll Brothers for the construction of a luxury home in Maryland. The Agreement of Sale (“the Agreement") required Plaintiffs to seek approval of a mortgage, and included an arbitration provision. Though Plaintiffs received a "Mortgage Loan Commitment" letter from at least one lender, which was later rescinded, and though several other of their mortgage applications were all denied, Toll Brothers sought to keep Plaintiffs' deposits of $ 77,008.

Plaintiffs sued Toll Brothers individually and on behalf of a class of other prospective buyers who allegedly lost deposits to Toll Brothers in a similar manner. The district court denied Toll Brothers' motion to dismiss or stay the suit pending arbitration, finding that the Agreement's arbitration provision lacked mutuality of consideration under Maryland law because it required only the buyer—but not the seller—to submit disputes to arbitration. Toll Brothers appealed.

Issue:

Was the arbitration provision unenforceable?

Answer:

Yes.

Conclusion:

The Agreement's arbitration provision was unenforceable for lack of mutual consideration under Maryland law. First, the court held it had jurisdiction pursuant to 9 U.S.C.S. § 16(a)(1)(A) over the interlocutory appeal of the denial of the motion to dismiss or stay pending arbitration. Section 16(a)(1)(A) allowed an appeal from an order that refused a stay of any action under 9 U.S.C.S. § 3. The court ruled that it had to apply Maryland law to determine the validity of the arbitration provision in the sales agreement. Under Maryland law, an arbitration provision had to be supported by consideration independent of the contract underlying it, namely, mutual obligation. The arbitration provision in the agreement unambiguously bound only the prospective buyers to arbitration and, thus, lacked mutuality of consideration. The United States Supreme Court had never held that the Federal Arbitration Act, 9 U.S.C.S. § 1 et seq., preempted state law rules requiring that arbitration provisions to be supported by consideration. The district court correctly held that the arbitration provision was unenforceable for lack of mutual consideration.

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