Riggs v. Patriot Energy Partners, L.L.C. , 2014 Ohio 558 ( 2014 )

[Cite as Riggs v. Patriot Energy Partners, L.L.C., 2014-Ohio-558.]
STATE OF OHIO, CARROLL COUNTY
IN THE COURT OF APPEALS
SEVENTH DISTRICT
WILLIAM E. RIGGS, et al., )
) CASE NO. 11 CA 877
PLAINTIFFS-APPELLANTS, )
)
- VS - ) OPINION
)
)
PATRIOT ENERGY PARTNERS, LLC, )
et al., )
)
DEFENDANTS-APPELLEES. )
CHARACTER OF PROCEEDINGS: Civil Appeal from Common Pleas
Court, Case No. 11 CVH 26885.
JUDGMENT: Affirmed in Part, Reversed in Part
And Remanded.
JUDGES:
Hon. Mary DeGenaro
Hon. Joseph J. Vukovich
Hon. Cheryl L. Waite
Dated: February 13, 2014
[Cite as Riggs v. Patriot Energy Partners, L.L.C., 2014-Ohio-558.]
APPEARANCES:
For Plaintiffs-Appellants: Attorney Brendan Delay
24500 Center Ridge Road
Suite 175
Westlake, OH 44145
For William L. Riggs, Brenda Riggs,
Roger Oyer and Beverly Oyer
For Defendants-Appellees: Attorney William D. Dowling
Attorney Christopher S. Humphrey
Buckingham, Doolittle &
Burroughs, LLP
3800 Embassy Parkway, Suite 300
Akron, OH 44333-8332
For Patriot Energy Partners, LLC,
Andrew W. Blocksom, Thomas R.
Blocksom, Robert Dickey, Buckeye
Oil Producing Co., Bass Energy, Inc.,
Wimsatt Family, LLC, and Sonata
Investment Company, Ltd.
Attorney David M. Hardyman
Attorney Timothy B. McGranor
Vorys, Sater, Seymour and
Pease, LLP
52 E. Gay Street, P.O. Box 1008
Columbus, OH 43216-1008
For Chesapeake Exploration, L.L.C.
[Cite as Riggs v. Patriot Energy Partners, L.L.C., 2014-Ohio-558.]
DeGenaro, P.J.
{¶1} Plaintiffs-Appellants, William and Brenda Riggs and Roger and Beverly
Oyer, oil and gas lessors (the Property Owners), appeal the December 1, 2011
judgment of the Carroll County Court of Common Pleas granting the motion of
Defendant-Appellee Chesapeake Exploration, LLC to stay the Property Owners'
claims pending arbitration, pursuant to an arbitration clause in the leases, which were
originally entered into between the Property Owners and Appellee Patriot Energy
Partners, LLC.1 On appeal, the Property Owners contend that the arbitration clauses
are unenforceable because their claims are exempt from arbitration pursuant to R.C.
2711.01(B)(1); that the clauses are unconscionable; and that the clauses should not
be enforced because the leases themselves, or the assignments of the leases are
invalid under a number of theories.
{¶2} Upon review, the Property Owners' arguments are meritless, with the
exception of the second assignment of error, in part. The Property Owners have not
proven both substantive and procedural unconscionability; thus the arbitration clause
is valid and enforceable. Any issues concerning the validity of the leases or the
assignments are to be resolved via arbitration; those issues have no bearing on the
enforceability of the arbitration clause. Moreover, the oil and gas company assignees
to the leases had the right to seek arbitration, despite the fact that they were non-
signatories to the original lease agreements.
{¶3} Finally, although most of the Property Owners' claims are subject to
arbitration pursuant to R.C. 2711.01, the trial court erred by submitting the quiet title
claim to arbitration because it is a controversy involving title to or possession of real
estate and does not fall under any of the listed exceptions in R.C. 2711.01(B)(1). In
cases where some claims are exempt from arbitration and others are not, trial courts
properly stay claims exempt from arbitration until the claims subject to arbitration are
resolved. In this case, the trial court properly required arbitration of those claims that
do not purely involve the ultimate question of title; thus, until those claims are resolved
1
The other Defendant-Appellees LMF Holdings, LLC, Andrew W. Blocksom, Thomas R. Blocksom,
Robert Dickey, Buckeye Oil Producing Co., Bass Energy, Inc., Wimsatt Family, LLC, and Sonata
Investment Company, Ltd., along with Appellee Patriot are represented by one law firm and will
sometimes be referred to collectively as "Patriot" as each argument warrants.
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via arbitration, the quiet title claim must be stayed in the trial court. Accordingly, the
judgment of the trial court is affirmed in part, reversed in part and remanded.
Facts and Procedural History
{¶4} On October 14, 2008, the Riggses executed an oil and gas lease in favor
or Patriot. The Oyers executed a similar lease in favor of Patriot on November 6,
2008. The main distinctions between the Riggses' and the Oyers' lease agreements
are that the Oyers' lease includes a higher delay rental provision that was negotiated
by the Oyers, and the assignment clauses in the two leases are different. There is no
dispute that the Riggses and the Oyers signed the lease agreements.
{¶5} Both leases contain an identical, broadly-worded arbitration clause that
provides:
NOTICES AND ARBITRATION * * * Any controversy arising out of or
relating to this agreement shall be settled by arbitration. Either party
may initiate any arbitration proceeding by notifying the other party in
writing, but only after the aforementioned notice of breach has been
served and the time period for cure provided for in this lease has
expired. The procedure to be followed in the event of any arbitration
shall be that prescribed in the Rules of the American Arbitration
Association. Judgment upon the award rendered by the arbitrators may
be entered in any Court having jurisdiction thereof.
{¶6} Andrew Blocksom is the president of Patriot and Thomas Blocksom had
an interest in an entity which had a membership interest in Patriot. Both Andrew and
Thomas played a role in the signing of the lease agreements with the Property
Owners.
{¶7} After the lease agreements were signed by the Property Owners, certain
rights under those leases, including overriding royalty interests and shallow rights
interests were assigned to various entities including Bass Energy, LMF Holdings,
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Buckeye Oil, Wimsatt and Sonata. Patriot assigned to Chesapeake the deep rights
under the leases. The Riggses objected to the assignments via a letter to Patriot.
{¶8} On September 16, 2011, the Riggses filed a Complaint against
Appellees, which they later amended on October 25, 2011 to include the Oyers as
plaintiffs. Without precisely distinguishing between the various Appellees for their
alleged liability, the Amended Complaint asserts individual and class action claims
against all 10 named Appellees for rescission of the oil and gas leases; damages for
"notary fraud" related to the leases; "land fraud" relating to the leases; disgorgement
of profits; civil conspiracy; unjust enrichment; quiet title/declaratory judgment; slander
of title; rescission and nullification of the assignments and overriding royalty interests
related to the leases; and fraudulent concealment and disgorgement of profits
"promoted by speculators" related to the leases.
{¶9} Chesapeake filed a motion to stay the proceedings pending arbitration
on October 14, 2011, which the Property Owners opposed, and on November 18,
2011, a hearing was held on the motion. Andrew testified about the business
relationships between the Appellees, and the lease assignments. The Property
Owners' counsel elicited extensive testimony from Andrew and from Patriot's
bookkeeper, Elizabeth Eshenbaugh, in an attempt to demonstrate that the leases had
expired. The trial court opined that this testimony actually went to the merits of the
claims, and was beyond the scope of the motion to stay, but permitted it insofar as the
Property Owners asserted that the validity of the overall contracts affected the validity
of the arbitration clauses. Brenda and William Riggs and Roger Oyer testified
generally about their work and educational background and the circumstances
surrounding the execution of the leases. Thomas testified that he notarized both
leases. Several exhibits were admitted into evidence, including the leases and the
assignments. The American Arbitration Association (AAA) Rules were not admitted as
an exhibit, nor did the trial court take judicial notice of them.
{¶10} Following the hearing, on December 1, 2011, the trial court issued a
detailed opinion and order granting the motion to stay pending arbitration. The trial
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court found that "the evidence does not support a contention that the arbitration
agreement was substantively or procedurally unconscionable, so it is enforceable like
any other contract." The trial court further found that R.C. 2711.01(B)(1) did not bar
arbitration of the Property Owners' claims. The trial court rejected the Property
Owners' argument that Patriot's failure to comply with certain lease provisions
rendered the arbitration clause unenforceable.
Arbitration, Jurisdiction and Standard of Review
{¶11} Ohio's Arbitration Act has been codified in Revised Code Chapter 2711
and arbitration is encouraged as a method of settling disputes. See Williams v. Aetna
Fin. Co., 83 Ohio St. 3d 464, 700 N.E.2d 859 (1998). "Arbitration agreements are
'valid, irrevocable, and enforceable, except upon grounds that exist at law or in equity
for the revocation of any contract.' " Taylor Bldg. Corp. of Am. v. Benfield, 117 Ohio
St.3d 352, 2008-Ohio-938, 884 N.E.2d 12, ¶33 (quoting R.C. 2711.01(A)). "A
presumption favoring arbitration arises when the claim in dispute falls within the scope
of the arbitration provision. An arbitration clause in a contract is generally viewed as
an expression that the parties agree to arbitrate disagreements within the scope of the
arbitration clause, and, with limited exceptions, an arbitration clause is to be upheld
just as any other provision in a contract should be respected." Id. at 471.
{¶12} Pertinent to this appeal, if an action has been filed by one of the parties
to an arbitration agreement raising issues which may be arbitrable pursuant to their
written agreement, the other party may move the trial court for a stay of those
proceedings "until the arbitration of the issue has been had in accordance with the
agreement[.]" R.C. 2711.02(B). An order that grants or denies the stay of trial
proceedings pending arbitration is a final appealable order. Taylor Bldg. Corp. of Am.
at ¶31, citing R.C. 2711.02(C). Regarding the standard of review, a court of appeals
generally applies an abuse of discretion standard to a trial court's decision regarding a
stay pending arbitration. Reynolds v. Crockett Homes, Inc., 7th Dist. No. 08 CO 8,
2009-Ohio-1020, ¶11.
{¶13} However, there are some exceptions to this rule for when the error
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alleged is solely a matter of law which apply to two assignments of error raised in this
appeal. See Kent Partners v. Crossings at Golden Pond-Portage Cty., L.L.C., 11th
Dist. No. 2010-P-0028, 2011-Ohio-2842, ¶22. Assignment of error two alleges that
the Property Owners' claims are exempt from arbitration pursuant to R.C.
2711.01(B)(1). Courts have held that this constitutes a legal error to be reviewed de
novo. Kent Partners at ¶20-21; see also Blanchard Valley Health Sys. v. Canterbury
Holdings, Inc., 3d Dist. No. 5-12-08, 2012-Ohio-5134, ¶12-13. Further, the Property
Owner's claim in the seventh assignment of error, that because the arbitration clause
is unconscionable the agreement is unenforceable, is subject to de novo review.
Taylor Bldg. Corp. of Am. at ¶2. However, any factual findings made by the trial court
in support of its unconscionability determination, particularly those involving credibility
determinations, should be afforded appropriate deference. Id. at ¶38.
Arbitrability of Claims
{¶14} The Property Owners assert in their second of eight assignments of
error, discussed out of order or together for clarity of analysis:
{¶15} "The court erred by ordering arbitration when Oil and Gas Agreements
are not covered by an exception to the statute which keeps disputes about possession
of land and title to land away from arbitration. Sections 2711.01 to 2711.16."
{¶16} The Property Owners contend their claims are not arbitrable under Ohio
law because they involve title to or the possession of real estate. R.C. 2711.01(B)(1)
creates an exemption to the general rule concerning enforceability of arbitration
clauses in Ohio. It provides that arbitration clauses in contracts "do not apply to
controversies involving the title to or the possession of real estate." Id. However the
statute contains exceptions to the general exemption:
(a) Controversies involving the amount of increased or decreased
valuation of the property at the termination of certain periods, as provided
in a lease;
(b) Controversies involving the amount of rentals due under any lease;
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(c) Controversies involving the determination of the value of improvements
at the termination of any lease;
(d) Controversies involving the appraisal of property values in connection
with making or renewing any lease;
(e) Controversies involving the boundaries of real estate.
R.C. 2711.01(B)(1)(a)-(e)
{¶17} The Property Owners argue their claims do not fall under any of the
listed exceptions; focusing mainly on the fact that the words "land" and "title" are used
numerous times in the Leases to support their argument. The Property Owners
advocate a very broad reading of the statute so as to exempt any claim from
arbitration that has an effect on a real property interest. Conversely, Appellees argue
the prohibition against arbitrating disputes involving title or possession of real property
is much narrower in scope and does not encompass the Property Owners' claims.
{¶18} Generally, R.C. 2711.01(B)(1) should be "narrowly construed * * * to
apply only where the arbitration agreement directly submits the ultimate question of
title to or possession of the real estate" to arbitration. Newark Trust Co. v. Abbott
Laboratories, 5th Dist. No. CA-2821, 1982 WL 3020, *6 (June 11, 1982).
{¶19} Matters held to be exempt from arbitration include a claim for specific
performance of a real estate purchase agreement; Kedzior v. CDC Dev. Corp., 123
Ohio App. 3d 301, 303, 704 N.E.2d 54 (8th Dist.1997); see also Kent Partners v.
Crossings at Golden Pond-Portage Cty., L..L.C., 11th Dist. No. 2010-P-0028, 2011-
Ohio-2842, ¶36; as well as claims for foreclosure. See U.S. Bank v. Wilkens, 8th Dist.
No. 93088, 2010-Ohio-262, ¶10. Finally, a trial court's order appointing a receiver with
authority to take immediate possession of all real property of a business entity is not
arbitrable under Ohio law because the statutory powers of a receiver include taking
and keeping possession of real property. In re Estate of Philips v. Daoud, 2d Dist. No.
15816, 1996 WL 354754 (June 28, 1996), *7.
{¶20} However, every controversy concerning real property does not
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necessarily involve title to or possession of real estate. Where the "subject matter of
the case is breach of the contract to purchase real estate and only money damages
are sought by appellee, * * * title to the property and possession of the property is not
in dispute," and therefore arbitration is not precluded by R.C. 2711.01(B)(1). Mears
Harding L.L.C. v. Ferri, 5th Dist. No. 2011CA00253, 2012-Ohio-2878, ¶25.
{¶21} In Blanchard Valley Health Sys. v. Canterbury Holdings, Inc., 3d Dist.
No. 5-12-08, 2012-Ohio-5134, ¶21, a condominium association and Blanchard Valley,
a unit owner, alleged that Canterbury, another unit owner, violated restrictive
covenants applicable to the medical condominium property by contracting with
Blanchard Valley's known competitor to provide laboratory services. The Third District
held that the claim did not involve title to or possession of real estate so as to fall
within the R.C. 2711.01(B)(1) exemption; reasoning that "neither party disputes that
Canterbury holds title to its condominium unit, and neither party has initiated an action
to quiet title. The controversy here revolves around the use of the property, rather
than title or possession." Blanchard Valley Health at ¶18. Similarly in Murtha v.
Ravines of McNaughton Condominium Assn., 10th Dist. No. 09AP-709, 2010-Ohio-
1325, the Tenth District held that a dispute over the restrictions in the condominium's
declaration documents prohibiting an owner from renting his unit was essentially a
dispute involving contract interpretation, not a dispute over who was entitled to
possess the property or who holds title. Id. at ¶13.
{¶22} The bulk of the Property Owners' claims concern the formation of the
parties' agreements, that is, whether their contracts were properly executed or were
procured by fraud. Specifically, the Property Owners assert claims for rescission of
the oil and gas leases; damages for "notary fraud" related to the leases; "land fraud"
relating to the leases; disgorgement of profits; slander of title; civil conspiracy; unjust
enrichment, rescission and nullification of the assignments and overriding royalty
interests related to the leases; and fraudulent concealment and disgorgement of
profits "promoted by speculators" related to the leases. These are all arbitrable claims
under Ohio law as they do not directly submit the ultimate question of title to or
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possession of the real estate to arbitration, consistent with Mears, Blanchard Valley
and Murtha.
{¶23} But the Property Owners' have also brought a quiet title claim which is
exempt from arbitration pursuant to R.C. 2711.01(B)(1). Quiet title actions are
governed by R.C. 5303.01, which provides, inter alia:
An action may be brought by a person in possession of real property, by
himself or tenant, against any person who claims an interest therein
adverse to him, for the purpose of determining such adverse interest.
Such action may be brought also by a person out of possession, having,
or claiming to have, an interest in remainder or reversion in real
property, against any person who claims to have an interest therein,
adverse to him, for the purpose of determining the interests of the
parties therein.
{¶24} In Papps v. Papps, 6th Dist. No. L-09-1260, 2010-Ohio-5028, a case
involving the trial court's confirmation of an arbitration award, the Sixth District held
that quiet title claims fell within the sole purview of the trial court and were exempt
from arbitration pursuant to R.C. 2711.01(B)(1) since they were controversies
involving title to or possession of real estate. Id. at ¶9. And as discussed above, one
reason the court in Blanchard Valley Health concluded the claims were not exempt
from arbitration was because "neither party [had] initiated an action to quiet title."
Blanchard Valley Health at ¶18.
{¶25} While Appellees do not address the quiet title claim specifically, Patriot
asserts that oil and gas leases are purely contractual rights concerning personal
property. However, we need not reach this issue in the narrow context presented by
this case. R.C. 2711.01 exempts controversies involving title to or possession of real
estate from going to arbitration, with certain exceptions that do not apply here. The
purpose of a quiet title action is to resolve or remove any clouds on the title to real
property. There is no need to predetermine the nature of the cloud to reach the
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conclusion that a quiet title action in this case will involve matters relating to the title to
or possession of real estate, and is thus exempt from arbitration. Thus, the trial court
erred by permitting the quiet title claim to go to arbitration since it is a controversy
directly involving title to real estate and therefore exempt from arbitration pursuant to
R.C. 2711.01(B)(1).
{¶26} However, in cases where some claims are exempt from arbitration and
others are not, courts may properly require arbitration of those claims that do not
purely involve the ultimate question of title. U.S. Bank, supra, ¶20-22. Any claims that
are exempt from arbitration must still be stayed in the trial court until the claims subject
to arbitration are resolved. Cheney v. Sears, Roebuck & Co., 10th Dist. No. 04AP-
1354, 2005-Ohio-3283, ¶12.
{¶27} Accordingly, the Property Owners' second assignment of error is
meritorious in part; the trial court should have stayed the quiet title claim pending
arbitration of the remaining claims, which it properly referred to arbitration for
resolution.
Validity of the Leases
{¶28} The Property Owners assert in their first and eighth assignments of error:
{¶29} "The court erred by ordering arbitration under an Oil and Gas Agreement
when it had been waived by Appellee Patriot Energy Partners."
{¶30} "The delay rental has not been paid in advance by the Lease signing
anniversary date."
{¶31} The Property Owners argue that the arbitration provision should not be
enforced because certain conditions precedent contained in the lease have not
occurred; specifically, that Patriot failed to verify that no prior oil and gas leases
existed on the subject property, failed to pay the initial $1.00 payment and failed to
timely pay delay rentals. Appellees counter that in light of the broad arbitration clause
in this case, those issues themselves are subject to arbitration.
{¶32} " '[A]n arbitration clause is, in effect, a contract within a contract, subject
to revocation on its own merits. * * * Because the arbitration clause is a separate
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entity, it only follows that an alleged failure of the contract in which it is contained does
not affect the provision itself.' " Taylor Bldg. Corp. of Am. v. Benfield, 117 Ohio St. 3d
352, 884 N.E.2d 12, ¶41, quoting ABM Farms Inc. v. Woods, 81 Ohio St. 3d 498, 501-
502, 692 N.E.2d 574.
{¶33} Thus, "an alleged failure of the overall contract does not necessarily
invalidate the arbitration clause," and a general challenge to the entire contract must
be submitted to the arbitrator to determine the contract's validity. Garber v. Buckeye
Chrysler-Jeep-Dodge of Shelby, 5th Dist. No. 2007-CA-0121, 2008-Ohio-3533, ¶16,
citing Buckeye Check Cashing, Inc. v. Cardegna, 546 U.S. 440, 445-446, 126 S. Ct.
1204, 163 L. Ed. 2d 1038 (2006) (holding that regardless of whether the challenge is
brought in federal or state court, a challenge to the validity to the contract as a whole,
not specifically to the arbitration clause, must be submitted to the arbitrator in the first
instance.) See also Mingo Junction Safety Forces Assoc. Local 1 v. Chappano, 7th
Dist. No. 10 JE 20, 2011-Ohio-3401, ¶53-54 (holding that the trial court properly
ordered the parties submit to the grievance and arbitration procedures in the collective
bargaining agreement notwithstanding appellants' assertion that the contract had
expired.)
{¶34} The Property Owners' arguments concerning the overall validity of the
lease due to purported unmet conditions precedent are irrelevant to the issue of
whether the arbitration clause is enforceable. Rather, these are issues to be resolved
via arbitration. Accordingly, the Property Owners' first and eighth assignments of error
are meritless.
Effect of the Assignments
{¶35} The Property Owners assert in their third, fourth, fifth and sixth
assignments of error:
{¶36} "The court erred by ordering arbitration when Plaintiffs/the Property
Owners William E. Riggs and Brenda Riggs refused to assign the Oil and Gas Lease
to Chesapeake Exploration LLC or any other Chesapeake entity."
{¶37} "The court erred by ordering arbitration when Plaintiffs/the Property
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Owners William E. Riggs and Brenda Riggs were never asked and have never agreed
to assign the Oil and Gas Lease to Buckeye Oil Producing Co., which was granted a
Shallow Rights Assignment to drill, which is not a working interest or overriding royalty
interest."
{¶38} "The court erred by ordering arbitration when Plaintiffs/the Property
Owners were never asked and have never agreed to assign the Oil and Gas Lease to
Defendant Bass Energy, Inc., which was granted a Shallow Rights Assignment to drill,
which is not a working interest or overriding royalty interest."
{¶39} "The court erred by ordering arbitration when Plaintiffs/the Property
Owners have no contract with Defendant Buckeye Oil Producing Co., Defendant Bass
Energy, Inc., Defendant Wimsatt Family LLC, nor Defendant Sonata Investment
Company, Ltd. which includes an arbitration clause."
{¶40} Any issues relating to the validity of the assignments, including whether
the Property Owners' unreasonably withheld their consent to the assignments, like the
Property Owners' claims of unperformed conditions precedent, as discussed above,
are matters for arbitration since the arbitration clause is very broad & includes "any
controversy arising out of or relating to this agreement."
{¶41} Further, the Property Owners' argument that Chesapeake and the other
oil and gas companies have no right to compel arbitration since they were not parties
to the original lease agreements is meritless. Both leases contain the following under
the heading "MISCELLANEOUS PROVISIONS": "All covenants and conditions
between the parties hereto shall extend to their heirs, personal representatives,
successors and assigns * * *[.]" Moreover, non-signatories to an arbitration agreement
can compel arbitration against a signatory pursuant to an "alternative estoppel theory."
See Short v. Resource Title Agency, 8th Dist. No. 95839, 2011-Ohio-1577, ¶14-15.
See also Trinity Health Sys. v. MDX, Corp., 180 Ohio App. 3d 815, 2009-Ohio-417,
907 N.E.2d 746, ¶22 (7th Dist.) ("A nonsignatory to an arbitration agreement may be
bound by the arbitration agreement under a variety of ordinary contractual and agency
related legal theories, including but not limited to estoppel, incorporation by reference,
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assumption, agency, veil-piercing/alter ego, and third-party beneficiary.")
{¶42} As explained by the Eighth District in U.S. Bank N.A. v. Wilkens, 8th Dist.
No. 96617, 2012-Ohio-1038, ¶54:
A signatory to an arbitration agreement cannot avoid arbitration with a
nonsignatory " 'when the issues the nonsignatory is seeking to resolve in
arbitration are intertwined with the agreement' " that the signatory
signed. I Sports [v. IMG Worldwide, Inc.], 157 Ohio App. 3d 593 [813
N.E.2d 4, 2004-Ohio-3113, at ¶ 24 [(8th Dist.)], 813 N.E.2d 4, quoting
Thomson–CSF, S.A. v. Am. Arbitration Assn., 64 F.3d 773 (2d
Circ.1995). The signatory will be estopped from attempting to avoid
arbitration because their claims against the nonsignatory "are integrally
related to the contract containing the arbitration clause." Id. at ¶ 24-25.
{¶43} The claims against Chesapeake and the other oil and gas companies
are certainly intertwined with the leases containing the arbitration clause. Thus, the
Property Owners are estopped from attempting to avoid arbitration with these
Appellees. Accordingly, the Property Owners' third, fourth, fifth and sixth assignments
of error are meritless.
Unconscionability
{¶44} The Property Owners assert in their seventh and final assignment of
error:
{¶45} "The Arbitration Clause is both substantively and procedurally
unconscionable."
{¶46} It is settled law in Ohio that generally: "In order to determine whether a
contract provision is unconscionable, courts must examine the facts and
circumstances surrounding the agreement." Peltz v. Moyer, 7th Dist. No. 06 BE 11,
2007-Ohio-4998, ¶43. There are two facets to unconscionability: procedural and
substantive. Both prongs must be met for a contract provision to be found
unenforceable due to unconscionability; with the focus on whether the arbitration
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provision itself is unconscionable, as opposed to the overall contract itself. Taylor
Bldg. Corp. of Am., 117 Ohio St. 3d 352, at ¶42. However, there is a dearth of case
law specifically addressing the enforceability of arbitration clauses in oil and gas
leases.
Substantive Unconscionability
{¶47} Whether a contract provision is substantively unconscionable requires
an analysis of the terms of the provision itself and whether those terms are
commercially reasonable. Hayes v. Oakridge Home, 122 Ohio St. 3d 63, 2009-Ohio-
2054, 908 N.E.2d 408, ¶33. No bright-line set of factors for determining substantive
unconscionability has been adopted by the Ohio Supreme Court. Id. "The factors to
be considered vary with the content of the agreement or provision at issue." Id.
{¶48} When reviewing arbitration provisions for substantive unconscionability,
courts have considered factors such as the cost of arbitration; the specificity of the
provision, e.g., whether the rules governing arbitration and any required fees are
disclosed; the relative prominence of the provision, e.g., whether the arbitration clause
is set forth in fine print buried within a larger contract or is contained in a separate
document; and whether the obligation to arbitrate applies equally to all parties. See,
e.g., Taylor Bldg Corp. of Am., ¶54-60; Peltz, 7th Dist. No. 06 BE 11, ¶47-48. Robbins
v. Country Club Ret. Ctr. IV, Inc., 7th Dist. No. 04 BE 43, 2005-Ohio-1338, ¶37;
Wascovich v. Personacare of Ohio, 190 Ohio App. 3d 619, 2010-Ohio-4563, 943
N.E.2d 1030, ¶43-54 (11th Dist.); Eagle v. Fred Martin Motor Co., 57 Ohio App. 3d
150, 2004-Ohio-829, 809 N.E.2d 1161 (9th Dist.); Vanyo v. Clear Channel Worldwide,
156 Ohio App. 3d 706, 2004-Ohio-1793, 808 N.E.2d 482, ¶20 (8th Dist.). The party
challenging the enforceability of the arbitration agreement bears the burden of
presenting evidence to support that challenge. Hayes, 122 Ohio St. 3d 63, at ¶27.
{¶49} The Property Owners failed to provide much, if any, evidence of
substantive unconscionability. The AAA Rules were neither proffered nor admitted
into evidence, nor did the trial court take judicial notice of the rules during the
hearings; and thus no evidence of the costs associated with arbitration is contained in
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the record. The trial court did read a brief portion of the AAA Supplementary Rules for
Class Actions into the record during the hearing; specifically, Rule (1)(A), which
weighs against substantive unconscionability because it demonstrates the Property
Owners' class action could proceed via arbitration. Aside from this reference, the
substance of the AAA Rules is not contained in the record.
{¶50} There was a similar "dearth of evidence" about the costs of alternative
dispute resolution and whether those costs would have been prohibitive to the
plaintiffs in Taylor Bldg. Corp. of Am., where the Ohio Supreme Court held that the
arbitration provision was not substantive unconscionable, the plaintiffs having failed to
meet their burden of proof on this issue. Id. at ¶59. The Court reasoned that "[t]he
lack of evidence before the trial court of excessively high arbitration costs undercuts
the [plaintiffs'] claim that arbitration costs would be prohibitively expensive." Id. at ¶57.
{¶51} The leases are part of the record, and on their face do not demonstrate
substantive unconscionability. The obligation to arbitrate clearly applies to both
parties, not just the lessors. See, e.g., Vanyo v. Clear Channel Worldwide, 156 Ohio
App.3d 706, 2004-Ohio-1793, 808 N.E.2d 482, ¶20 (8th Dist.). The clause specifically
informs the parties about the procedures under which the arbitration will proceed:
"[t]he procedure to be followed in the event of any arbitration shall be that prescribed
in the Rules of the American Arbitration Association." See Peltz at ¶48. Nor is an
arbitration clause substantively unconsicionable because the word "binding" was not
used, see generally Schaefer v. Allstate Ins. Co., 63 Ohio St. 3d 708, 711, 590 N.E.2d
1242 (1992), or because the clause requires the parties to waive their right to a jury
trial, and does not warn them of this fact. Taylor Bldg. Corp. of Am., 117 Ohio St. 3d
352 at ¶55. Finally, the text of the arbitration clause was set forth in the same sized
text as every other clause in the contract, not in "fine print," which would weigh
somewhat against substantive unconscionability as well. See, e.g., Moran v.
Riverfront Diversified, Inc., 2d Dist. No. 24545, 2011-Ohio-6328, ¶25.
{¶52} Accordingly, the Property Owners have not proven that the arbitration
clause is substantively unconscionable; in other words, they failed to produce
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evidence that the clause is commercially unreasonable.
Procedural Unconscionability
{¶53} "Procedural unconscionability concerns the formation of the agreement
and occurs when no voluntary meeting of the minds is possible." Ball v. Ohio State
Home Servs., Inc., 168 Ohio App. 3d 622, 2006-Ohio-4464, 861 N.E.2d 553, ¶7 (9th
Dist.), quoting Porpora v. Gatliff Building Co., 160 Ohio App. 3d 843, 2005-Ohio-2410,
828 N.E.2d 1081, ¶7 (9th Dist.). Thus, courts must consider the circumstances
surrounding the parties' bargaining. Taylor Bldg. Corp. of Am., 117 Ohio St. 3d 352 at
¶44. Such circumstances include the parties' respective ages, educational
backgrounds, intelligence, business acumen and experiences, along with who drafted
the contract, whether alterations in the printed terms were possible and whether there
were alternative sources of supply for the subject goods or services. Id.
{¶54} In addition, other factors that may contribute to a finding of procedural
unconscionability include:
'[a] belief by the stronger party that there is no reasonable probability
that the weaker party will fully perform the contract; knowledge of the
stronger party that the weaker party will be unable to receive substantial
benefits from the contract; knowledge of the stronger party that the
weaker party is unable reasonably to protect his interests by reason of
physical or mental infirmities, ignorance, illiteracy or inability to
understand the language of the agreement, or similar factors.'
Id. at ¶44, quoting Restatement of the Law 2d, Contracts (1981), Section 208,
Comment d.
{¶55} In this case, the age and educational backgrounds of the Property
Owners would appear to weigh in favor of procedural unconscionability. Brenda Riggs
testified that she was 50 years old with a tenth grade education and no GED. She
had no prior oil and gas or business experience. She was disabled from a motorcycle
accident. William Riggs testified that he was 55 years old with an eighth grade
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education and no GED. He characterized himself as "slow," due to a head injury as a
child, and stated his reading ability was "poor." William testified he also receives SSI
disability benefits stemming from injuries from a motorcycle accident in the 1980s.
Roger Oyer testified that he was a high school graduate who had completed one
college credit in marketing.
{¶56} There is also some evidence of unequal bargaining power. Patriot's
representatives certainly had more experience with oil and gas leases than the
Property Owners. However, "[m]ere inequality of bargaining power is insufficient to
invalidate an otherwise enforceable arbitration agreement." Vanyo v. Clear Channel
Worldwide, 156 Ohio App. 3d 706, 2004-Ohio-1793, 808 N.E.2d 482, ¶19, citing
Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20, 33, 111 S. Ct. 1647, 114
L. Ed. 2d 26 (1991). These factors weigh in favor of procedural unconscionability.
{¶57} But the following factors weigh against procedural unconscionability.
Importantly, there is no evidence of duress or coercion by the Patriot representatives.
None of the Property Owners testified that they felt pressured into signing the leases.
To the contrary, the Property Owners were provided copies of the leases to review
before signing. Brenda testified she had between 2 weeks and one month to review
the lease before signing. It is unclear from the record how long the Oyers had to
review the lease, however, Roger testified that Patriot representatives visited his home
several times before he and his wife ultimately signed the lease.
{¶58} Despite having ample time to review the lease, William testified he only
read some parts of it and Roger testified that he only scanned it. A party's decision
"not to read the agreement does not relieve [that party] of [the] obligations incurred by
* * * signing." Robbins, 7th Dist. No. 04 BE 43, ¶34. It is a fundamental legal principle
that one may not "enter into a contract, and, when called upon to respond to its
obligations, to say that he did not read it when he signed it, or did not know what it
contained. If this were permitted, contracts would not be worth the paper on which
they are written." McAdams v. McAdams, 80 Ohio St. 232, 240-241, 88 N.E. 542
(1909), quoting Upton v. Tribilcock, 91 U.S. 45, 50, 23 L. Ed. 203 (1875). In other
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words, "[t]he legal and common-sensical axiom that one must read what one signs
survives[.]" ABM Farms, 81 Ohio St. 3d at 503.
{¶59} The Riggses testified that they did not understand the arbitration
provision. However, Brenda testified: that she did consult with an advisor of some sort
before writing a letter to Patriot objecting to the assignment to Chesapeake, which
included legal terms such as "unconscionable" and "ratify;" that she had help from
"friends" in drafting that letter; that she was close friends with a local judge; and that
she could have asked her friends or advisors for advice before initially signing the
lease, but did not. Roger testified that he also did not understand the arbitration
provision, but conceded he did have the opportunity to ask questions about the lease
to Andrew before signing, and that he and Andrew discussed some of the other lease
terms.
{¶60} Also weighing against procedural unconscionability, the Property Owners
were given the opportunity to negotiate the lease terms. In fact, Roger testified that he
negotiated for a higher delay rental. Thus, the subject leases, though they stemmed
from a form contract, cannot truly be deemed contracts of adhesion. A contract of
adhesion is "a standardized form contract prepared by one party, and offered to the
weaker party, usually a consumer, who has no realistic choice as to the contract term."
Taylor Bldg. Corp. of Am. 117 Ohio St. 3d 352, at ¶49, citing Black's Law Dictionary
(8th Ed.2004) 342 (emphasis added.)
{¶61} Thus, overall the evidence weighs against procedural unconscionability.
This is not a situation where "no voluntary meeting of the minds is possible." Porpora
at ¶7. Moreover, as discussed, the Property Owners have failed to meet their burden
of proof regarding substantive unconscionability. Since both facets of
unconscionability, procedural and substantive, are required to invalidate the arbitration
clause, the failure to establish either is fatal to this claim. Accordingly, the Property
Owners' seventh assignment of error is meritless.
Conclusion
{¶62} In sum, the Property Owners' assignments of error are meritless, with
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the exception of the second assignment of error, in part. The Property Owners have
not proven both substantive and procedural unconscionability; thus the arbitration
clause is valid and enforceable. Any issues concerning the validity of the leases or
the assignments are to be resolved via arbitration; those issues have no bearing on
the enforceability of the arbitration clause. Moreover, the oil and gas assignees to the
leases had the right to seek arbitration, despite the fact that they were non-signatories
to the original lease agreements.
{¶63} Finally, although most of the Property Owners' claims are subject to
arbitration pursuant to R.C. 2711.01, the trial court erred by submitting the quiet title
claim to arbitration because it is a controversy involving title to or possession of real
estate and does not fall under any of the listed exceptions in R.C. 2711.01(B)(1). In
cases where some claims are exempt from arbitration and others are not, trial courts
properly stay claims exempt from arbitration until the claims subject to arbitration are
resolved. In this case, the trial court properly required arbitration of those claims that
do not purely involve the ultimate question of title; thus, until those claims are resolved
via arbitration, the quiet title claim must be stayed in the trial court. Accordingly, the
judgment of the trial court is affirmed in part, reversed in part and remanded.
Vukovich, J., concurs.
Waite, J., concurs.