Melaas v. Diamond Resorts U.S. Collection Development

FILED
IN THE OFFICE OF THE
CLERK OF SUPREME COURT
JANUARY 12, 2021
STATE OF NORTH DAKOTA
IN THE SUPREME COURT
STATE OF NORTH DAKOTA
2021 ND 1Kathleen Melaas, Plaintiff and Appellant
v.
Diamond Resorts U.S.
Collection Development, LLC, Defendant and Appellee
No. 20200055
Appeal from the District Court of Cass County, East Central Judicial District,
the Honorable Thomas R. Olson, Judge.
REVERSED AND REMANDED.
Opinion of the Court by McEvers, Justice, in which Chief Justice Jensen,
Justice Crothers, and Justice Tufte joined, and Justice VandeWalle concurred
in the result.
Joshua A. Swanson, Fargo, ND, for plaintiff and appellant.
Matthew D. Lamb (argued), Washington, DC, and Joseph A. Wetch, Jr.
(appeared), Fargo, ND, for defendant and appellee.
Melaas v. Diamond Resorts U.S. Collection Development
No. 20200055
McEvers, Justice.
[¶1] Kathleen Melaas appeals from a district court order granting a motion
to compel arbitration and dismissing her complaint against Diamond Resorts
U.S. Collection Development, LLC. Melaas argues the district court erred by
ordering arbitration because the contract containing the arbitration agreement
is unenforceable and void, she lacked the necessary capacity to consent to the
contract, and any consent was obtained by undue influence, duress, menace,
or fraud. We conclude the district court erred by ordering arbitration without
first deciding Melaas’ capacity to consent challenge to the formation of the
contract. We reverse and remand.
I
[¶2] In August 2019, Melaas sued Diamond Resorts claiming undue
influence, lack of capacity to consent, and unlawful practices under N.D.C.C.
ch. 51-15, and requesting the district court declare her October 30, 2018
timeshare agreement with Diamond Resorts is not a valid and binding
agreement. She alleged Diamond Resorts offers vacation and timeshare
packages, she attended a sales meeting with a Diamond Resorts
representative, the sales meeting lasted approximately five hours, and she
asked to leave the meeting on at least one occasion and Diamond Resorts
refused to allow her to leave. She claimed Diamond Resorts knew she was a
diabetic and experienced fatigue and confusion, Diamond Resorts knew she
was a vulnerable adult subject to a durable power of attorney for financial
management, and Diamond Resorts would not allow her to leave the sales
meeting until she signed the timeshare agreement. Melaas asserted she lacked
the capacity to enter into the agreement, Diamond Resorts used high-pressure
and abusive sales tactics and knowledge of her medical condition to unduly
influence and coerce her into signing the agreement, and any consent was
obtained by duress and menace.
2
[¶3] Diamond Resorts moved to compel arbitration and dismiss the complaint
or, alternatively, to stay proceedings. Diamond Resorts argued the agreement
requires arbitration of any and all claims stemming from the contract.
Diamond Resorts claimed the arbitration provision is valid and enforceable,
the agreement requires arbitration of all of Melaas’ claims in Nevada, and
therefore arbitration should be ordered and the action should be dismissed.
Melaas opposed the motion, arguing the agreement and its arbitration and
forum selection clauses are unenforceable and her claims are properly before
the court.
[¶4] After a hearing, the district court granted Diamond Resorts’ motion to
compel arbitration and dismissed Melaas’ complaint. The court ordered, “This
matter is referred to arbitration pursuant to the parties’ agreement, and
Plaintiff’s Complaint is hereby DISMISSED.”
II
[¶5] Diamond Resorts argues the appeal should be dismissed for lack of
jurisdiction. It contends this Court’s decision in Superpumper, Inc. v. Nerland
Oil, Inc., 1998 ND 144, 582 N.W.2d 647, applies and precludes an immediate
appeal from an order compelling arbitration.
[¶6] Most states have adopted the Uniform Arbitration Act or the Revised
Uniform Arbitration Act. See Unif. Arbitration Act (1956), U.L.A. Refs &
Annos; Unif. Arbitration Act (2000), U.L.A. Refs & Annos. The North Dakota
Legislature adopted the Uniform Arbitration Act (UAA) in 1987. See 1987 N.D.
Sess. Laws ch. 408; Superpumper, 1998 ND 144, ¶ 9. In 2003, the legislature
amended the UAA and recodified it at N.D.C.C. ch. 32-29.3. See 2003 N.D. Sess.
Laws ch. 280.
[¶7] Section 32-29.3-28(1), N.D.C.C., authorizes appeals in arbitration cases
and states an appeal may be taken from:
a. An order denying a motion to compel arbitration;
....
f. A final judgment entered pursuant to this chapter.
3
The statute further states, “An appeal under this section must be taken as from
an order or a judgment in a civil action.” N.D.C.C. § 32-29.3-28(2). The Federal
Arbitration Act (FAA), 9 U.S.C. § 1, et seq., also includes a section authorizing
appeals in certain cases, stating:
(a) An appeal may be taken from –
(1) an order –
(A) refusing a stay of any action under section 3 of this
title,
(B) denying a petition under section 4 of this title to
order arbitration to proceed,
(C) denying an application under section 206 of this
title to compel arbitration,
....
(3) a final decision with respect to an arbitration that is
subject to this title.
(b) Except as otherwise provided in section 1292(b) of title 28, an
appeal may not be taken from an interlocutory order –
(1) granting a stay of any action under section 3 of this title;
(2) directing arbitration to proceed under section 4 of this
title;
(3) compelling arbitration under section 206 of this title; or
(4) refusing to enjoin an arbitration that is subject to this
title.
9 U.S.C. § 16.
[¶8] Neither the UAA nor the FAA explicitly authorize an appeal from an
order granting a motion to compel arbitration and dismissing the action. This
Court addressed the appealability of an order compelling arbitration in
Superpumper, 1998 ND 144. We said orders compelling arbitration are not
listed as appealable under the UAA and jurisdictions that adopted the uniform
act are divided about whether the orders are appealable. Id. at ¶ 10. This Court
acknowledged that some jurisdictions hold an order compelling arbitration is
appealable as a final order or an appealable interlocutory order and that other
jurisdictions have held the orders are interlocutory and are not appealable. Id.
at ¶¶ 11-12. We said, “we are persuaded by the wisdom of the decisions
interpreting and applying the procedural requirements of the FAA in deciding
4
whether an order compelling arbitration is appealable under the UAA.” Id. at
¶ 17. We explained the FAA states that an appeal may not be taken from an
interlocutory order directing arbitration to proceed but allows an appeal from
a final decision with respect to arbitration. Id. We said, “This statutory
contrast grew out of the distinction that federal courts had previously
recognized ‘between so-called independent proceedings and so-called
embedded proceedings.’” Id. (quoting Filanto, S.P.A. v. Chilewich Int’l Corp.,
984 F.2d 58, 60 (2d Cir. 1993)). We explained, “In an independent proceeding,
the request to compel arbitration is the sole issue before the district court. In
an embedded proceeding, the motion for arbitration is made in the course of a
larger, substantive suit.” Superpumper, at ¶ 18 (quoting Napleton v. Gen.
Motors Corp., 138 F.3d 1209, 1211 (7th Cir. 1998)). We said the lack of
dismissal after ordering arbitration is often indicative of an embedded
proceeding because it suggests the order compelling arbitration is not wholly
dispositive of the case. Superpumper, at ¶ 21. We held an order to arbitrate in
an embedded proceeding is not appealable, even when the practical result is to
refer all claims to the arbitrator and terminates the proceedings before the
district court. Id. at ¶¶ 22-23. We said, “The rule we adopt today for our own
State procedure, that an order compelling arbitration in an embedded
proceeding is not appealable, is consistent with the policy favoring arbitration
endorsed by the Congress and this Court’s recent precedents.” Id. at ¶ 23. We
explained the issues raised were appealable once the arbitration was complete
and the district court rendered a final disposition, but an order compelling
arbitration in an embedded proceeding is not appealable. Id.
[¶9] This Court’s decision on appealability under the UAA in Superpumper
was guided by the federal courts’ interpretation of similar appealability
provisions of the FAA. Melaas argues the law about appealability under the
FAA changed after Superpumper and therefore the order in this case is
appealable.
[¶10] In Green Tree Fin. Corp.-Ala. v. Randolph, 531 U.S. 79, 86 (2000), and
more recently in Lamps Plus, Inc. v. Varela, 139 S.Ct. 1407, 1414 (2019), the
Supreme Court held an order compelling arbitration and dismissing a party’s
underlying claims is appealable under the FAA because it is a “final decision
5
with respect to an arbitration” within the meaning of 9 U.S.C. § 16(a)(3). The
Court explained an order compelling arbitration and dismissing a party’s
underlying claims disposes of the entire case on the merits and leaves no part
of it pending before the court, which is consistent with the longstanding
interpretation of a “final decision.” Green Tree, at 86. The Court noted that the
order compelling arbitration would not have been appealable if the district
court had entered a stay instead of dismissing the underlying action. Id. at 87
n.2. The Court also recognized that the FAA permits parties to bring a separate
proceeding in a district court to enter judgment on an arbitration award once
it is made, but said the “existence of that remedy does not vitiate the finality
of the District Court’s resolution of the claims in the instant proceeding[,]” and
therefore the dismissal was “a final decision with respect to an arbitration” and
is appealable. Green Tree, at 86.
[¶11] The proceedings in both Lamps Plus and Green Tree were “embedded”
proceedings, and the Supreme Court rejected the argument that an order
compelling arbitration was only appealable in an “independent” proceeding.
Green Tree, 531 U.S. at 87-89. The Court explained “the plain language of the
statutory text does not suggest that Congress intended to incorporate the
rather complex independent/embedded distinction, and its consequences for
finality, into § 16(a)(3).” Id. at 88-89. See also Interactive Flight Techs., Inc. v.
Swissair Swiss Air Trans. Co., Ltd., 249 F.3d 1177, 1179 (9th Cir. 2001)
(recognizing Green Tree clarified the law and old decisions distinguishing
between dismissals in “independent” and “embedded” actions are no longer
good law to the extent they conflict with Green Tree).
[¶12] Most state courts that have considered this issue in recent years have
generally held a party may appeal from an order compelling arbitration and
dismissing the underlying action. See, e.g., Ala. Psychiatric Servs., P.C. v.
Lazenby, 292 So.3d 295, 299 (Ala. 2019) (holding an order granting a motion to
compel arbitration is a final judgment under state procedural rules); City of
Rochester v. Kottschade, 896 N.W.2d 541, 547-48 (Minn. 2017) (holding order
compelling arbitration and dismissing the case was appealable as an appeal
from a final judgment under state rules of civil appellate procedure,
recognizing an order entering a stay instead of dismissal is not appealable, and
6
also explaining Green Tree was not relevant because state arbitration law is
different from the FAA); Sawyers v. Herrin-Gear Chevrolet Co., Inc., 26 So.3d
1026, 1034 (Miss. 2010) (holding an order compelling arbitration which
disposes of all the issues before the trial court or orders the entire controversy
to be arbitrated is a final decision and is immediately appealable whether the
trial court stays the action or dismisses the action); Kremer v. Rural Cmty. Ins.
Co., 788 N.W.2d 538, 547-549 (Neb. 2010) (discussing cases from other
jurisdictions on this issue, explaining state law is silent on whether a party
may appeal an order compelling arbitration or staying judicial proceedings but
the list of appealable arbitration orders is not exclusive, under the state’s UAA
both orders have the same effect in that the parties cannot litigate their
dispute in court because the order divests the court of jurisdiction to hear the
dispute, and both types of orders are final orders affecting a substantial right
in a special proceeding and are appealable); Williams v. TAMKO Bldg. Prods.,
Inc., 451 P.3d 146, 150-51 (Okla. 2019) (recognizing both the FAA and OUAA
allow appeals from arbitration orders that are a final decision, and holding an
order granting a motion to stay proceedings and compel arbitration was
appealable because it is a final decision under the OUAA); Widener v. Fort Mill
Ford, 674 S.E.2d 172, 173-74 (S.C. Ct. App. 2009) (order compelling arbitration
and dismissing action was immediately appealable, citing Green Tree and
explaining state law does not preclude the order from being appealed and
stating the court finally determined the parties’ rights by dismissing the
action); In re Gulf Explr., LLC, 289 S.W.3d 836, 839-40 (Tex. 2009)
(summarizing decisions on the issue in other states, recognizing most uniform
act states follow Green Tree, and holding Texas allows review from an order
compelling arbitration and dismissing the action because it is a final order and
is not an interlocutory order).
[¶13] The UAA and FAA contain similar language allowing appeals from final
orders. Compare N.D.C.C. § 32-29.3-28(f), with 9 U.S.C. § 16(a)(3). Because our
interpretation of appealability under the UAA was previously guided by the
federal courts’ interpretation of the appealability provisions of the FAA and to
remain consistent with other states that have adopted the uniform act, we
conclude an appeal from an order compelling arbitration and dismissing the
7
underlying action is appealable. Superpumper is overruled to the extent it
conflicts with our decision in this case.
III
[¶14] Melaas argues the district court erred by granting Diamond Resorts’
motion to compel arbitration and dismissing her complaint.
[¶15] “An order granting a motion to compel arbitration is reviewed de novo
on appeal, unless the district court’s decision was based on factual findings,
which will only be reversed on appeal if they are clearly erroneous.” 26th St.
Hosp., LLP v. Real Builders, Inc., 2016 ND 95, ¶ 11, 879 N.W.2d 437. The
interpretation of a contract to determine its legal effect is a question of law,
which is fully reviewable on appeal. Id.[¶16] The relevant portion of the arbitration provision of the timeshare
agreement states:
16.1 Arbitration of Claims. Any Claim (defined in Section 16.2
below) between You and Diamond, whether preexisting, present or
future, arising from or relating to this Agreement or the Collection
shall, at the election of either party, be arbitrated on an individual
basis before JAMS . . . pursuant to its Streamlined Rules. . . . The
Federal Arbitration Act (“FAA”), 9 U.S.C. § 1, et seq., shall govern
the interpretation and enforcement of this Provision. . . . The
arbitrator shall follow applicable substantive law consistent with
the FAA, apply applicable statutes of limitations, honor valid
claims of privilege, and issue a written reasoned decision which
will be final and binding except for any review under the FAA. The
arbitrator may award all remedies that would apply in an
individual court action (subject to constitutional limits that would
apply in court). Any in-person hearing will be held in Clark
County, Nevada unless otherwise agreed. . . .
16.2 Claims. “Claim” shall be broadly construed and includes,
without limitation, disputes concerning: purchase, financing,
ownership or occupancy; breach, termination, cancellation or
default; condition of any Collection Accommodation; THE Club or
other exchange programs; reservations, points or rewards
programs; applications and personal information; marketing or
8
sales solicitations, representations, advertisements, promotions or
disclosures; and collection of delinquent amounts and the manner
of collection. “Claim” also includes disputes based upon contract,
tort, consumer rights, fraud and other intentional torts,
constitution, statute, Uniform Commercial Code, regulation,
ordinance, common law and equity. . . .
....
16.4 Application of the Provision. An arbitration award may be
enforced in any court with jurisdiction. This Provision shall
survive the breach, cancellation, termination or rescission of this
Agreement, and any bankruptcy to the extent permitted by law.
This provision requires the FAA to govern the interpretation and enforcement
of the arbitration agreement.
[¶17] Under the FAA, “A written provision in . . . a contract evidencing a
transaction involving commerce to settle by arbitration a controversy
thereafter arising out of such contract . . . shall be valid, irrevocable, and
enforceable, save upon such grounds as exist at law or in equity for the
revocation of any contract.” 9 U.S.C. § 2. Upon the application of one of the
parties, the court shall stay any suit or proceeding brought on an issue
referable to arbitration under an arbitration agreement until the arbitration
has been had in accordance with the terms of the arbitration agreement. 9
U.S.C § 3. Section 4 of the FAA authorizes a party to petition the court to
compel arbitration, stating:
A party aggrieved by the alleged failure, neglect, or refusal of
another to arbitrate under a written agreement for arbitration
may petition any United States district court which, save for such
agreement, would have jurisdiction under title 28, in a civil action
or in admiralty of the subject matter of a suit arising out of the
controversy between the parties, for an order directing that such
arbitration proceed in the manner provided for in such agreement.
. . . The court shall hear the parties, and upon being satisfied that
the making of the agreement for arbitration or the failure to
comply therewith is not in issue, the court shall make an order
directing the parties to proceed to arbitration in accordance with
the terms of the agreement. . . . If the making of the arbitration
9
agreement or the failure, neglect, or refusal to perform the same
be in issue, the court shall proceed summarily to the trial thereof.
9 U.S.C. § 4.
[¶18] The FAA governs arbitration agreements in contracts involving
interstate commerce. See Real Builders, 2016 ND 95, ¶ 14. The parties do not
dispute that the timeshare agreement is a contract involving interstate
commerce or that the FAA applies. The FAA governs the interpretation and
enforcement of the arbitration agreement in this case.
[¶19] Melaas argues the entire timeshare agreement, including the arbitration
agreement and forum selection clause, is unenforceable and void because she
lacked the ability to consent to the agreement and any purported consent was
obtained by Diamond Resorts’ undue influence, duress, menace, or fraud. She
contends the court was required to decide whether a valid contract existed
before it could compel arbitration.
[¶20] In Real Builders, 2016 ND 95, ¶ 12, this Court considered whether a
challenge to the validity of a contract should be determined by the court or the
arbitrator under the FAA and UAA. The plaintiff argued the contract was
fraudulently entered into and the court was required to determine whether the
contract was valid. Id. Quoting Rent-A-Center, West, Inc. v. Jackson, 561 U.S.
63, 70-71 (2010), we explained there are two types of validity challenges, one
type challenges the validity of the agreement to arbitrate and the other type
challenges the validity of the contract as a whole, but only a challenge to an
agreement to arbitrate is relevant to a court’s determination whether the
arbitration agreement is enforceable under the FAA. Real Builders, at ¶ 17.
An arbitration agreement is severable from the remainder of the contract, and
therefore a party’s challenge to the contract as a whole does not prevent a court
from enforcing a specific agreement to arbitrate. Id. The basis of the challenge
must be directed specifically at the agreement to arbitrate for the court to
decide the issue, even when the alleged fraud that induced the whole contract
equally induced the agreement to arbitrate. Id. We held the district court did
not err in refusing to decide the plaintiff’s claims related to the validity of the
10
entire contract before ordering arbitration. Id. at ¶ 19. This case remains
consistent with federal cases interpreting the FAA.
[¶21] In Buckeye Check Cashing, Inc. v. Cardegna, 546 U.S. 440, 444 (2006)
(citation omitted), the Supreme Court explained there are two types of
challenges to the validity of arbitration agreements:
One type challenges specifically the validity of the agreement to
arbitrate. The other challenges the contract as a whole, either on
a ground that directly affects the entire agreement (e.g., the
agreement was fraudulently induced), or on the ground that the
illegality of one of the contract’s provisions renders the whole
contract invalid.
In a footnote, the Court also explained a claim that a contract does not exist is
different from a challenge to the validity of the contract as a whole, stating:
The issue of the contract’s validity is different from the issue
whether any agreement between the alleged obligor and obligee
was ever concluded. Our opinion today addresses only the former,
and does not speak to the issue decided in the cases cited by
respondents (and by the Florida Supreme Court), which hold that
it is for courts to decide whether the alleged obligor ever signed the
contract, Chastain v. Robinson–Humphrey Co., 957 F.2d 851 (C.A.
11 1992), whether the signor lacked authority to commit the
alleged principal, Sandvik AB v. Advent Int’l Corp., 220 F.3d 99(C.A. 3 2000); Sphere Drake Ins. Ltd. v. All American Ins. Co., 256
F.3d 587 (C.A. 7 2001), and whether the signor lacked the mental
capacity to assent, Spahr v. Secco, 330 F.3d 1266 (C.A. 10 2003).
Buckeye, at 444 n.1. The Court explained that if the challenge is to the validity
of the arbitration clause itself, it is an issue which goes to the making of the
agreement to arbitrate under § 4 of the FAA, and the court may adjudicate it,
but the statutory language in the FAA does not permit the court to consider
challenges to the validity of the entire contract as a whole. Id. at 445. The Court
further explained that under the FAA the arbitration provision is severable
from the remainder of the contract, the issue of the contract’s validity is
determined by the arbitrator unless the challenge is to the arbitration clause
itself, and arbitration law applies in state and federal courts. Id. at 445-46. The
11
Court held, “We reaffirm today that, regardless of whether the challenge is
brought in federal or state court, a challenge to the validity of the contract as
a whole, and not specifically to the arbitration clause, must go to the
arbitrator.” Id. at 449.
[¶22] Although the issue of the validity of a contract as a whole must be
decided by the arbitrator, the Supreme Court stated in Buckeye, 546 U.S. at444 n.1, that the issue of a contract’s validity is different from the issue of
whether an agreement was ever formed and a contract exists. The Court
explained its decision only addressed the issue of a contract’s validity and did
not speak to the issue of whether the court should decide a claim that a contract
does not exist, including claims the signor lacked the mental capacity to assent
to the contract. Id.[¶23] The Supreme Court again alluded to the issue in Granite Rock Co. v. Int’l
Bhd. of Teamsters, 561 U.S. 287, 296 (2010) (citations and quotations omitted),
stating:
It is well settled in both commercial and labor cases that whether
parties have agreed to submit a particular dispute to arbitration is
typically an issue for judicial determination. It is similarly well
settled that where the dispute at issue concerns contract
formation, the dispute is generally for courts to decide.
The Court said courts should order arbitration of a dispute only where the
court is satisfied neither the formation of the arbitration agreement nor its
enforceability or applicability to the dispute is in issue, and if either is in issue
then the court must resolve the disagreement. Id. at 299-300.
[¶24] The federal courts of appeals that have directly addressed a capacity to
contract challenge are split in deciding whether a court or an arbitrator is
required to determine whether a contact exists. In Primerica Life Ins. Co. v.
Brown, 304 F.3d 469, 471-72 (5th Cir. 2002), the court held the issue of a
party’s mental capacity to execute a contract was for the arbitrator to decide.
The court explained the Supreme Court has held the “making” of an agreement
to arbitrate under § 4 of the FAA was not called into question by an allegation
that the entire contract was void, the capacity defense was a defense to the
12
entire agreement and was not a specific challenge to the arbitration clause,
and therefore the issue was part of the underlying dispute between the parties
and must be submitted to the arbitrator. Id. at 472. See also 4 Am. Jur. 2d
Alternative Dispute Resolution § 78 (citing Primerica for the proposition that
the issue of whether a party had the mental capacity to execute the contract is
a question for the arbitrator).
[¶25] However, in Spahr v. Secco, 330 F.3d 1266, 1273 (10th Cir. 2003), the
court held the court should decide a mental capacity challenge to a contract
providing for arbitration under the FAA. The court explained § 4 of the FAA
states the court shall order arbitration upon being satisfied the “making” of the
agreement for arbitration is not an issue, a mental incapacity defense goes to
both the entire contract and the specific agreement to arbitrate the contract,
and therefore a claim that a party lacked the mental capacity to enter into an
enforceable contract placed the “making” of an agreement to arbitrate at issue
under § 4 of the FAA. Spahr, at 1273. The court stated that unlike fraud in the
inducement which can be directed at individual provisions in a contract, a
mental capacity challenge can only be directed at the entire contract. Id.
[¶26] State courts that have decided the issue have generally held a party’s
capacity to consent to a contract and therefore whether a contract was ever
formed is an issue for the court to decide. See Estate of Grimm v. Evans, 251
P.3d 574, 577 (Colo. Ct. App. 2010) (holding a mental capacity defense must be
resolved by the court because it denies that an agreement to arbitrate exists
and without an agreement to arbitrate the arbitrator cannot act); Bark v. Lake
Country Chevrolet Cadillac, LLC, 321 P.3d 1007, 1010-11 (Okla. Civ. App.
2014) (holding § 4 of the FAA requires the court to determine whether a valid
contract containing an arbitration agreement was ever formed when plaintiff
alleged he lacked capacity to “make” a contract); In re Morgan Stanley & Co.,
Inc., 293 S.W.3d 182, 187-89 (Tex. 2009) (holding a challenge to whether any
agreement was ever concluded and exists based on a mental capacity challenge
is an issue for the court to decide); Rhymer v. 21st Mortg. Corp., 2006 WL
3731937, 3-4 (Tenn. Ct. App. 2006) (holding the court must decide the
incompetence to contract issue). Courts have also recognized the decision in
Primerica has been roundly criticized, other courts generally have not followed
13
its reasoning, and the same court later held in Will-Drill Res., Inc. v. Samson
Res., Co., 352 F.3d 211 (5th Cir. 2003), that the court must first resolve a
dispute where a party attacks the existence of an agreement as opposed to its
continued validity or enforcement. Morgan Stanley, at 189.
[¶27] Courts have also held other types of challenges to the formation or
existence of a contract, and not the contract’s validity, are issues for the court
to decide before arbitration can be ordered. See e.g., Sandvik AB v. Advent Int’l
Corp., 220 F.3d 99, 107 (3d Cir. 2000) (holding existence of the underlying
contract must be decided before arbitration can be ordered when defendant
alleged agent lacked authority to sign contract); Sanford v. MemberWorks, Inc.,
483 F.3d 956, 962 (9th Cir. 2007) (holding “[i]ssues regarding the validity or
enforcement of a putative contract mandating arbitration should be referred to
an arbitrator, but challenges to the existence of a contract as a whole must be
determined by the court prior to ordering arbitration.”); Toledano v. O’Connor,
501 F. Supp.2d 127, 138-41 (D.D.C. 2007) (holding the court was the proper
forum for deciding plaintiffs’ challenge to the existence of a contract when
plaintiffs alleged no contract ever existed because offer was withdrawn before
other party accepted); Rowe Enters. LLC v. Int’l Sys. & Elecs. Corp., 932 So.2d
537, 541-42 (Fla. Dist. Ct. App. 2006) (holding the court must decide whether
signature on contract was a forgery before ordering arbitration); Thompson v.
Lithia Chrysler Jeep Dodge of Great Falls, Inc., 185 P.3d 332, 338-39 (Mont.
2008) (holding the court is the appropriate forum to determine whether a
contract exists when a party challenges a contract containing an arbitration
clause on the ground that the parties never entered into a contract because a
condition precedent was not met).
[¶28] These courts have explained that there are three types of challenges in
arbitration cases:
(1) [A] challenge to the validity of the contract as a whole, (2) a
challenge to the validity of the arbitration provision itself, and (3)
a challenge to whether any agreement was ever concluded. Prima
Paint [Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395 (1967),]
reserves the first category for the arbitrator and the second
category for the court. Buckeye, 546 U.S. at 446, 126 S.Ct. 1204.
14
Since Buckeye, the federal courts, a state supreme court, and other
state appellate courts have generally concluded that the third
category involves a threshold inquiry for the court.
Morgan Stanley, 293 S.W.3d at 187; see also Rowe Enters., 932 So.2d at 540.
Arbitration is a matter of consent, arbitrators have authority to resolve
disputes only because the parties agreed to submit their disputes to
arbitration, a court can only order arbitration when it is satisfied the parties
agreed to arbitrate that dispute, and the court must resolve any issue that
challenges the formation of the arbitration agreement a party seeks to have
the court enforce. See Granite Rock, 561 U.S. at 299-300. If the contract
containing the arbitration agreement was never formed and therefore does not
exist, then the parties never agreed to arbitrate. See Thompson, 185 P.3d at
338; see also Estate of Grimm, 251 P.3d at 577; Bark, 321 P.3d at 1110-11. If a
party claims a contract was never formed and does not exist because the party
lacked the mental capacity to consent, then the “making of the agreement for
arbitration” is at issue and the court must determine whether an agreement
exists before ordering arbitration. See Spahr, 330 F.3d at 1273; Bark, at 1010-
11; 9 U.S.C. § 4 (stating the court shall order arbitration upon being satisfied
that the making of the agreement for arbitration is not in issue). We find this
reasoning persuasive. We conclude the court must decide whether a contract
was formed before ordering arbitration if a party challenges the existence of
the contract containing the arbitration agreement by alleging she lacked the
capacity to consent.
[¶29] In summary, when a party moves to compel arbitration, the district court
must first determine if there is an arbitration agreement requiring arbitration
of the dispute between the parties. If there is an arbitration agreement
applicable to the dispute, the court must then decide any challenges to the
making of the arbitration agreement, including any challenges to the validity
of the arbitration agreement itself and any claims that the contract containing
the arbitration agreement was never formed because one party did not have
the capacity to consent to the agreement. Any claims challenging the contract
as a whole based on alleged fraud or duress or similar claims must be decided
by the arbitrator. After resolving any challenges to the making of the
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arbitration agreement, the court must order arbitration if the court has
determined that a valid arbitration agreement exists requiring arbitration of
the dispute.
[¶30] Melaas claimed she could not enter into the timeshare agreement
because she could not form the required consent. She alleged she has multiple
medical conditions, which impacted her decision making capabilities, and she
was a vulnerable adult. Christina Melaas Hargiss, Melaas’ daughter, filed an
affidavit in support of Melaas’ argument that she did not have capacity to
consent to the timeshare agreement. Because Melaas claimed she lacked the
capacity to consent to the timeshare agreement at the time it was executed,
and provided an affidavit supporting her argument, we conclude the district
court erred in ordering arbitration without holding an evidentiary hearing and
deciding whether a contract exists.
[¶31] However, Melaas’ claims about fraud, duress, menace, and undue
influence are arguments about the validity of the entire contract, which under
law applicable to arbitration, do not challenge the existence of the contract. See
Real Builders, 2016 ND 95, ¶¶ 17-19. Because these claims challenge the
validity of the entire timeshare agreement and do not challenge the validity of
the arbitration agreement itself, they are issues for the arbitrator to decide if
the district court determines that a contract exists and arbitration is
appropriate.
[¶32] We conclude the district court erred by granting Diamond Resorts’
motion to compel arbitration before deciding whether a contract containing an
arbitration agreement was formed. On remand the court must hold an
evidentiary hearing and decide whether a contract containing an arbitration
agreement exists.
[¶33] The district court did not give any explanation for dismissing the action
after ordering arbitration. Section 32-29.3-07(7), N.D.C.C., states, “If the court
orders arbitration, the court on just terms shall stay any judicial proceeding
that involves a claim subject to the arbitration.” (Emphasis added.) See also
Kottschade, 896 N.W.2d at 548-49 (holding district court erred in dismissing
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action after ordering arbitration because state statutory law states the court
“shall on just terms stay any judicial proceeding that involves a claim subject
to the arbitration” and required the court to stay judicial proceedings when
granting a motion to compel arbitration); Widener, 674 S.E.2d at 174 (holding
the trial court erred in dismissing the action and explaining there was the
potential that the statute of limitations could bar refiling of any unarbitrated
claims in court if the dismissal was not reversed); Gulf Explr., 289 S.W.3d at
841 (holding a stay is generally the only appropriate order for a state court
with jurisdiction of all of the issues and the Texas arbitration act states an
order compelling arbitration must stay the underlying litigation). If the court
determines on remand that a contract exists and that arbitration is
appropriate, the court must consider whether it should dismiss or stay
proceedings pending the arbitration and explain its decision.
IV
[¶34] Diamond Resorts argues we should remand for further proceedings on
its motion to dismiss under the timeshare agreement’s forum selection clause
if we conclude some or all of Melaas’ claims are not subject to arbitration.
[¶35] Diamond Resorts moved to compel arbitration and dismiss under the
FAA. Diamond Resorts argued in its brief in support of its motion to compel
arbitration that the district court should dismiss the case because Melaas
agreed to arbitrate any claim in Nevada and so the arbitration should be
instituted in Nevada and the case here should be dismissed. Diamond Resorts
did not move to dismiss under N.D.R.Civ.P. 12(b)(3) for improper venue.
However, in a footnote in its brief in support of its motion to compel arbitration,
Diamond Resorts said “Dismissal for improper venue is also appropriate
pursuant to North Dakota law . . . N.D.[C.C.] § 28-04.1-02.” Melaas addressed
the contract’s forum selection clause in her response to the motion to compel,
arguing the forum selection clause is unenforceable because it was obtained
through duress or unconscionable means. Diamond Resorts filed a reply brief
in support of its motion, stating, “The Court should dismiss this action so
Melaas may bring her claims before an arbitration forum in Clark County,
Nevada, pursuant to the Timeshare Contract; or alternatively, order a stay in
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proceedings pursuant to 9 U.S.C. § 3.” The record does not include a separate
motion to dismiss under N.D.R.Civ.P. 12(b)(3) for improper venue. The district
court did not address any argument about improper venue.
[¶36] The entire arbitration agreement is contained in section 16 of the
timeshare agreement. The arbitration agreement states the FAA “shall govern
the interpretation and enforcement of this Provision.” The only mention of
Nevada in the arbitration agreement is that “[a]ny in-person hearing will be
held in Clark County, Nevada unless otherwise agreed.” Subsection 16.4 of the
arbitration agreement further states, “An arbitration award may be enforced
in any court with jurisdiction.” There is also a forum selection clause in section
17 of the contract, which is not part of the arbitration agreement. The forum
selection clause states, “This Agreement is governed by Nevada law without
regard to Nevada’s choice of law rules. You must bring any legal action in Clark
County, Nevada.” When the term “Agreement” is used in the contract it refers
to the entire contract and not the arbitration agreement.
[¶37] Under N.D.C.C. § 28-04.1-03, “If the parties have agreed in writing that
an action on a controversy may be brought only in another state and it is
brought in a court of this state, the court will dismiss or stay the action, as
appropriate, unless” one of the listed exceptions applies. The listed exceptions
include if “[t]he agreement as to the place of the action was obtained by
misrepresentation, duress, the abuse of economic power, or other
unconscionable means” or if “[i]t would for some other reason be unfair or
unreasonable to enforce the agreement.” Id.
[¶38] A motion to dismiss based on a forum selection clause is a separate issue
from arbitration. The application of a forum selection clause is separate
grounds for dismissal that should be argued in a motion to dismiss under
N.D.R.Civ.P. 12(b)(3) for improper venue. See Osborne v. Brown & Saenger,
Inc., 2017 ND 288, 904 N.W.2d 34. To the extent Diamond Resorts argues the
action should have been brought in Nevada, it is a venue issue and not a
jurisdictional issue, and the right can be waived. See Arthur R. Miller, 14D
Fed. Prac. & Proc. Juris. § 3801 (4th ed. 2020) (discussing the difference
between venue and jurisdiction); see also Wachovia Bank v. Schmidt, 546 U.S.
18303, 316 (2006) (explaining venue is largely a matter of litigational convenience
and is waived if not timely raised).
[¶39] A party’s right to rely on a forum selection clause and right to object to
venue can be waived. See Triple Quest, Inc. v. Cleveland Gear Co., Inc., 2001
ND 101, ¶¶ 22-25, 627 N.W.2d 379 (holding a party may waive its right to rely
on a forum selection clause). The issue of improper venue is waived if it is
omitted from a motion to dismiss or if it is not made by motion or included in
the responsive pleading. See 1A Fed. Proc., L. Ed. § 1:707 (2020); 1 Bus. & Com.
Litig. Fed. Cts. § 3:40 (4th ed. 2019); 3 Cyc. of Fed. Proc. § 4:16 (3d ed. 2020)
(stating, “A defendant waives venue by submitting to the litigation without
raising the issue of venue by motion, responsive pleading, or answer as
provided under the applicable rule of civil procedure. In short, venue is waived
if not challenged at the time the party makes its first defensive move.”).
[¶40] On remand, if any of the parties argue the case must be dismissed under
the forum selection clause, the district court must first determine whether a
contract exists. See N.D.C.C. § 28-04.1-03. If the court determines a contract
exists, it may then consider the forum selection clause issue, including whether
the issue was waived.
V
[¶41] We reverse the order compelling arbitration and dismissing Melaas’
complaint, and we remand for further proceedings consistent with this opinion.
[¶42] Jon J. Jensen, C.J.
Gerald W. VandeWalle, concur in result.
Daniel J. Crothers
Lisa Fair McEvers
Jerod E. Tufte
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