Arbitration Hearing (1/27/10) – House Committee on Judiciary & Civil Jurisprudence

Arbitration Hearing (1/27/10) – House Committee on Judiciary & Civil Jurisprudence

Below are our rough notes and impressions. Please excuse any misspellings of names and add your own comments.

Chairman Todd Hunter called the public hearing with little advanced notice and a list of invited speakers to address Interim Charge #2 on Arbitration and continue hearings from last year’s regular session. HOT was one of those invited to testify and, after learning about the hearing, dozens of Texas homeowners also came to Austin and testified.

Overall issue:
  • Arbitration is a dispute resolution alternative to civil suits that seems to work well in business-to-business (B2B) disputes where both sides have similar resources.
  • Arbitration is widely criticized when applied to business-to-consumer (B2C) disputes where there’s wide disparity of resources between parties involved.
  • Those favoring B2C arbitration said it was faster and cheaper than a civil suit. HOT strongly disagrees.

Tom Archer (HOT President)

  • Endorsed pending federal legislation – the Arbitration Fairness Act
  • Recommended that Texas abolish pre-dispute binding arbitration agreements in contracts pertaining to a Texas homestead, including sales contracts, home warranties and home insurance

David Payton (Houston trial lawyer who handles residential defense cases)

  • He said arbitration is a Great solution for commercial construction where both parties are more equal.
  • He said homeowners also do better in arbitration than in jury trials (yeah, right).
  • All 3 of his latest Residential cases ruled in favor of consumers (yeah, right – What was the award vs. the damages?).
  • American Arbitration Association (AAA) statistics: 1256 commercial cases vs. 76 residential cases.

Bob Perk (Associated Builders & Contractors, Corpus Christi)

  • He said arbitrators have technical construction experience and decide on facts, where juries decide on emotion.

Pam Bolton (Texas Watch Policy Director)

  • Costs are MUCH higher for consumers and there’s bias since arbitrators are beholden to industry for repeat business. They only see the consumer once.
  • Open issues include preservation of rights to a class action, attorney fees, and no gag order. Arbitration does NOT work for small disputes. Spending $1500+ per day is not justified to recover small (e.g. $500) damages unless as part of a class.
  • Because of the secrecy of arbitration proceedings, consumers can’t research a company’s business performance.
  • Total costs of arbitration are often hidden from consumers (due to added fees).

Mark Kincaid (Texas Trial Lawyers Association) – This GREAT testimony starts at 0:49.

  • The fundamental issue is Forcing arbitration on the weaker party when they would not normally choose it.
  • Why do some argue for pre-dispute consumer arbitration but don’t let them decide? The consumer’s Adversary makes the choice and forces it on the consumer.
  • Consumers don’t voluntarily choose arbitration when signing contracts.
  • Selecting a dispute resolution process for everyone is too paternalistic. (We know better than you.)
  • Consumers don’t rise as a group and ask for laws that force arbitration on big corporations.
  • He recommends prohibiting pre-dispute arbitration clauses when there’s disparate bargaining power or litigation funding between the parties.
  • MOST lawsuits are settled before a trial commences. The threat of a trial motivates this.

Lee Parsley (Texans for Lawsuit Reform)

  • He said a ban on pre-dispute arbitration agreements would limit the right to contract.
  • He said the Arbitration Study Group should focus on “specific” reforms (i.e. not given free reign).

William Allensworth (Construction Law professor at UT)

  • He said arbitration is good for homeowners. (yeah, right)
  • He said home building is complicated and disputes are inevitable, suggesting that arbitrators with specific construction knowledge are best qualified to decide the cases.
  • He said judges and juries don’t have the required knowledge and first must be educated, leaving appeals options likely, and increasing the cost. He said it takes at least a semester to teach Construction Law students the info they need in order understand construction and construction contracts.
  • He said arbitration has no Summary Judgment process, so all points can be heard.
  • He described the procedure as “reasonably fair and relatively fast and low cost.”

Judge Mike Shliss

  • He was asked about “Rule 11 mechanics.” Rule 11 covers Post-dispute arbitration where arbitration provides more flexibility for the parties to design their own legal process. How formal do we want this? Will we allow oral testimony or not? What sorts of evidence will be allow? Do we want the rules of law followed? Etc.

Robert C. Lou McCreary (Consumer Attorney) – His GREAT testimony starts at 1:23.

  • He agreed generally with Judge Shliss about potential arbitration advantages.
  • BUT, Texas is 46% Hispanic.
  • Arbitrators are “old white men in suits.”
  • 80% of civil suits are settled at mediation. (Someone else said earlier that 90+% are settled before the trial begins.)
  • Typical costs = $2500-$3000 per day, split between parties.
  • 600K registered new homes (2004-2009) used TAB’s standard contract with binding arbitration.
  • Recommendation (1) – Don’t allow Pre-Dispute arbitration in contracts of existing home sales, since there’s NO intrastate commerce involved and thus no conflict with federal law.
  • Recommendation (2) – Preserve the right to opt-out in respect to the Texas Homestead, which is held sacred and protected.
  • Recommendation (3) – Require mediation before arbitration.
  • Recommendation (4) – Stamp: “By signing this arbitration agreement, you the consumer waive your Constitutional right trial by jury right.”

Tom Archer (HOT President) – His GREAT testimony starts at 1:30.

  • He compared TRCC arguments and Arbitration arguments. Industry said “It’s good for you; take it or leave it.” Not one consumer testified the TRCC was good for them, and not one has testified that Arbitration is good for them.
  • Arbitration is NOT good for consumers, as some have argued.
  • He referenced The Woodlands, a Houston suburb where all 13 builders have non-negotiable binding arbitration
  • Consumers have gross inequalities of resources, a critical issue for their homestead.
  • There is “NO Freedom to Contract” since consumers have NO negotiating power.
  • Recommendation – Prohibit pre-dispute arbitration in ANY agreement concerning the homestead, including sales contracts and warranty or insurance agreements.
  • He referenced Mary Henderson’s case with its $100K in damages but a meager $7K arbitration award that didn’t even cover the costs of the arbitration process.
  • He referenced HOT’s excellent 1-page Arbitration flyer.

Charles Cervantes (past realtor and now Centex homeowner from San Antonio’s Hills of Rivermist subdivision)

  • He described the collapsed retaining wall
  • He described Centex sales enticements, including the use of their in-house Mortgage Company and Title Company.
  • Because the “old white guys” will see him just once, he worried that he won’t get restitution.

Angela Ward (Centex homeowner)

  • Simply asks for Fairness.
  • Doesn’t believe arbitration will be beneficial to her.
  • Wants the process to be Open and is concerned about the high cost.

Joe Canterbury (Dallas Construction Law attorney & arbitrator representing construction industry)

  • He said “Homeowners fare well” and suggested that any change to arbitration would have a huge impact on the economy, jobs, courts, and home prices. “Leave B2B arbitration alone.”
  • Rep. Roberto Alowzo asked about the good/bad of arbitration. “It’s quick, final (get on with it), and cheaper (since there’s no “scorched earth” discovery), and arbitrators have construction expertise.” Cases that may hurt consumers relate to small disputes, age discrimination, and class actions. He recommends putting the arbitration clause in bold print.
  • He was asked about the Cost (i.e. $25K damages vs. $15K to arbitrate). He suggested that legislation could limit arbitration costs vs. damages.
  • He was asked about transparency and the need for stenographic records. He said adding a court reporter adds cost but CAN be an agreement between parties. Any party can ask for it, but the other party can object.
  • He was asked about transparency & confidentiality so the public can know about the track record of the process and the arbitrator.

Brian Ramirez (Centex homeowner)

  • He was thrust into learning about Binding Arbitration (for the first time). The pre-dispute agreement was NOT part of his home buying decision process.
  • He learned about “don’t bite the hands that feed you” and has concerns about his prospects for a good outcome.
  • He asked how he could research potential arbitrators without knowledge of their decision record due to secrecy of the process.
  • He was asked about permitting of the collapsing retaining wall and why the City would issue a permit for the home but NOT the retaining wall.

Christian Agular (Centex homeowner)

  • Simply wants to prevent this in the future, saying homeowners need a louder voice, and contractors should be held accountable.

Janet Ahmad (HOBB)

  • She was not called but jumped up in response to a question of anyone providing legal representation, even though she admitted that she’s NOT an attorney.
  • She gave a repetitive history lesson of federal & state bills hoping and echoed known problems, saying Forced Arbitration denies choice and is contrary to public interest.
  • Losing a case involving your home is a “life changing” experience.
  • She also reference the old time “pistol duel” and called pre-dispute arbitration “a bullet you can’t dodge.”
  • She said the TRCC, RCLA and “builder’s right to repair” cause Disputes vs. Warranties.
  • She said, “75% of all San Antonio homes have missed inspections.”
  • Even a “win” is seldom a win – e.g. put a door knob on.

Martha Cushner (Houston homeowner who took sick time from teaching)

  • Her testimony was impassioned and tearful and obviously angry. She said she can’t even imagine the Hills of Riverview homeowners’ plight.
  • She does NOT want to sit with an arbiter behind closed doors and wants the right to an appeal.
  • She referenced a homeowner with a $2000 claim who spent over $5000 in arbitration.
  • She was asked for a copy of her contract and its arbitration clause and promised to provide it.
  • She said went through BBB mediation and was extremely unsatisfied.

Andy Willson (Public Citizen)

  • He handed out “Forced Arbitration: Unfair and Everywhere” (http://www.citizen.org/documents/UnfairAndEverywhere.pdf), which documents the prevalence of arbitration.
  • He handout out “Home Court Advantage” (http://www.fairarbitrationnow.org/uploads/HomeCourtAdvantage.pdf), which is specific to pre-dispute binding arbitration in the homebuilding industry.
  • He referenced a case where the arbitrator had an obvious conflict-of-interest.
  • Andy recently bought a Centex home and understood what he was signing. He asked to opt-out but was told it wasn’t an option, and his wife pressured the purchase. He endorsed HOT’s recommendation of creating an exemption for the homestead.
  • He was asked about the retaining walls in San Antonio and responded that such walls are everywhere, but he had no specifics about their permitting or inspection.
  • He was asked about the arbitration appeal process and statutes of limitation and responded that the 30-day limit applies to malfeasance. Otherwise arbitration appeals are nearly impossible.
  • He read part of one of the reports, including the fact that “9 out of 9 homebuilders” had binding arbitration clauses.

Nancy Henchell (Sugarland homeowner) – Her effective testimony starts at 2:41

  • She described people who get angry or give up due their anger and distrust of government, saying fewer Americans (percent) vote in elections than in any other country. The implication is what they vote when they’re pissed and see a chance of change and that legislators who side with industry and against consumers will face their voting wrath.
  • People who sign MDAs don’t know of the industry’s poor performance or the risks they’re taking.
  • Deuteronomy said, “Don’t put a stumbling block in front of a blind man.” People are becoming aware that “it just doesn’t pay to buy a new home in Texas.” This CAN’T be good for our economy!
  • When builders are allowed to act irresponsibility without accountability and with impunity, it’s no wonder
  • She was asked about the word “mandatory” and said there is no negation option. The representative defended pre-dispute MDA as a ontract, not by law.

John Corby (HADD) – His GREAT testimony starts at 2:48

  • He asked the Committee why we are here yet again talking about the same issue that is still not fixed. It’s because the home building industry continues to abuse binding arbitration.
  • The home building industry (not credit cards, cell service, etc.) are the ones abusing MDA, and consumers have demanded resolution for 10 years with no result.
  • He referenced the anger of homeowners and referenced a Georgia case where such anger drove the homeowner to murdering the builder. (Might they next murder the lawmaker who contributed to the abuse?).
  • He passionately argued that MDA steals our 7th amendment Constitution rights.
  • The solution is to abolish pre-dispute MDA for home building industry by abolishing it for the homestead.
  • Contrary to what some others say, MDA it’s NOT voluntary, and it’s NOT a contract issue.
  • He referenced The Woodlands, saying “Invite me to YOUR city, and let’s do a study there.”
  • He referenced KB Homes and federal legislation that now precludes them (just them) from MDA.

James Winslow

  • He was a US Air Force construction manager and “knows” construction.
  • He knew what to look for when he bought a San Antonio home, but it still suffered from serious defects.
  • He described problems with the TRCC dispute process and its faulty inspection report and now worries about his arbitration case.
  • He knew what he was signing (i.e. MBA clause) but believed the builder’s promises, saying he was lied to.
  • Make arbitration a choice and make it transparent. Protect consumers.

Richard Niemark (SVP AAA) – His effective testimony starts at 3:00.

  • He described AAA as a “nonprofit” corporation that promotes public service options, including Hurricane Katrina mediation services.
  • He described arbitration as originally B2B, which has slowly grown to B2C.
  • He acknowledges that the award ratio (builders win vs. consumers win) is WAY OUT OF LINE in Texas, probably due to contracts used in this state. (This is a likely a TAB issue). The CONTRACT is where the problem is, not the arbitration process.
  • Showing concern with abusive sales and warranty contracts, he said “Arbitrators can ONLY award under the terms of the contract & warranty.”
  • He was asked about possible safeguards and was asked to be submitted them in written form. [Why didn’t they ask him to respond in public like others when they were asked? This request shows a lack of transparency.]
  • He was asked how arbitrators are selected and put on the list of arbitrators. He said they’re required to disclose conflicts-of-interest.
  • He was asked about the potential of having average taxpayers on the arbitration panel vs. just industry specialists. He said they do this in other states, but not in Texas.
  • He was asked about the appeal process and whether we can add something to opt-out or appeal. His suggestion is to create a separate section of law for consumers and employees. He promised to deliver a Finegold model of what that might look like.

Terry Leightness (Centex resident)

  • She’s overwhelmed and extremely disappointed with what she heard here today. “What I learned today is that, a homeowner has no rights… We’re going to be losing everything and wonder, how builders can be allowed to get away with this.”
  • Rep. Alonzo acknowledged told her that people can sign the contract or not (or buy or not), and he put the blame onto the homeowners themselves.

Ned Munios (TAB General Council)

  • Arbitration is fair, and contract freedom should be maintained.
  • “Disproportionate bargaining power” is overblown and often does not apply to smaller builders. [But they are TAB members specifically to get those contracts. Without their own legal teams, they naturally won’t negotiate changes.]
  • He was asked about current law now that the TRCC is gone. He responded that existing TRCC (1-2-10 year) warranties are in place for these San Antonio homeowners. [But those warranties exclude “soil conditions.”]

Wayne Caswell (HOT Communications Director) – My own testimony is at 3:41.

  • I didn’t plan to testify but signed up late to clarify that signing a contract with MDA is “NOT optional.” The builder’s sales contract is non-negotiable among almost all Texas builders, because it’s a standard contract written by the powerful attorneys at Texas Association of Builders (TAB).
  • Pre-dispute MBA is an “Illegal Restraint of Trade” – I referenced The Woodlands and the fact that ALL 13 builders include MBA in their non-negotiable contracts.
  • I described how corporations are duty bound to act in the interests of shareholders – not society. That’s why they will naturally act as a Sociopath unless regulatory oversight prevents that.
  • I described the environment of how people shop for homes and sign sales agreements that define their future rights.
  • I forgot to say that ALL 10 of the home warranties we got from them included MBA clauses that force buyers into arbitration even if they were allowed to opt-out in the sales contract.
  • I forgot to describe the impact of the “gifted home warranty,” which is presented at closing and usually has exemptions such as “soil conditions.” Even if buyers get closing contracts ahead of time and have them reviewed by an attorney, the “free” warranty is first introduced at closing as a “thank you” gift. Closings are often held at 4:00PM on Fridays specifically so there’s no time to review those late submissions.

Leslie & Francis Crouch (Centex homeowners)

  • Their tearful and emotional testimony was a fitting close to the day’s hearing.
  • “The builder is my enemy. He has made himself that way.”
  • They are “homeless homeowners” because of serious defect in their Plantation Homes home.
  • They don’t have the money to go into arbitration.
  • “They lied to us.” “We’ll gladly take a polygraph test.”
  • Gas leaks and toxic fumes caused Francis’ health problems and made the home unlivable.
  • They noticed the MBA clause but trusted the builder and his promises.
  • This is the second time they went through this. The first time it was a Ryland home that became unlivable.
  • The builders hope for and rely on foreclosure so they don’t have to deal with it. [Note the number of builder-owned mortgage companies that immediately sell the mortgage to 3rd party investors as complex derivatives. This is a cause of the Global Collapse, and it continues today.]

Here’s a very hypothetical thought. If Americans can legally use lethal force to protect themselves, their families or their property, might that standard extend to protecting themselves from builders as well as burglars? The emotional impact of builder abuse is often far greater. So what might a jury decide if a homeowner victim shoots their builder? I wonder what the Centex homeowners would decide if they were on the jury, because people at their wits end with nothing to lose – like the Crouch couple – can behave irrationally and do anything. Who could blame them?

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