Sanders v. Savannah Highway Auto. Co.

440 S.C. 377

892 S.E.2d 112

Cleo SANDERS, Respondent, v. SAVANNAH HIGHWAY AUTOMOTIVE COMPANY, a General Partnership d/b/a Rick Hendrick Dodge Chrysler Jeep Ram ; Santander Consumer USA Holdings, Inc.; Isiah S. White; Danny Anderson; and Patrick Bachrodt Jr., Defendants, of which Savannah Highway Automotive Company, a General Partnership d/b/a Rick Hendrick Dodge Chrysler Jeep Ram, and Isiah S. White are the Petitioners.

Appellate Case No. 2021-000137

Opinion No. 28168

Supreme Court of South Carolina.

Heard April 28, 2022

Filed July 26, 2023

Rehearing Denied September 27, 2023

John Thomas Lay Jr. and Jessica Waller Laffitte, of Gallivan, White & Boyd, PA, of Columbia, for Petitioners.

C. Steven Moskos, of C. Steven Moskos, PA, of Charleston, and Brooks Robert Fudenberg, of Law Office of Brooks R. Fudenberg, LLC, of Charleston, for Respondent.

James Y. Becker and Robert Lawrence Reibold, of Haynsworth Sinkler Boyd, P.A., of Columbia, for Amicus Curiae the South Carolina Automobile Dealers Association.

JUSTICE JAMES :

The Federal Arbitration Act ¹ (FAA) sometimes requires the arbitrator to decide not only the merits of a dispute but also the gateway question of whether the dispute is arbitrable in the first instance. Petitioners Rick Hendrick Dodge Chrysler Jeep Ram (Rick Hendrick Dodge) and Isiah White contend this is such a case. Specifically, Petitioners argue the arbitrator—not the circuit court—must decide whether they can enforce an arbitration provision in a contract even after that contract has been assigned to a third party. The court of appeals rejected this argument and affirmed the circuit court's determinations that (1) the circuit court was the proper forum for deciding the gateway question of whether the dispute is arbitrable and (2) Petitioners could not compel arbitration because Rick Hendrick Dodge assigned the contract to a third party. Sanders v. Savannah Highway Auto. Co. , 432 S.C. 328, 332-34, 852 S.E.2d 744, 746-47 (Ct. App. 2020).

We hold the Prima Paint² doctrine requires the arbitrator to decide whether the assignment extinguished Petitioners’ right to compel arbitration. Therefore, we reverse the court of appeals’ decision and vacate the circuit court's discovery order.

Background

In August 2012, Cleo Sanders purchased a vehicle from Rick Hendrick Dodge. Sanders and Rick Hendrick Dodge closed the deal by executing a retail installment sales contract (RISC) containing an arbitration provision. A portion of the arbitration provision provides:

Any claim or dispute, whether in contract, tort, statute or otherwise (including the interpretation and scope of this Arbitration Clause, and the arbitrability of the claim or dispute), between you and us or our employees, agents, successors or assigns, which arises out of or relates to your credit application, purchase or condition of this vehicle, this contract, or any resulting transaction or relationship (including any such relationship with third parties who do not sign this contract) shall, at your or our election, be resolved by neutral, binding arbitration and not by a court action.

Sanders alleges Rick Hendrick Dodge contacted Santander Consumer USA Holdings, Inc. (Santander) in an effort to assign the RISC to Santander. Among other allegations of wrongdoing, Sanders alleges Rick Hendrick Dodge misrepresented his income to Santander, thus causing Santander to accept an assignment of the RISC. Sanders contends that as a result of Rick Hendrick Dodge's wrongful acts, he had a monthly payment that was thirty-seven percent of his true pretax monthly income. Sanders did not make timely payments under the RISC, so Santander repossessed the vehicle. Sanders commenced this action against Rick Hendrick Dodge, Santander, Isiah White, Danny Anderson, and Patrick Bachrodt. ³

Petitioners answered and moved to stay or dismiss the case and compel arbitration. ⁴ Sanders then moved to compel discovery. Sanders argued Petitioners could not compel arbitration because Rick Hendrick Dodge assigned in full its rights and interests under the RISC to Santander. Petitioners acknowledged Rick Hendrick Dodge "fully assigned" the RISC to Santander but claimed the arbitrator—not the circuit court—should decide the gateway question of whether the arbitration provision is enforceable. The circuit court determined it was the proper forum for deciding the gateway arbitrability question and ruled on the merits of Sanders’ challenge to arbitration. On the gateway arbitrability question, the circuit court determined that although the FAA applied, South Carolina law governed "the enforceability of the arbitration clause." The circuit court ruled that because Rick Hendrick Dodge assigned "all of its interests in the [RISC] to Santander," Petitioners’ right to compel arbitration was extinguished. The circuit court denied Petitioners’ motion to compel arbitration, and Petitioners appealed.

A few weeks after Petitioners appealed, the circuit court granted Sanders’ motion to compel discovery. The circuit court ordered Rick Hendrick Dodge to respond to Sanders’ discovery requests in thirty days and ruled Rick Hendrick Dodge would waive its right to arbitration by responding to discovery. Petitioners appealed the discovery order.

The court of appeals consolidated the appeals and affirmed the circuit court. Sanders , 432 S.C. at 331, 852 S.E.2d at 745. Like the circuit court, the court of appeals held Petitioners could not compel arbitration after the assignment: "Because Rick Hendrick Dodge assigned the RISC to Santander, we find all alleged rights arising from the contract, including the right to have an arbitrator determine the arbitrability of the action and the right to arbitrate, were extinguished as to [Petitioners]." Id. at 334, 852 S.E.2d at 746-47. Apart from the passing mention of Rick Hendrick Dodge's "right to have an arbitrator determine the arbitrability of the action[,]" the court of appeals did not discuss Petitioners’ argument that the arbitrator should decide that gateway question. The court of appeals also held the circuit court had authority to issue the discovery order.

The court of appeals denied Petitioners’ petition for rehearing and suggestion for rehearing en banc. We granted Petitioners a writ of certiorari to review the court of appeals’ decision.

Discussion

Petitioners contend the court of appeals erred in affirming the circuit court's arbitration ruling. We review this issue de novo. See Chassereau v. Global-Sun Pools, Inc. , 363 S.C. 628, 631, 611 S.E.2d 305, 307 (Ct. App. 2005) ("Appeal from the denial of a motion to compel arbitration is subject to de novo review." ). However, we must honor the factual findings of the circuit court pertinent to its arbitration ruling if those findings are reasonably supported by evidence in the record. Partain v. Upstate Auto. Grp. , 386 S.C. 488, 491, 689 S.E.2d 602, 603 (2010).

Our holding in this case is not controlled by what Petitioners refer to in their brief as the "heavily-favored arena of arbitration." We recently addressed the notion that the law "favors" arbitration in Palmetto Construction Group, LLC v. Restoration Specialists, LLC , 432 S.C. 633, 856 S.E.2d 150 (2021). We noted: "[O]ur statements that the law ‘favors’ arbitration mean simply that courts must respect and enforce a contractual provision to arbitrate as [they] respect[ ] and enforce[ ] all contractual provisions. There is, however, no public policy—federal or state—’favoring’ arbitration." Id. at 639, 856 S.E.2d at 153.

I. Arbitration Appeal

Petitioners do not ask this Court to reverse the court of appeals’ holding that the assignment extinguished their right to arbitration. While Petitioners assert—in their brief and during oral argument—their right to arbitration was not extinguished by the assignment, ⁵ Petitioners ask this Court to hold only that the FAA requires the arbitrator to decide the gateway question of whether the assignment extinguished their right to arbitration.

Petitioners raise two arguments in support of their position that the arbitrator must decide Sanders’ challenge to arbitration. First, they claim that because Sanders did not specifically challenge the validity of the arbitration provision, the Prima Paint doctrine requires the arbitrator to resolve Sanders’ challenge. Second, Petitioners contend the parties contracted for the arbitrator to resolve Sanders’ challenge to arbitration by including a delegation clause in their agreement. We begin our analysis with a review of general FAA provisions concerning arbitrability.

A. The FAA and Gateway Arbitration Issues

The parties concede Sanders’ transaction with Rick Hendrick Dodge involved interstate commerce and is, therefore, governed by the FAA. The FAA provides:

A written provision in ... a contract evidencing a transaction involving commerce to settle by arbitration a controversy thereafter arising out of such contract or transaction ... 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. The FAA recognizes arbitration agreements "may be invalidated by ‘generally applicable contract defenses, such as fraud, duress, or unconscionability.’ " Rent-A-Ctr., W., Inc. v. Jackson , 561 U.S. 63, 68, 130 S.Ct. 2772, 177 L.Ed.2d 403 (2010) (quoting Doctor's Assocs., Inc. v. Casarotto , 517 U.S. 681, 687, 116 S.Ct. 1652, 134 L.Ed.2d 902 (1996) ). Here, Sanders’ challenge—or defense—to arbitration is that Petitioners lost the right to arbitration after Rick Hendrick Dodge assigned the RISC to Santander.

When one party challenges another party's right to invoke an arbitration provision, the gateway question sometimes becomes: Does the court or the arbitrator decide whether the dispute is arbitrable? See Peabody Holding Co. v. United Mine Workers of Am., Int'l Union , 665 F.3d 96, 101 (4th Cir. 2012) ("Arbitrability disputes often necessitate a two-step inquiry. Fi...