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In one of the most politically charged appellate cases in recent years, the Texas Supreme Court handed a 5-4 victory to defendants Perry Homes and two warranty companies in a case their lawyer says marks the first time the high court has interpreted what constitutes a waiver of arbitration. The dispute in Perry Homes, et al. v. Robert E. Cull and S. Jane Cull received attention from the media and consumer groups, because Bob Perry, the owner of Houston-based Perry Homes, has donated thousands of dollars to the campaigns of each of the nine justices on the all-Republican high court. Bob Perry also is a benefactor of Texans for Lawsuit Reform, a tort reform group that has donated thousands of dollars to the justices’ campaigns. Texas Ethics Commission records show that between 2000 and 2006, Bob Perry contributed a total of $72,750 to the campaigns of the nine justices currently on the high court. During the same period, Bob Perry also contributed more than $1 million to HillCo Political Action Committee, which contributed $110,000 to five of the sitting justices’ campaigns. Interestingly, the four justices who dissented in Perry Homes received more campaign donations from Bob Perry and the HillCo PAC than those justices in the majority who voted to grant relief, according to a report by Texas Watch, which tracked the contributions to the high court justices between 2000 and 2007. For example, Justice Don Willett’s campaign received a total of $75,000 from Bob Perry and HillCo — – the most of any of the justices — – but he wrote a dissent in Perry Homes. However, the campaign of Justice Scott Brister, who wrote the majority opinion, received only $5,000 from Bob Perry and nothing from HillCo, according to Texas Watch. Despite the political controversy surrounding the case, Geoffrey Bracken, who represents the defendants, and Thomas Michel, who represents the plaintiffs, agree that the justices were not influenced by Bob Perry’s campaign contributions. “I just don’t think it had anything to do with it or why any judge rules the way they do,” Bracken says. The May 2 fractured decision in Perry Homes interests numerous Texas lawyers who have become disillusioned with binding arbitration, because it often takes away their clients’ rights to appeal, and arbitration decisions that are appealed to state courts rarely succeed. [ See the court's opinions.] According to the Texas Supreme Court’s opinion in Perry Homes, the facts are as follows: In 1996, the Culls bought a house from Perry Homes for $233,730. A home warranty the Culls purchased from Home Owners Multiple Equity Inc. and Warranty Underwriters Insurance Co. included a broad arbitration clause, providing that all disputes the Culls might have against Perry Homes or the warranty companies were subject to arbitration. Over the next several years, the home had structural and drainage problems. The Culls maintained that the defendants — Perry Homes and the warranty companies — spent more effort shifting blame than repairing the home. When the Culls sued the defendants in state district court in 2000, the warranty companies (but not Perry Homes) immediately requested arbitration. The Culls opposed it, and none of the parties pressed the trial judge for a ruling on the arbitration issue. After most of the discovery was completed and the Culls’ suit was set for trial, the Culls changed their minds about litigating and asked the trial judge to compel arbitration. On Dec. 6, 2001, four days before trial, the judge ordered arbitration, because the defendants had not shown their case was prejudiced by their participation in pretrial proceedings. A year later an arbitrator awarded the Culls $800,000. The defendants asked the trial judge to vacate the award, arguing that the case should never have been sent to an arbitrator, because the plaintiffs had proceeded too far in the litigation. The trial court declined to vacate the arbitration award, as did Fort Worth’s 2nd Court of Appeals. The defendants then appealed to the Texas Supreme Court. In a majority opinion, Justice Scott Brister wrote that the Culls — who wanted to avoid the delays of an appeal — waited too long to compel arbitration, thereby waiving that option and prejudicing the defendants. The high court vacated the award and remanded the case to the trial court. “They got extensive discovery under one set of rules and then sought to arbitrate under another. They delayed disposition by switching to arbitration when trial was imminent and arbitration was not,” Brister ruled in an opinion joined by Justices Nathan Hecht, Harriet O’Neill, Dale Wainwright and David Medina. “They got the court to order discovery for them and then limited their opponents’ right to appellate review,” Brister wrote. “Such manipulation of litigation for one party’s advantage and another’s detriment is precisely the kind of inherent unfairness that constitutes prejudice under federal and state law.” Justice Phil Johnson dissented, believing that the trial judge did not abuse his discretion in ordering arbitration in the case. Johnson, in a dissent joined by Chief Justice Wallace Jefferson and Justice Paul Green, believed the defendants did not prove they were prejudiced by being sent to arbitration after preparing for litigation in the trial court. “It is hard to see how discovery of facts, witness names, documents and testimony about the controversy can prejudice either party,” Johnson wrote. “Defendants neither alleged nor proved that they were prejudiced because some privileged, proprietary, or confidential matter had been disclosed.” Justice Don Willett wrote a separate dissent in which he said the trial judge did not abuse his discretion when he upheld the plaintiffs’ arbitration award. “This is admittedly a close call, and the court makes the best possible case for going the other way,” Willett wrote. “Given the relevant record, however, I have a difficult time saying the trial court acted arbitrarily or disregarded all guiding standards in not reaching the opposite result.” Risk of Waiver Referring to the waiver-of-arbitration issue in Perry Homes, Bracken, a partner in the Houston office of Gardere Wynne Sewell, says, “The problem with Texas jurisprudence up to this point in time is you’ve had [appellate courts define] what’s not waiver, but you never had the highest court in the state articulating what is waiver, particularly in regard to a plaintiff,” Bracken says. “From that standpoint, it’s a pretty noteworthy decision.” But Michel, a partner in Fort Worth’s Griffith Jay & Michel, says he is disappointed with the majority decision. “The majority’s opinion states that there was prejudice without pointing to any prejudice in the record,” says Michel, who adds that his clients are still deciding whether to ask the high court for a rehearing or to go back to the trial court for trial. Michel believes litigants could use the Perry Homes decision strategically to vacate arbitration awards. “I think the court’s opinion could create a situation where a party could raise the issue of waiver prior to arbitration and preserve that issue to try to raise it at a later time, depending on the outcome,” Michel says. “I think it creates a situation where you think you may have a final arbitration award that is statutorily restricted, but now can be expanded,” he says. Lonny Hoffman, a professor at the University of Houston Law Center who teaches civil procedure, says Perry Homes has an unusual set of facts; usually plaintiffs want to litigate construction-defect cases while defendants want to arbitrate. The opinion shows that it will take an extreme set of circumstances for the high court to vacate an arbitration award, he says. “The bigger picture for me is how much everyone accepts as a given — the majority and the dissent — that arbitration is so favored that you can rarely avoid it. It took the most extreme facts, and a special party alignment, to get the arbitration waiver ruling in this case,” Hoffman says. “Good luck down the road for plaintiffs facing the same problem.” “The way this is going to play out is defendants are going to get two bites at the apple, because it’s going to be hard for plaintiffs to show prejudice as a result of the defendant substantially invoking the litigation process,” Hoffman adds. “That’s one of the big dangers of this case.” Robert Bass, a shareholder the Austin office of Winstead who practices construction law, says Perry Homes provides guidance for lawyers in showing how far litigation can go before a party can change its mind and ask for arbitration. “What lawyers need to know is what are we going to do, arbitration or litigation?” says Bass. “At some point we’ve got to know what it’s going to be, because [a case] may call for different tactics and different trial strategies. In that sense, it’s good to have a decision that says, at some point, the parties can’t change approaches.” While Perry Homes is a win for defendants in construction-defect cases, Lindy Jones, a partner in Dallas’ Jones Allen & Fuquay, doesn’t believe it will be of much use for defendants in the future. Defendants would need to have too many unusual occurrences during litigation to get the same result as the defendants in Perry Homes, he says. “The problem is you are playing with fire,” says Jones, who represents plaintiffs and defendants in construction-defect cases. Too many things could go wrong for the defendant, he adds. “Yeah, you could use it, but I can’t see where that would be some weapon I would truly want to rely on if I were representing a home builder. I don’t see that.” In the end, the high court decision may not prove to be much of a win for the Perry Homes defendants if they return to a trial court to litigate against the Culls, Jones says. “If there’s one saving grace to this, if an arbitrator gave [the Culls] $800,000, then a jury will probably give them a whole lot more,” Jones says. “Arbitrators aren’t usually swayed by emotion.”

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