Alabama Legal Update November 2014

Contracting Parties Cannot Have Their Cake
And Eat It Too…

America’s Home Place, Inc. v. Rampey

Supreme Court of Alabama rules that a party cannot sue under a contract while repudiating the arbitration provision found therein based solely on allegations of forgery relative to the arbitration provision.

Defendant appealed an order from the trial court denying its motion to compel arbitration of the claims brought by Plaintiff. Plaintiff and Defendant entered into a contract pursuant to which Defendant would construct a house for Plaintiff. However, after Plaintiff took possession of the home, he noticed settlement and sinking of the foundation and proceeded to file suit against Defendant alleging ten counts stemming from the construction of the house.

Defendant moved to compel arbitration pursuant to a provision within the contract which provided, in part, “ALL CLAIMS, DISPUTES AND OTHER MATTERS OR QUESTIONS ARISING OUT OF OR RELATING TO THIS AGREEMENT, OR THE BREACH THEREOF, SHALL BE SETTLED BY BINDING ARBITRATION.” Plaintiff responded to the motion to compel by contending that his signature immediately beneath the arbitration provision had been forged. The Court denied the motion to compel arbitration and Defendant appealed.

On appeal, the court noted that it was undisputed that the arbitration provision was binding and valid. Additionally, it was noted that the Plaintiff had admitted to writing his initials in the line provided next to the arbitration provision. Moreover, another paragraph within the agreement provided “[Plaintiff] acknowledges that each paragraph of this contract has been explained and initials acceptance of same.”

In its analysis the Court cited prior decisions that stood for the proposition that “[a] plaintiff cannot seek the benefits of a contract but at the same time avoid the arbitration provision in the contract.” The court stated that “Here, [Plaintiff], whose claims are all predicated on alleged breaches and violations of the contract, attempts to claim the benefits of the contract while repudiating one of its conditions.”

The Court held that plaintiff was bound by all the provisions of the contract, including the arbitration provision. The Alabama Supreme Court reversed the trial court’s denial of the motion to compel arbitration and remanded with instructions to compel arbitration.

Read the full decision.

The LLC As A Shield To Personal Liability For Debts

Smelser v. L&H Truck Services, LLC

Court of Civil Appeals finds that conduct of individual defendant was insufficient to create liability for debts of his LLC.

L&H performed mechanical and repair work on multiple vehicles and sent invoices to Smelser for $22,100.27. When these invoices were not paid, a complaint was filed against Smelser and its co-Defendant, Ashmore. After a trial, the trial court entered a judgment against Defendants for $20,228.75. Smelser appealed, arguing that the trial court incorrectly applied the law exempting a member of an LLC from the debts of that company.

On appeal, the Court noted that, pursuant to Alabama Code 1975, § 10A-5-3.02, as a general rule, a member of a limited-liability company cannot be held liable for the debts of the limited-liability company under any legal or equitable theory. However, the court stated that an exception to that rule existed to the extent that a member could be held liable for that member’s own conduct. In its analysis, the Court noted that the judgment was based on a debt resulting from multiple invoices issued by L&H to Smelser.

The Court noted that Smelser “had disclosed his relationship with the limited-liability companies and the course of the dealings between the parties establishe[d] that L&H knew and had agreed that Smelser was acting on behalf of the limited-liability companies when he contracted for the repair work upon which the invoices were based.” The Court remarked that Smelser testified that at no point had he agreed to pay any part of the debt attributable to the vehicles operated by the limited-liability companies.

The appellate court found that the trial court had erred in finding Smelser personally liable for the debt of the LLCs because “Smelser did not commit any “acts or conduct” to incur personal liability for the debt.” The Alabama Court of Civil Appeals reversed the trial court’s ruling and remanded the case for entry of a judgment consistent with its findings.

Read the full decision.