Alternative Dispute Resolution: Arbitration

With the rising popularity of alternative dispute resolution, more contractual agreements are including mandatory arbitration clauses. In response, courts have put arbitration clauses under the microscope, making the drafting and review of arbitration clauses and the contracts that contain them even more significant. A good example of the of where the court has given an arbitration clause a thorough review is Perdido Key Island Resort Dev., L.L.P. v. Regions Bank, 37 Fla. L. Weekly D147 (Fla. 1st DCA 2012).

In this case, Perdido Key Island Resort Development, L.L.P. and a Louisiana company (collectively referred to as the “Borrowers”) executed a promissory note in favor of Regions Bank (the “Lender”). The promissory note contained the following arbitration clause:

It is hereby agreed that all disputes, claims and controversies between Borrowers and Lender with regard to this Note and all other obligations of Borrower[s] with respect to the indebtedness represented by said Note shall be resolved through binding arbitration under the Rules of the American Arbitration Association in effect at the time said dispute, claim or controversy arises. The foreclosure upon any collateral securing this Note shall not constitute a waiver of this provision.

Along with the promissory note, the Borrowers executed a mortgage deed. The mortgage deed did not contain an arbitration clause but did incorporate all terms of the promissory note. David J. Cattar and Joseph Holyfield (collectively referred to as the “Guarantors”) executed personal guarantees for all obligations to the Lender under the promissory note. The guarantees did not contain arbitration clauses nor did they incorporate the terms of the promissory note, and they were signed by the Guarantors in their individual capacities.

The Borrowers defaulted on their loan, and the Lender brought an action against the Borrowers and the Guarantors asserting claims for breach of a promissory note, foreclosure of a mortgage, and to enforce the guarantees upon default. The trial court entered an order compelling arbitration of the claim for breach of the promissory note, but denied arbitration on the remaining claims because the mortgage and guarantees did not contain arbitration clauses. It was also denied because claims arising under these instruments were separate from the Lender’s claim under the note, therefore the promissory note’s arbitration clause did not apply to the mortgage and guarantees. The Borrowers and the Guarantors appealed. The denial of arbitration for the mortgage foreclosure claim was reversed because the mortgage explicitly incorporated all of the terms of the promissory note. However, the denial of arbitration was affirmed for the personal guarantees claims because the personal guarantees did not have arbitration clauses and the arbitration clause in the promissory note was drafted narrowly, only allowing for arbitration of claims between the Lender and the Borrowers, not the Guarantors.

If you are a commercial or residential real estate lender or are an individual or business seeking a real estate loan, please contact the real estate attorneys at Schecter Law today at (954) 779-7009 to best protect your interests.