Ronald C. Teachout v. Conseco Securities, Inc.A/K/A Conseco Financial Services, Inc., Conseco Finance Servicing Corp., Conseco Bank, Inc. and Lisa M. Bynum
Docket: M2003-00621-COA-R3-CV
Court: Court of Appeals of Tennessee; August 20, 2004; Tennessee; State Appellate Court
The case involves Ronald C. Teachout, who executed an adjustable rate note with Conseco Bank, which included an arbitration clause mandating that disputes between the borrower and the "Note Holder" be arbitrated. "Note Holder" is defined in the note as the lender or anyone who takes the note by transfer and is entitled to receive payments. After the bank transferred the note, Teachout began making payments to a third party and subsequently filed a lawsuit against the bank and others, alleging various forms of fraud and violations of the Consumer Protection Act. The defendants sought to compel arbitration, but the trial court denied this motion. The Court of Appeals affirmed the trial court's decision, ruling that Conseco Bank was no longer the "Note Holder" after transferring the note and thus lacked standing to invoke the arbitration clause. The arbitration clause also mentioned that the Note Holder retains the right to pursue judicial action in case of default on the note. The appeal was affirmed under Tenn. R. App. P. 3.
Judicial relief in the form of a lawsuit may be initiated without waiving the right to compel arbitration for other disputes, including counterclaims. The Note Holder can pursue judicial remedies if Teachout defaults, but Teachout is required to resolve other issues through arbitration, which Teachout contends constitutes an adhesion contract due to its one-sided nature. Although a notice indicated the right to collect payment was transferred, it did not clarify whether the Note itself was transferred. It is established that Conseco Bank no longer holds the Note, and a third entity, Conseco Finance Servicing Corp., was named as a defendant but later dismissed by Teachout. Conseco filed a motion to stay proceedings and compel arbitration, citing the arbitration clause of the Note under the Federal Arbitration Act (FAA) and Tennessee Uniform Arbitration Act. Teachout countered that Conseco lacked standing to invoke the arbitration clause and argued that the clause was an unenforceable adhesion contract. The trial court denied Conseco's motion, determining that none of the defendants were the "Note Holder" entitled to enforce arbitration, thus lacking standing. The court did not address other issues raised. Conseco has appealed the decision, focusing on contract interpretation, which will be reviewed de novo. Contract interpretation seeks to ascertain the parties' intentions, which must be derived from the entire contract and its context, with ambiguities construed against the drafter. The FAA asserts that arbitration provisions in contracts involving commerce are valid and enforceable unless legally revocable.
In contracts involving interstate commerce, arbitration provisions are enforceable under the Federal Arbitration Act (FAA). Doubts about the applicability of such clauses should favor arbitration. However, contract terms must be interpreted according to their ordinary meaning, and ambiguities should be construed against the drafter. In this case, the trial court determined that Conseco lacked standing to enforce the arbitration clause because the "Note Holder," defined as either the Lender or any party receiving the Note through transfer, was no longer Conseco after the Note was transferred to a third party. While Conseco, as the original Lender, argued it retained the right to arbitrate disputes, the clear disjunctive language of the definition indicated that only one entity at a time could be the Note Holder. Consequently, the trial court's finding that Conseco was no longer the Note Holder is upheld, leading to the affirmation of its denial of Conseco's motion to compel arbitration and a remand for further proceedings. The costs of the appeal are imposed on Conseco and its affiliates.
