Kentucky Supreme Court Upholds An Arbitrator’s Use of the Merger Doctrine Over a Statutory Challenge

The Supreme Court of Kentucky upholds unanimously an Arbitrator’s award despite a challenge on the grounds that KRS 324.360 overruled the merger doctrine** as applied.

This news article first appeared on Securities Arbitration Alert, here.

In Booth v K&D Builders, Inc., 2020-SC-0023-DG (KY Sup. CT 2020), homebuyer Nicole Ribiero (“Ribiero”) bought a home from K&D Builders (“K&D”) using a standard “Residential Sales Contract” (“contract”) which included a requirement to arbitrate and mediate all disputes arising out of the transaction. Under KRS 324.360, K&D was required to provide disclosures about the condition of the property. The contract allowed Ribiero to void it if the disclosures were not delivered. K&D did not provide the required disclosures, however. Ribiero then hired an independent inspection report that disclosed certain deficiencies, but otherwise found the house “fundamentally sound.” Ribiero closed on the house and did not void the contract notwithstanding that the disclosures were made.

Buyer Moves Out and Arbitration Follows

Ribiero moved out within five months, citing damage to the property. She then promptly filed arbitration for breach of contract and rescission. The Arbitrator heard an extensive amount of evidence and, after excluding testimonial evidence from Ribiero’s expert geologist, found that there was no breach of contract and that Ribiero could not prevail under KRS 324.360. The Arbitrator determined that Ribiero’s independent investigation revealed all defects that would have been disclosed to her, and therefore she had not relied upon K&D’s failure to disclose the defects. The Arbitrator also determined that the testimony to be offered by Ribiero’s expert was not relevant.

Award “Unvacated”

Ribiero filed an unsuccessful petition to vacate the Award. The Court of Appeals reversed, however, finding that the adoption of KRS 324.360 superseded the merger doctrine and therefore the Arbitrator exceeded his powers when he: 1) invalidated the statute; and 2) improperly denied the expert’s testimony. The Supreme Court of Kentucky reverses, strongly disagreeing that KRS 324.360 overrules the merger doctrine. First, the Court states that the merger doctrine does not conflict with KRS 324.360 because the statute regulates sellers and brokers on the front end by providing remedies before closing. The only time KRS 324.360 applies after closing is to impose sanctions on brokers and sellers or to support an exception to the merger doctrine. The Court upholds the Arbitrator’s application of the merger doctrine, finding that a court may not vacate an Award because it merely disagrees with an Arbitrator’s application of the law.

Additionally, the Court states, the Arbitrator was correct in his application of the law when he found that no exception to the merger doctrine existed because K&D did not conceal defects and Ribiero was aware of all defects prior to closing. Ribiero knew of all the defects and therefore did not rely on K&D to disclose. She also had the option to void the contract after not receiving disclosure, which she chose not to exercise. Finally, the Court holds, the Arbitrator properly excluded the expert’s testimony.

(ed: *This Squib was authored by Hayes Favinger, a 3L at St. John’s School of Law. He is an intern with the Securities Arbitration Clinic at St. John’s. **The Court states that: “The merger doctrine holds that all prior statements and agreements, both written and oral, are merged into the deed and the parties are bound by that instrument.”)