While KB Home, one of the nation's top homebuilders, continues to make inroads into the homebuilding industry in Laredo, it has not come without being under the shadow of a lawsuit filed against it in one of its newest markets.
What started as an individual complaint by Laredo home buyer Timothy Pruitt grew to an application to the U.S. District Court for the Southern District of Texas Laredo Division for certification as a nationwide class action lawsuit, including application for a temporary restraining order, temporary injunction and permanent injunction, filed March 18.
Much of the matter for the class action lawsuit has to do with a KB Home requirement that unresolved disputes between the homebuilder and homebuyer be taken to "binding arbitration" and not to a jury and court for resolution.
Attorney Alice Oliver-Parrott, of Burrow & Parrot, L.L.P, Houston, on behalf of Pruitt and other persons similarly situated, states in the lawsuit that KB Home has been in violation of a "1979 Federal Trade Commission Consent Decree that specifically requires KB Home to issue a [w]arranty related to its sales of homes nationwide that does not require or provide for binding arbitration of consumers' claims and complaints."
Pruitt went to Parrott, a consumer advocate lawyer in Houston, trying to resolve problems with his home that he felt could not be resolved through arbitration. Pruitt purchased a home on St. Kathryn Loop in the Cielito Lindo subdivision where KB Home builds. The complaint does not list what problems or issues Pruitt wanted resolved in his home.
But KB Home countered in response to the suit that the 1979 FTC consent decree is not an apples to apples comparison now. For one, the contract that KB Home was to simulate in its warranties was by a company (Home Owners Warranty Corporation) no longer in business. Secondly, KB's response indicates that the plaintiff "does not have standing to sue to enforce an FTC consent decree."
But also, the KB Home response says, "Virtually all warranties issued by home builders and industry-recognized third-party warranties require binding arbitration. There is a warranty provided by KB Home and also a warranty provided from national home warranty companies.
Obviously, it is not always better to go to the courts for dispute resolution. Interestingly, the Texas Real Estate Commission has within its prescribed contract for licensed agents for real estate sales that "it is the policy of the State of Texas to encourage resolution of disputes through alternative dispute resolution procedures such as mediation."
There is a place on the TREC approved form for the buyer to check off whether he or she "will" or "will not" go for a mutually accepted mediation service.
However, it also states, "This paragraph does not preclude a party from seeking equitable relief from a court of competent jurisdiction."
Parrott explained last week that she is not against binding arbitration, but this action was taken against KB Home by the FTC and she thinks it ought to be enforced.
While the suit is still active in the federal court, according to the district clerk's office last week, KB Home has taken action to indicate that it will not require its homebuyers to resolve to "arbitration only" in the future.
An editorial in the San Antonio Express-News July 13 noted that as of July 21, KB Home would change its contract, no longer requiring its home buyers "to sign away their right to sue for damages when they contract to buy a house from KB Home."
The editorial said the action was "long overdue."
The editorial also noted, as the TREC statement above implies, that "binding arbitration offers a speedier and less expensive way to resolve problems. It allows for a legal dispute to be settled without a lengthy trial before a judge and a jury, but it is not for every situation."
The Express-News editorial notes that the "lawyer for an unhappy KB Home owner who has sued in Laredo" says the change is prompted by the pending class action lawsuit over violation of the Federal Trade Commission consent decree.
Debra Hotaling, spokesperson for KB Home, said last week the change was entirely voluntary and came about in looking at the way KB Home does business.
KB Home said in a letter (June 26) to the FTC explaining its change on binding arbitration, "KB Home is certainly well aware that these steps have not been in the subject of negotiation between (FTC) staff and KB Home nor do these steps constitute a 'settlement' of the current staff inquiry. Nonetheless, after careful consideration, KB Home has decided to take these steps."
In a letter from the KB Home attorney Michael Shaunessy (The Shaunessy Law Firm, P.C. in Austin) to the Honorable Keith Ellison, U.S. District Judge, of May 1, it was noted that it was - as of then, anyway - the policy of KB Home not to enforce mandatory binding arbitration, though he said in some cases the policy was not followed.
"It remains the policy of KB Home not to enforce binding arbitration provisions in its current home warranties," he wrote.
Hotaling explained last week that dealing with as many houses as KB Homes does, there are occasions when a third party (arbitration or the courts) is necessary to resolve an issue, but not very often because KB Home does everything possible to resolve customers' problems before that becomes necessary.
With 25,000 homes built and sold last year, not one went to arbitration, she said.
But, in coming about the change in agreement procedures, KB Home has been dealing with the FTC on the matter, as indicated above. The FTC letter provided by Hotaling indicates contacts between KB Home and FTC staff on several occasions, going back to June 2001.
The letter to the FTC contains the specifics of changes planned by KB Home, with a major effective date of July 21. According to that correspondence, current and future customers of KB Home will be given an option with regard to the warranty: (1) select non-binding arbitration for warranty dispute with a 10-year warranty period; or (2) select mandatory binding arbitration with a 12-year warranty period.
Past customers will be notified that they will no longer be limited to binding arbitration, but will have the option, if arbitration fails for them, to go to the courts.
The letter to the homeowners, also provided by KB Home, stipulates that in the case of arbitration, KB Home pays the fees needed to initiate arbitration, but after arbitration, the arbitrator determines who pays the rest.
KB Home speaks in the letter to the FTC to the logistics required of such a large company to change its procedures, particularly for persons who purchased in the past. KB Home, which was established in 1956, began building in Texas in 1996, it said, with the purchase of Rayco. Also, since that time, KB Home has acquired Dover Homes, General Homes and Ideal Homes in the Houston area. The letter notes that all contracts that came during KB's watch will be treated the same way.
The attorney for the plaintiff is not totally satisfied, however.
Alice Oliver-Parrott said in a letter to Judge Ellison on July 15, "Now, the fox wants to clean out the hen house."
Parrott began the letter applauding any change in policy made by KB Home for its customers but noted, "[I]t is imperative that KB Home's latest ploy (changing the dispute resolution procedure) does not obscure the issues before this court."
Parrot says Pruitt's case is still out there, which asks for judicial action in declaring his binding arbitration provision from KB Home invalid.
"Was and is invalid and unenforceable," she said.
Parrott said from her Houston office that the suit is about more than binding arbitration.
"It is about equal bargaining power," she said.
(LMTBusiness writer Chuck Owen can be reached at 728-2547 or email chucko@lmtonline.com)
07/21/03