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Noohi v. Toll Bros., Inc., No. 12-1261

Decided: February 26, 2013

In a putative class action, prospective luxury home buyers brought suit against a real estate development company and several of its subsidiaries (collectively “Toll Brothers”), alleging that Toll Brothers unlawfully refused to return deposits when the prospective buyers were unable to obtain mortgage financing. The Agreement of Sale used by Toll Brothers included an arbitration provision, but the district court denied Toll Brothers’ motion to dismiss or stay the suit pending arbitration, finding that the arbitration provision lacked mutuality of consideration under Maryland law since it required the buyer, but not the seller, to submit disputes to arbitration.  Toll Brothers appealed. The Court of Appeals held that the appeal was properly brought before the Court, and that the arbitration provision is unenforceable for lack of mutual consideration under Maryland law.

On appeal, the plaintiffs argued that the Court of Appeals lacked jurisdiction over the interlocutory appeal. However, the Court of Appeals noted that, under an exception to the final judgment rule established by the Federal Arbitration Act, a party may appeal the denial of a motion to stay an action concerning a matter that a written agreement has committed to arbitration.

The Court then addressed whether the lower court erred in holding that the arbitration provision was unenforceable for lack of mutual consideration. The Court held that, under Maryland law, an arbitration provision must be supported by consideration independent of the contract underlying it. Since the arbitration provision binds only the plaintiffs to arbitration, the Court held that it lacks mutuality of consideration. Furthermore, the Court of Appeals found that there were no ambiguities in the provision, thus rejecting Toll Brothers’ argument and that lower court failed to resolves all ambiguities in favor of arbitration. The Court also declined to distinguish Cheek v. United Healthcare of Mid-Atlantic, Inc., which sets forth the current articulation of Maryland law regarding the validity of arbitration agreements. Finally, the Court rejected Toll Brothers’ argument that, under AT&T Mobility LLC v. Concepcion, the Cheek rule is preempted by the Federal Arbitration Act. Noting that the United States Supreme Court has never held that Congress intended the Federal Arbitration Act to preempt states from requiring mutual consideration in an arbitration provision, the Court of Appeals declined to so hold. The Court further noted that Toll Brothers could have avoided implicating this serious constitutional question by simply binding itself to arbitration as it contends it intended to all along.

In summary, the Court of Appeals held that it had jurisdiction over the Toll Brothers’ appeal, and affirmed the district court’s holding, finding that the arbitration provision is unenforceable for lack of mutual consideration.

Full Opinion

– Kassandra Moore