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Kestel argues that American General's delay in filing its motion to compel arbitration after the filing of her counterclaims and its engaging in litigation activity occurring during the delay, including the litigation of her motion to strike its arbitration defenses and her motion for partial summary judgment, constitute action inconsistent with its right to pursue arbitration. But we note that after filing the initial foreclosure action, American General limited itself to defending against Kestel's motions for partial summary judgment and to strike arbitration defenses, always stating at least a possibility that it might seek arbitration. While we find nothing improper in the Court of Appeals reaching the issue of waiver by litigation conduct, we hold that the Court of Appeals incorrectly concluded that American General had waived its arbitration rights through its litigation conduct. Because we are essentially reviewing the Court of Appeals' application of the law to facts, we review its decision under a de novo standard. In the present case, the litigation-conduct issue boils down to American General's delaying for several months a motion to compel arbitration after giving notice in pleadings of the possibility of arbitration of arbitrable claims and defending motions filed in the circuit court by its party-opponent after the party-opponent was on notice of the possibility of arbitration.
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American General Home Equity Inc - Martinsburg
But considering the settled principle that an appellate court has authority to affirm a trial court judgment, based on different grounds and the lack of requirement that an appellee file a prehearing statement under CR 76.03, we think it is clear that CR 76.03 does not prohibit the Court of Appeals from affirming a judgment on grounds that the appellee failed to raise in a prehearing statement. Kestel argues that we should revisit the issue to avoid a misleading application of the law despite her failure to file a cross-motion. But Mitchell makes clear that ignoring a failure to cross-appeal is outside the normal procedure and appropriate only on "rare occasions." And Mitchell involved the court's deciding the case on the question of the defendant physician's duty, an issue never litigated by the parties in that case, rather than ruling on whether physical contact was required, which was the issue actually resolved by the lower courts. In contrast, in the instant case, Kestel was clearly aware of the arbitration provision applicability issue because she argued it both to the trial court and in the Court of Appeals; but she chose not to challenge the Court of Appeals' adverse finding through a cross-appeal.
American General Home Equity, Inc., filed a mortgage foreclosure action in circuit court against Teresa Kestel. Kestel counterclaimed, asserting fraud and federal and state statutory claims under the Truth in Lending Act and the Kentucky Consumer Protection Act. The trial court denied American General's motion to compel arbitration on Kestel's counterclaims, finding that no arbitration agreement existed between American General and Kestel.
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Because we hold that the applicability of the November note arbitration provisions is now law of the case, it is not necessary for us to reach American General's argument that Teresa Kestel is equitably estopped from arguing the applicability of arbitration provisions in the October note signed by her husband. Nothing further occurred on the court's docket until Kestel propounded her first discovery requests in early November, which was relatively quickly followed by the motion to compel arbitration. That Kestel may, by proper motion, raise her contention that application of the arbitration provisions could, by cost or otherwise, deprive her of an adequate opportunity to present her claims and defenses. “he filing of an affirmative defense is not to be taken lightly. A timely defense serves notice on plaintiffs, eliminates the element of surprise from litigation, and allows the opposing party an opportunity to argue against it.” Rodriguez Font v. Paine Webber Inc., 649 F.Supp.
Amicus Curiae, The Kentucky Justice Association, suggests in its brief that arbitration procedures, which “deny discovery”, finally motivated the filing of the motion to compel arbitration. American General argues that the Court of Appeals erred by considering the issue of litigation-conduct waiver because Kestel had failed to file a supplemental prehearing statement requesting review of that particular issue. We must disagree with American General's argument here, which misconstrues CR 76.03 governing the Court of Appeals' requirements on prehearing conferences and prehearing statements. Apparently, the Court of Appeals also rejected American General's argument because it affirmed the trial court's ruling on the grounds of litigation-conduct waiver in the face of American General's same argument that Kestel's failure to raise the litigation-conduct waiver issue in a prehearing statement barred consideration of the argument. Naturally, in other cases where the party seeking arbitration has not given notice of a possible arbitration defense and/or has defended numerous motions filed by the other party without continuing to assert the possibility of arbitration, the fact that his actions have been solely defensive might not always defeat claims of waiver.
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In mid-December, the trial court conducted a hearing on American General's motion to compel arbitration and ruled from the bench that the arbitration provisions of the November note did not apply to Kestel's counterclaim because her counterclaim stemmed from the October 2001 loan transaction. The trial court issued a written order denying the motion to compel arbitration in January 2005 but did not state any grounds for its ruling in its written order. American General then filed a timely appeal to the Court of Appeals, which affirmed the trial court on the alternative ground of litigation-conduct waiver. The majority disagreed with the trial court's finding that the arbitration provisions were not applicable. American General then filed a timely appeal to the Court of Appeals,2 which affirmed the trial court on the alternative ground of litigation-conduct waiver. Although the trial court ruled from the bench at a hearing in April 2004 that it would grant Kestel's motion to strike the arbitration defenses based on its finding that the arbitration clause in the November note did apply to the dispute over the October note, the trial court did not enter a written order to this effect until August 2004.
We leave open the possibility that the presumption that courts decide issues of litigation-conduct waiver might be rebutted in certain circumstances, such as where an arbitration agreement between sophisticated parties explicitly provides that arbitrators will decide questions of whether arbitration rights have been waived by inconsistent litigation conduct. American General, citing a portion of the Arbitration Agreement that defines a “covered claim” subject to arbitration as including “any defenses as to the enforceability of the Loan Agreement or the Arbitration Provisions,” asserts that the contract provides for the arbitrator to decide litigation-conduct waiver. Nevertheless, we decline to decide today whether this contractual language is sufficient to rebut the presumption that the issue of litigation conduct waiver should be resolved by the courts because that issue has not been briefed by the parties; and it is not necessary for resolution of this case. Litigation-conduct waiver by arguing that arbitrators rather than courts should resolve issues of whether rights under an otherwise binding agreement to arbitrate have been waived through a party's litigation conduct. In other words, American General contends that having found a binding agreement to arbitrate, the Court of Appeals should have refrained from considering the issue of litigation-conduct waiver but simply reversed the trial court's judgment with directions to send the case to an arbitrator to decide whether litigation-conduct waiver occurred.
In January 2004, Teresa Kestel filed an answer and counterclaim against American General in the Mercer Circuit action, alleging fraud and federal and state statutory claims under the Truth in Lending Act and the Kentucky Consumer Protection Act. American General immediately filed a motion for an extension of time to answer the counterclaim, stating it was evaluating its affirmative defenses, "including the right to insist upon arbitration as provided in the loan documents." American General filed its answer in Mercer Circuit Court in late February 2004, raising arbitration as an affirmative defense to the counterclaim. American General immediately filed a motion for an extension of time to answer the counterclaim, stating it was evaluating its affirmative defenses, “including the right to insist upon arbitration as provided in the loan documents.” American General filed its answer in Mercer Circuit Court in late February 2004, raising arbitration as an affirmative defense to the counterclaim. We recognize that the Court of Appeals has applied CR 76.03 to bar consideration of an appellant's arguments for reversal that were not raised in a prehearing statement or by timely motion.
And we are aware that some courts are more apt to find litigation-conduct waiver once discovery has commenced. In any case, whatever their motivation, American General's conduct was not inconsistent with intent to exercise arbitration rights since they did not, in fact, agree to discovery before seeking to compel arbitration. Similarly, in the instant case, we focus our inquiry on whether American General's litigation conduct was truly inconsistent with asserting its arbitration rights. So we do not find it necessary under the facts of this case to decide whether prejudice must be shown.
So Kestel's failure to identify the litigation-conduct waiver issue in a prehearing statement or by a timely motion did not prevent the Court of Appeals from taking up that issue as an alternate ground for affirming the trial court's denial of the motion to compel arbitration. And we note that both parties briefed the issue of litigation-conduct waiver in the trial court in connection with American General's motion to compel arbitration; although, the trial court's written order denying the motion did not state specific grounds, and it orally stated at the hearing only that it was denying the motion based on lack of applicability. Kestel also briefed the litigation-waiver issue in the Court of Appeals. American General argued to the Court of Appeals in its reply brief that the panel could not consider the waiver issue because it was not raised in a prehearing statement or by motion and did not address the merits of the litigation-conduct waiver issue in its reply brief to the Court of Appeals.12 In summary, we hold that the Court of Appeals has the discretion to address an issue that the appellee did not raise by prehearing statement if it so chooses.
We granted discretionary review in order to provide guidance to courts and counsel concerning when a party's litigation conduct amounts to an implied waiver of its rights to enforce a contractual right to arbitration. Because we conclude that American General's litigation conduct at issue here was not clearly inconsistent with asserting contractual arbitration rights and thatthe Court of Appeals erred in determining that American General waived its arbitration rights, we reverse and remand to the trial court for proceedings consistent with this opinion. Our ruling here leaves open on remand the possibility that Kestel may, by proper motion, raise her contention that application of the arbitration provisions could, by cost or otherwise, deprive her of an adequate opportunity to present her claims and defenses. We do not reach the question of whether courts or arbitrators must decide questions of other types of waiver, such as failure to comply with contractual time limitations for demanding arbitration. We note that the Court of Appeals previously held that arbitrators must decide a question of whether arbitration was timely demanded where the contract required that such demand be made within a reasonable time within the applicable statute of limitations and where the only litigation conduct of the party seeking arbitration was to file an action for an order enjoining the other party to participate in arbitration.
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