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All opinions are subject to modification and technical correction prior to official publication in the North Carolina Reports and North Carolina Court of Appeals Reports. In the event of discrepancies between the electronic version of an opinion and the print version appearing in the North Carolina Reports and North Carolina Court of Appeals Reports, the latest print version is to be considered authoritative.
1. Appeal and Error_appealability_denial of motion to compel arbitration_substantial
right
The denial of a motion to compel arbitration is not a final judgment but is immediately
appealable because it involves a substantial right.
2. Arbitration and Mediation_unconscionability_standards
The interpretation of arbitration agreements is governed by contract principles and the
parties may specify the rules under which arbitration will conducted, but are not bound by
unconscionable provisions.
3. Arbitration and Mediation_costs_not prohibitive_agreement not unconscionable
The trial court erred by concluding that the plaintiffs' arbitration costs were prohibitive
and that the arbitration clause was unconscionable and unenforceable where plaintiffs did not
fairly measure arbitration costs against the costs of litigation and appeal.
4. Arbitration and Mediation_class action precluded_not unconscionable
An arbitration clause was not unconscionable because it precluded a class action, and the
court erred by so finding.
5. Arbitration and Mediation_mutuality_North Carolina standard
The trial court erred by finding an arbitration clause to be unconscionable based on a
mutuality of obligations analysis contrary to North Carolina contract law.
Judge HUNTER dissenting.
Jones Martin Parris & Tessener Law Offices, P.L.L.C., by John
Alan Jones and G. Christopher Olson, for plaintiffs-appellees.
Moore & Van Allen, PLLC, by Jeffrey M. Young, and Rogers &
Hardin LLP, by Richard H. Sinkfield and Christopher J. Willis,
Atlanta, Georgia, pro hac vice, for defendants-appellants.
Ellis & Winters LLP, by Matthew W. Sawchak, for Amicus Curiae
American Financial Services Association.
Wallace & Graham, P.A., by Mona Lisa Wallace and John S.
Hughes, and The Jackson Law Group, PLLC, by Gary W. Jackson,
for Amicus Curiae The North Carolina Academy of Trial Lawyers.
Carlene McNulty, for Amicus Curiae North Carolina Justice
Center.
Mallam J. Maynard, for Amicus Curiae Financial Protection Law
Center.
Richard Frankel and F. Paul Bland, Jr., for Amicus Curiae
Trial Lawyers for Public Justice, Washington, D.C.
TYSON, Judge.
Commercial Credit Loans, Inc., Commercial Credit Corporation,
Citigroup, Inc., Citicorp, Inc., Citifinancial, Inc., and
Citifinancial Services, Inc. (collectively, “defendants”) appeal
from order entered 20 January 2005 denying defendants' motion to
compel arbitration, and from order entered 28 September 2004
denying in part defendants' motion to compel and granting in part
Fannie Lee Tillman's and Shirley Richardson's, on behalf of all
others similarly situated (collectively, “plaintiffs”), motion for
protective order. We reverse and remand.
Credit insurance was purchased by plaintiffs in connection with their mortgage loans and benefits are paid to the lender if a covered event occurs. Credit insurance coverages include: (1) credit life, which pays off the loan in the event of the borrower's death; (2) credit disability, which makes the monthly mortgage payments if the borrower becomes disabled; and (3) credit involuntary unemployment, which makes the monthly mortgage payments if the borrower becomes involuntarily unemployed. Single premium credit insurance requires the borrower to pay the entire expected term of coverage at the time the mortgage loan is closed. The up- front premium is financed as a part of the loan.
Plaintiffs' loan agreements contain an arbitration provision. The provision is contained in an outlined box with the heading:
“ READ THE FOLLOWING ARBITRATION PROVISION CAREFULLY. IT LIMITS CERTAIN OF YOUR RIGHTS, INCLUDING YOUR RIGHT TO OBTAIN REDRESS THROUGH COURT ACTION.”
The arbitration provision provides:
Upon written request by either party that is submitted according to the applicable rules for arbitration, any Claim, except those specified below in this Provision, shall be resolved by binding arbitration in accordance with (i) the Federal Arbitration Act; (ii) the Expedited Procedures of the CommercialArbitration Rules of the American Arbitration Association (“Administrator”); and (iii) this Provision, unless we both agree in writing to forego arbitration.
This provision excludes two types of claims from arbitration: (1) “Any action to effect a foreclosure to transfer title to the property being foreclosed;” and (2) “Any matter where all parties seek monetary damages in the aggregate of $15,000 or less in total damages (compensatory and punitive), costs, and fees.” The provision further provides:
No Class Actions/No Joinder of Parties. You agree that any arbitration proceeding will only consider Your Claims. Claims by or on behalf of other borrowers will not be arbitrated in any proceeding that is considering Your Claims. Similarly, You may not join with other borrowers to bring Claims in the same arbitration proceeding, unless all of the borrowers are parties to the same Credit Transaction.
The arbitration provision requires the party initiating the arbitration to pay the first $125.00 toward arbitration costs. Commercial Credit agreed to pay “all other costs for the arbitration proceeding up to a maximum of one day (8 hours) of hearings.” It further provides, “All costs of the arbitration proceeding that exceed one day of hearings will be paid by the non- prevailing party.”
The arbitration agreements gives either party the right to appeal the arbitrator's award to a three-arbitrator panel “which shall reconsider de novo any aspect of the initial award requested by the appealing party.” The appealing party is required to pay the costs of initiating the appeal. The non-prevailing party isrequired to pay all costs, fees, and expenses of the appeal and may be required to reimburse the prevailing party for the cost of initiating the appeal.
Defendants filed a motion to compel arbitration in the Vance County Superior Court and was heard on 16 December 2004. The trial court made findings of fact and conclusions of law and denied defendants' motion. Defendants appeal.
A dispute can only be settled by arbitration if a valid arbitration agreement exists. The party seeking arbitration must show that the parties mutually agreed to arbitrate their disputes. The trial court's findings regarding the existence of an arbitration agreement are conclusive on appeal where supported by competent evidence, even wherethe evidence might have supported findings to the contrary. However, the trial court's determination of whether a dispute is subject to arbitration is a conclusion of law that is reviewable de novo on appeal.
Revels v. Miss Am. Org., 165 N.C. App. 181, 188-89, 599 S.E.2d 54, 59 (quoting Slaughter v. Swicegood, 162 N.C. App. 457, 461, 591 S.E.2d 577, 580 (2004)) (internal citations and quotations omitted), disc. rev. denied, 359 N.C. 191, 605 S.E.2d 153 (2004).
“The interpretation of the terms of an arbitration agreement are governed by contract principles and parties may specify by contract the rules under which arbitration will be conducted.” Trafalgar House Construction v. MSL Enterprises, Inc., 128 N.C. App. 252, 256, 494 S.E.2d 613, 616 (1998). As a general rule, “[p]ersons entering contracts of insurance, like other contracts,have a duty to read them and ordinarily are charged with knowledge of their contents.” Nationwide Mut. Insur. Co. v. Edwards, 67 N.C. App. 1, 8, 312 S.E.2d 656, 661 (1984).
Plaintiffs argue they are not bound by the provisions of the agreements to arbitrate because they are unconscionable. Unconscionability is an affirmative defense and the party asserting the defense bears the burden of proof. Rite Color Chemical Co. v. Velvet Textile Co., 105 N.C. App. 14, 20, 411 S.E.2d 645, 649 (1992). In assessing unconscionability, a court is to consider “all the facts and circumstances of a particular case.” Brenner v. School House, Ltd., 302 N.C. 207, 213, 274 S.E.2d 206, 210 (1981). This Court has previously held that “to find unconscionability there must be an absence of meaningful choice on part of one of the parties [procedural unconscionability] together with contract terms which are unreasonably favorable to the other [substantive unconscionability].” Rite Color Chemical Co., 105 N.C. App. at 20, 411 S.E.2d at 649 (quoting Martin v. Sheffer, 102 N.C. App. 802, 805, 403 S.E.2d 555, 557 (1991)) (emphasis in original).
Procedural unconscionability involves 'bargaining naughtiness' in the formation of the contract, i.e., fraud, coercion, undue influence, misrepresentation, inadequate disclosure. Substantive unconscionability . . . involves the harsh, oppressive, and one-sided terms of a contract, i.e., inequality of the bargain. The inequality of the bargain, however, must be so manifest as to shock the judgment of a person of common sense, and . . . the terms . . . so oppressive that no reasonable person would make them on the one hand, and no honest and fair person would accept them on the other.
King v. King, 114 N.C. App. 454, 458, 442 S.E.2d 154, 157 (1994) (citation omitted); see also Brenner, 102 N.C. App. at 805, 403 S.E.2d at 557.
The trial court found defendants' arbitration clause to be unconscionable and unenforceable due to the combination of: (1) “prohibitively high arbitration costs” and the risk of “excessive arbitration and appeal costs;” (2) its class action waiver; and (3) its “excessively one-sided” nature which “lacks mutuality.”
The United States Supreme Court examined the issue of arbitration costs in Green Tree Financial v. Randolph, 531 U.S. 79, 148 L. Ed. 2d 373 (2000). In Green Tree Financial, the Court addressed “whether an arbitration agreement that does not mention arbitration costs and fees is unenforceable because it fails to affirmatively protect a party from potentially steep arbitration costs.” 531 U.S. at 82, 148 L. Ed. 2d at 378. The Court acknowledged that “the existence of large arbitration costs could preclude a litigant . . . from effectively vindicating her federal statutory rights in the arbitral forum.” Id. at 90, 148 L. Ed. 2d at 383 (emphasis supplied).
The respondent in Green Tree Financial argued she was unable to vindicate her statutory rights in arbitration because “the arbitration agreement's silence with respect to costs and feescreates a 'risk' that she will be required to bear prohibitive arbitration costs if she pursues her claims in an arbitral forum[.]” 531 U.S. at 90, 148 L. Ed. 2d at 383. The Court stated, “where . . . a party seeks to invalidate an arbitration agreement on the ground that arbitration would be prohibitively expensive, that party bears the burden of showing the likelihood of incurring such costs.” Id. at 92, 149 L. Ed. 2d at 384. The Court held that the record contains “hardly any information” regarding costs of arbitration, and the “'risk' that Randolph will be saddled with prohibitive costs is too speculative to justify the invalidation of an arbitration agreement.” Id. at 91, 149 L. Ed. 2d at 384.
In Bradford v. Rockwell Semiconductor Systems Inc., 238 F.3d 549, 556 (4th Cir. 2001), the United States Court of Appeals for the Fourth Circuit considered an express fee-splitting provision in an arbitration agreement and held:
We believe that the appropriate inquiry is one that evaluates whether the arbitral forum in a particular case is an adequate and accessible substitute to litigation, i.e., a case-by-case analysis that focuses, among other things, upon the claimant's ability to pay the arbitration fees and costs, the expected cost differential between arbitration and litigation in court, and whether that cost differential is so substantial as to deter the bringing of claims.
Following the Supreme Court's decision in Green Tree Financial, the Fourth Circuit concluded the respondent “failed to demonstrate any inability to pay the arbitration fees and costs, much less prohibitive financial hardship, to support his assertion that thefee-splitting provision deterred him from arbitrating his statutory claims.” Id. at 558. The Court further stated:
The cost of arbitration, as far as its deterrent effect, cannot be measured in a vacuum or premised upon a claimant's abstract contention that arbitration costs are “too high.” Rather, an appropriate case-by-case inquiry must focus upon a claimant's expected or actual arbitration costs and his ability to pay those costs, measured against a baseline of the claimant's expected costs for litigation and his ability to pay those costs.
Id. at 556, n.5 (emphasis supplied).
Here, with regard to arbitration costs, the trial court concluded:
4. The Commercial Credit arbitration clause, as written, exposes borrowers to prohibitively high arbitration costs. The arbitration clause exposes consumers to arbitrator fees, based upon the AAA average for North Carolina, of $1,225.00 per day after the first eight hours of hearings. For example, a three-day arbitration with an arbitrator charging the average AAA hourly fee in North Carolina could cost a borrower $2,450.00 plus costs and attorneys' fees. If the arbitrator charged the high end of the range in North Carolina, a borrower could face arbitration fees of $4,760.00 for a three-day arbitration, plus costs and attorneys' fees. (Emphasis supplied).
5. Defendant's arbitration clause provides for a de novo appeal from the initial arbitration proceeding. The de novo appeal would be to a three-arbitrator panel. The arbitration clause contains a fee-shifting provision with respect to costs of that de novo appeal. That is, the party that loses the appeal “shall pay all costs, fees, and expenses of the appeal proceeding” even if that party had won the initial arbitration proceeding. Thus, a consumer seeking to vindicate her rights through the arbitration process faces the prospect of paying not only arbitrator fees for the initial arbitrationproceeding exceeding eight hours, but also much greater costs associated with the de novo appeal. For example, a two-day appeal could cost a borrower $7,350.00 in arbitrator fees alone, with a three-arbitrator panel charging the AAA average arbitrator fee. These appeal costs would be borne by a borrower even if the borrower had prevailed at the initial arbitration proceeding. (Emphasis supplied).
With regard to litigation costs, the trial court found:
15. Based upon the 1998 North Carolina Bar
Association Economic Survey, the most recent
survey published, the average hourly rate for
attorneys working on litigation matters such
as this is between $150.00 - $250.00 per hour.
. . . .
19. To successfully prosecute a complex case,
including a class action such as this one, a
law firm would likely need the assistance of
expert witnesses. The hourly fees of experts
in the fields of economics, lending practices,
and credit insurance can range from $150.00 to
$300.00 per hour, plus expenses. In complex
cases, litigation costs and expenses,
including deposition costs, travel expenses,
and expert witness fees, can easily run into
thousands of dollars. The class action
mechanism allows persons with relatively small
claims to pool their resources and have those
litigation expenses and costs shared among all
class members. . . .
The trial court concluded:
6. The fees and costs associated with both
the initial arbitration proceeding and any
appeal to a three-arbitrator panel are beyond
what would be incurred by a civil litigant in
the court system. These fees and costs may
deter a substantial number of consumers from
pursuing valid claims. The cost-shifting
(“loser pays”) provisions of the arbitration
clause further serve as a substantial
deterrent to consumers attempting to pursue
claims against Defendant.
Plaintiffs' counsel filed an affidavit in which he stated, “In
complex cases such as this, costs and expenses advanced by our law
firm can total more than $150,000.00.” Plaintiffs argued to the
trial court that the costs involved in arbitrating their claims
“represent a cost that would not be incurred in civil court.”
Plaintiffs argued that if this case were tried in civil court it
would be certified as a class action and the costs of the lawsuit,
if it was successful, would be shared among the class members and
taxed against defendants. This arrangement “places the risk
associated with the case on the law firm.” See North Carolian
State Bar Revised Rules of Professional Conduct, Rule 1.5(c) (2006)
(“A fee may be contingent on the outcome of the matter for which
the service is rendered, except in a matter in which a contingent
fee is prohibited by paragraph (d) or other law.”). Even though
plaintiffs may sign a contingency agreement with their attorneys,
they are still liable for the costs of the litigation. The State
Bar ruled in RPC 124 (January 17, 1992) (“RPC 124”) that “an
attorney may never ethically agree to be ultimately responsible for
the costs of litigation.” An attorney cannot agree with his or her
client to bear all or some of the costs of litigation. Under the
arbitration agreements, after paying the $125.00 initiation fee
plaintiffs are only liable for the costs if the arbitration exceeds
“one day (8 hours) of hearings.” The costs of filing suit in the
North Carolina superior courts is $95.00. N.C. Gen. Stat. § 7A-305
(2005). Plaintiffs' counsel stated in his affidavit that advanced
costs and expenses could total more than $150,000.00. The costsplaintiffs would bear for litigation would likely be higher than
the costs they would bear for arbitration.
Plaintiffs also failed to address or quantify the costs of
litigation associated with this lawsuit if they were not successful
in the superior court or the costs of an appeal. Their argument
solely focuses on the costs of arbitration only if the arbitration
exceeds “one day (8 hours) of hearings” and plaintiffs were the
non-prevailing party and sought a de novo appeal. Plaintiffs costs
comparison between arbitration and civil litigation also presumes
plaintiffs would be the non-prevailing party in arbitration and
would be the prevailing party in litigation. This argument is an
“apples to oranges” comparison. Plaintiffs also failed to equate
the time and costs between a “bench trial” and arbitration hearing,
both lasting up to eight hours.
Plaintiffs' argument is premised upon the same kind of “risk”
of prohibitive arbitration costs the Supreme Court addressed in
Green Tree Financial. Plaintiffs failed to fairly measure the
costs of arbitration “against a baseline of the claimant's expected
costs for litigation.” Bradford, 238 F.3d at 556, n.5.
“Speculative assertions . . . do not constitute competent
evidence.” MCC Outdoor, LLC v. Town of Franklinton Bd. of Comm'rs,
169 N.C. App. 809, 815, 610 S.E.2d 794, 798, disc. rev. denied, 359
N.C. 634, 616 S.E.2d 540 (2005). Based on the evidence presented
and the lack of equal comparisons between arbitration and trial and
appeals, the trial court erred in concluding plaintiffs' costs of
arbitration were “prohibitive.”
Plaintiffs conceded, and the trial court acknowledged, that a class action waiver in an arbitration agreement does not, in and of itself, render the arbitration agreements unenforceable. See Adkins v. Labor Ready, Inc., 303 F.3d 496, 503 (4th Cir. 2002) (A class action waiver “cannot by itself suffice to defeat the strong congressional preference for an arbitral forum.”).
The trial court accepted plaintiffs' proposition that without the ability to join claims, they are deterred from bringing lawsuits against defendants due to the amount of money at stake being too small to justify an attorney's involvement. This proposition and the trial court's conclusion ignores the fact that the consumer protection statute underlying plaintiffs' claims provides for the recovery of plaintiffs' costs and attorney's fees if plaintiffs prevail.
Plaintiffs' complaint seeks damages against defendants for violations of N.C. Gen. Stat. § 75-1.1. N.C. Gen. Stat. § 75.16.1 (2005) provides that “[i]n any suit instituted by a person who alleges that the defendant violated G.S. 75-1.1, the presiding judge may . . . allow a reasonable attorney fee to the duly licensed attorney representing the prevailing party.”
In Snowden v. CheckPoint Check Cashing, the United States Court of Appeals for the Fourth Circuit expressly and explicitlyrejected the precise argument plaintiffs assert and the trial court accepted here:
We also reject Snowden's argument that the Arbitration Agreement is unenforceable as unconscionable because without the class action vehicle, she will be unable to maintain her legal representation given the small amount of her individual damages. Snowden's argument is unfounded in light of: (1) the fact that attorney's fees are recoverable by a prevailing plaintiff in a TILA action, 15 U.S.C. § 1640(a)(3), and a civil RICO action, 18 U.S.C. § 1962(c); and (2) the fact that, although the Arbitration Agreement provides that each party shall bear the expense of their respective attorneys' fees regardless of which party prevails in the arbitration, such provision expressly does not apply if it is “inconsistent with the applicable law . . . .”
290 F.3d 631, 638 (4th Cir. 2002) (emphasis supplied), cert. denied, 537 U.S. 1087, 154 L. Ed. 2d 631 (2002). Like in Snowden, the arbitration agreements at bar provide, “Each party shall pay his/her own attorney . . . fees and expenses, unless otherwise required by law.” (Emphasis supplied).
The United States Court of Appeals for the Eleventh Circuit adopted the Fourth Circuit's reasoning in Jenkins v. First American Cash Advance of Georgia, 400 F.3d 868 (11th Cir. 2005), cert. denied, __ U.S. __, 164 L. Ed. 2d 132 (2006).
The Arbitration Agreements expressly permit Jenkins and other consumers to recover attorneys' fees and expenses “if allowed by statute or applicable law.” Under the Georgia RICO statute, a prevailing plaintiff may be awarded attorney's fees. . . . Jenkins, therefore, can presumably recover attorneys' fees and costs if she prevails in arbitration on her Georgia RICO claim.
Id. at 878. The trial court's conclusion regarding class action waivers is contrary to the great majority of federal and state courts that have examined and ruled upon this issue. See Snowden, 290 F.3d at 638 (rejecting the argument “that the Arbitration Agreement is unenforceable as unconscionable because without the class action vehicle, she will be unable to maintain her legal representation given the small amount of her individual damages”); Johnson, 225 F.3d at 369 (holding arbitration “clauses are effective even though they may render class actions to pursue statutory claims under the TILA or the EFTA unavailable”); Livingston v. Associates Finance, Inc., 339 F.3d 553, 559 (7th Cir. 2003) (“The Arbitration Agreement at issue here explicitly precludes the [borrowers] from bringing class claims or pursuing 'class action arbitration,' so we are therefore 'obliged to enforce the type of arbitration to which these parties agreed, which does not include arbitration on a class basis.'”); Iberia Credit Bureau, Inc. v. Cingular Wireless, 379 F.3d 159, 175 (5th Cir. 2004) (“ . . . the arbitration clause does not leave the plaintiffs without remedies or so oppress them as to rise to the level of unconscionability.”); Rosen v. SCIL, LLC, 799 N.E.2d 488, 494 (Ill. App. 2003)(“We find the arbitration provision enforceable despite its prohibition on class actions. We further note that the question of whether an individual is entitled to participate in a class action as a matter of right is a question of public policy, which we suggest should be addressed by the legislature.”); Med Center Cars, Inc. v. Smith, 727 So.2d 9, 20 (Ala. 1998) (“to require class-wide arbitration would alter theagreements of the parties, whose arbitration agreements do not provide for class-wide arbitration”); Rains v. Foundation Health Systems, 23 P.3d 1249, 1253 (Colo. App. 2001) (“arbitration clauses are not unenforceable simply because they might render a class action unavailable”); Edelist v. MBNA America Bank, 790 A.2d 1249, 1261 (Del. Super. Ct. 2001) (finding that, because “the surrender of [the] class action right was clearly articulated in the arbitration amendment[,] the Court finds nothing unconscionable about it and finds the bar on class actions enforceable”); AutoNation USA Corp. v. Leroy, 105 S.W.3d 190, 200 (Tex. App. 2003) (enforcing arbitration clause which prohibited class action claims, stating that “there is no entitlement to proceed as a class action”).
These courts and others expressly recognized that class action waivers in arbitration provisions do not “necessarily choke off the supply of lawyers willing to pursue claims on behalf of debtors.” Johnson v. West Suburban Bank, 225 F.3d 366, 374 (3rd Cir. 2000). The great majority of federal and state jurisdictions who have addressed this issue are directly contrary to the trial court's findings and conclusions. Upon de novo review, the trial court's conclusion that plaintiffs would be deterred from bringing their claims against defendants due to the class action waiver is erroneous in light of the express arbitration provisions and plaintiffs' assertion of claims under N.C. Gen. Stat. §§ 75-1.1 and 75.16.1.
The trial court concluded:
8. The Commercial Credit arbitration clause used in North Carolina since February 12, 1996 is one-sided and lacks mutuality, in that it preserves for the lender the right to pursue almost all claims it would choose to pursue in civil court while denying that right to borrowers in most instances. The arbitration clause contains exceptions for foreclosure actions and claims in which the amount sought, including costs and attorneys' fees is under $15,000.00. This portion of the clause preserves for the lender the only remedies it would be likely to assert against borrowers - foreclosure and collection actions.
The trial court's order cites cases from the United States Court of Appeals for the Ninth Circuit, the United States District Court for the Southern District of Georgia, the Supreme Court of Tennessee, the Supreme Court of Arkansas, and the Supreme Court of Appeals of West Virginia to support its conclusion. No North Carolina or other controlling precedents or statutes were cited to support this conclusion.
“Mutuality of promises means that promises to be enforceable must each impose a legal liability upon the promisor. Each promise then becomes a consideration for the other.” Wellington v. Dize Awning & Tent Co., 196 N.C. 748, 751, 147 S.E. 13, 14 (1929). Under North Carolina law, “mutuality” merely requires consideration on each side of a contract. Mutuality does not require that each of the contract terms must apply equally to both parties to be enforceable. Id. Want of mutuality is merely one form of want of consideration. But a single consideration may support several promises; it is not necessary that each promise have a separate consideration. Hence, a covenant which imposes obligations upon one party only may be enforceable if it is part of an entire contract which is supported by a sufficient consideration.
Id.
Likewise, the Restatement (Second) of Contracts § 79 (1979) provides:
If the requirement of consideration is met, there is no additional requirement of:
(a) a gain, advantage, or benefit to the promisor or a loss, disadvantage, or detriment to the promisee; or
(b) equivalence in the values exchanged; or
(c) “mutuality of obligation.”
Even under a “mutuality of obligation” analysis, we fail to
see how the exclusions in the arbitration agreements are not
mutual. The language of the arbitration provision states, “The
following types of matters will not be arbitrated. This means that
neither one of us can require the other to arbitrate.” (Emphasis
supplied). The first exclusion covers claims “where all parties
seek monetary damages . . . of $15,000 or less.” This exclusion
applies equally to both plaintiffs and defendants. If defendants
had asserted a lawsuit in civil court for damages of $15,000.00 or
more against plaintiffs on their promissory notes, plaintiffs can
compel defendants into arbitration under their agreements.
The second exclusion from arbitration for “[a]ny action to
effect a foreclosure to transfer title to the property beingforeclosed” is also mutual. Neither party can force the other to
arbitrate such a claim. Further, the fact that the North Carolina
superior courts have “exclusive jurisdiction” over any action
affecting title to land is a good reason to exclude foreclosure
actions from arbitration agreements. N.C. Gen. Stat. § 43-1
(2005).
The Maryland Court of Appeals recently held that an
arbitration agreement that excluded foreclosure proceedings was not
unconscionable. Walther v. Sovereign Bank, 872 A.2d 735, 748-49
(Md. 2005).
Maryland foreclosure proceedings, like those
of both Kentucky and South Carolina, do not
act solely to protect the interests of the
mortgage lender against a defaulting debtor
but instead provide protections for both
sides. We agree with these other
jurisdictions and their findings that the act
of a mortgage lender in providing certain
exceptions for itself in the arbitration
agreement, such as the ability to pursue
foreclosure proceedings in a judicial forum,
does not in and of itself make the arbitration
agreement unconscionable where the
mortgage-debtor/borrower is not provided with
identical exceptions to the arbitration
agreement. The arbitration agreement at
issue, which includes exceptions to that
agreement that enable the mortgage lender,
presently Sovereign Bank, to pursue certain
judicial remedies including foreclosure, is
not made unconscionable where petitioners are
not provided with identical exceptions to the
arbitration agreement.
Id. at 749 (internal citations omitted). The Maryland Court of
Appeals' rationale is persuasive and applicable to the issue before
us. Here, the foreclosure exception in the arbitration agreements
applies equally to both parties. Under de novo review, the trial court erred in applying a
“mutuality of obligations” to the arbitration agreements that is
contrary to North Carolina contract law. Wellington, 196 N.C. at
751, 147 S.E.2d at 14. Further, plaintiffs failed to show how the
two exclusions contained in the arbitration agreements were not
equally binding upon both parties and were not mutual obligations.
The trial court's order denying defendants' motion to compel arbitration is reversed. This case is remanded to the trial court for entry of an order granting defendants' motion to compel arbitration.
Reversed and Remanded.
Judge MCCULLOUGH concurs.
Judge HUNTER dissents by separate opinion.
HUNTER, Judge, dissenting.
Because I disagree with the majority's position that the trial
court erred in finding the arbitration agreement to be
unconscionable, I respectfully dissent.
The majority opinion does not include numerous and detailed
findings of fact made by the trial court, most of which are
uncontroverted. Because the findings are necessary for a full
understanding of the issues before this Court, I recite them here:
1. Plaintiffs, Fannie Lee Tillman and
Shirley Richardson, filed this putative class
action lawsuit pursuant to Rule 23 of the
North Carolina Rules of Civil Procedure on
June 24, 2002. Plaintiffs seek to represent a
class of borrowers who obtained loans from
Defendant Commercial Credit Loans, Inc. (now
known as and hereinafter referred to as
“CitiFinancial Services, Inc.” or “Defendant”)
and who were sold single-premium credit
insurance by Defendant in connection with
their loans.
2. Single-premium credit insurance
(“SPCI”) is a type of credit insurance sold by
a lender to a borrower in which the borrower
is charged the entire insurance premium at the
time the underlying loan is originated, with
the premium being financed into and over the
life of the loan. As a result of the premium
charge being financed, the loan principal is
increased by the amount of the premium charge,
and the borrower pays interest on the
increased principal, including the insurance
premium, for the entire life of the loan.
Furthermore, the increase in loan principal
leads to a concomitant increase in certain
loan costs such as origination fees and
points. With the passage of the North
Carolina Predatory Lending Law, N.C. Gen.
Stat. § 24-1.1E, it has been unlawful to
finance the premium costs of single-premium
credit insurance since July 1, 2000.
3. Plaintiff Fannie Lee Tillman
obtained a loan from Commercial Credit Loans,
Inc. (hereafter “Commercial Credit”) on
September 22, 1998. Ms. Tillman's loanincluded single-premium credit life insurance
with a premium costing $1,058.80 and single-
premium credit disability insurance with a
premium costing $1,005.95. The amount
financed in connection with this loan was
$18,253.68, with $2,064.75 attributable to
single-premium credit insurance. The interest
rate on the loan was over 15%. The loan
proceeds were used, in part, to pay off
another Commercial Credit loan which had been
originated eight months earlier, in January
1998. Ms. Tillman was also sold credit
insurance, with premiums costing $1,799.95, in
connection with the earlier Commercial Credit
loan. The interest rate on the earlier loan
was over 20%.
4. Plaintiff Fannie Lee Tillman has
limited financial resources. She works as a
sewer at Wayne Industries in Archdale, North
Carolina, and her take-home pay is
approximately $258.00 per week after taxes.
She has worked at Wayne Industries for roughly
18 years, and the $8.50 hourly rate she
currently receives is the most she has earned
at that job. Ms. Tillman receives $285.60 per
month in pension benefits from her deceased
husband's employer. She receives $1,063.00
per month in Social Security benefits. Ms.
Tillman has no other sources of income. Ms.
Tillman's most significant asset is her home
in High Point, North Carolina. That home is
worth approximately $60,000.00 to $65,000.00
and is encumbered by a first and second
mortgage with balances which are roughly equal
to the value of the home. Ms. Tillman is 66
years of age. She completed the seventh grade
but then had to begin working full-time to
help support her family. Ms. Tillman does not
have a retirement plan or any significant
savings. The balance in Ms. Tillman's
checking account is typically under $100.00.
5. Plaintiff Shirley Richardson
obtained a loan from Commercial Credit on 4
June 1999. The amount financed in that loan
was $20,935.57, with $4,208.75 attributable to
single-premium credit insurance. The interest
rate was over 15%. In connection with that
loan, Ms. Richardson was charged $1,871.54 for
single-premium credit life insurance,
$1,109.49 for single-premium credit disabilityinsurance, and $1,227.72 for single-premium
credit involuntary unemployment insurance.
Ms. Richardson had received two prior loans
from Commercial Credit, and both of those
loans included single-premium credit
insurance. Those prior Commercial Credit
loans were originated in October 1997 and
April 1998; Ms. Richardson was charged
$3,782.96 for credit insurance premiums in
connection with those loans. With her June 4,
1999 loan, Ms. Richardson was also charged
$499.95 for a “Home Security Plan.” She was
not told what that product or service is at
the time of closing or at any point
thereafter.
6. Plaintiff Shirley Richardson has few
economic resources. Ms. Richardson works
full-time in the medical records section at
Murdock Center in Henderson, North Carolina,
where she earns $12.70 per hour. She also
works part-time at the Louisburg Group Home as
a direct care aide, earning $12.00 per hour
during the 10-15 hours per week she works that
job. Ms. Richardson, who is 52 years of age,
had $2,523.25 in her retirement account as of
the date of the hearing of this matter. Ms.
Richardson lives from paycheck to paycheck,
and after paying her monthly bills often has
no money in her bank account. Ms.
Richardson's most significant asset is her
home in Henderson, North Carolina, which is
encumbered by a first and second mortgage.
Ms. Richardson has substantial outstanding
credit card debt.
7. CitiFinancial Services, Inc. is a
subprime lender which typically loans money to
borrowers, such as Plaintiffs Tillman and
Richardson, with impaired credit who
oftentimes would not qualify for financing at
lending institutions primarily making loans in
the prime, or conventional, lending market.
8. Since February 12, 1996,
CitiFinancial Services, Inc. has included an
arbitration clause in its loan agreements.
Prior to that time, Defendant's loan
agreements did not contain an arbitration
clause. . . .
9. The Commercial Credit arbitration
clause is a standard-form contract of
adhesion. The borrower is given no
opportunity to negotiate out of the
arbitration provision, and CitiFinancial
Services, Inc. would not make a loan if the
loan agreement did not include the arbitration
provision. The loan documents, including the
arbitration provision at issue, were drafted
by Defendant.
10. Since the time CitiFinancial
Services, Inc. began including an arbitration
clause in its loan agreements, the lender has
made more than 68,000 loans in North Carolina.
During that time, CitiFinancial Services, Inc.
has pursued lawsuits in civil court against
more than 3,700 borrowers in North Carolina,
including over 2,000 collection actions and
more than 1,700 foreclosure actions.
Defendant has been able to pursue claims in
civil court by virtue of two exceptions within
the arbitration clause, which Defendant
drafted, for (1) foreclosure actions and (2)
matters in which less than $15,000.00 in
damages, including costs and fees, are sought.
The average amount in dispute in matters in
which CitiFinancial Services, Inc. pursued
legal action against North Carolina borrowers
is under $7,000.00.
11. Since the time CitiFinancial
Services, Inc. began including an arbitration
provision in its loan agreements, there have
been no arbitration proceedings in North
Carolina involving CitiFinancial Services,
Inc. and any of its borrowers. Since
introduction of the arbitration clause, no
North Carolina borrower has requested
arbitration of any dispute with CitiFinancial
Services, Inc., nor has CitiFinancial
Services, Inc. demanded arbitration of any
dispute involving any North Carolina borrower.
The only legal redress sought has been the
collection and foreclosure actions pursued in
civil court by Defendant against its
borrowers.
12. The only persons present at the loan
closings involving Plaintiffs Tillman and
Richardson were Plaintiffs and a Commercial
Credit loan officer. Ms. Tillman and Ms.Richardson were rushed through the loan
closings, and the Commercial Credit loan
officer indicated where Ms. Tillman and Ms.
Richardson were to sign or initial the loan
documents. There was no mention of credit
insurance or the arbitration clause at the
loan closings.
. . .
14. Plaintiffs Fannie Lee Tillman and
Shirley Richardson entered into contingency
fee contracts with the attorneys representing
them. The contingency fee contract is typical
of such agreements. The contingency fee
agreement entered into by Plaintiffs provides
that their attorneys will not be entitled to
any fee unless there is some monetary recovery
obtained on behalf of Plaintiffs, either by
way of settlement or verdict. The agreement
further provides that the law firm
representing Plaintiffs shall advance the
costs and expenses incurred in prosecuting the
action.
15. Based upon the 1998 North Carolina
Bar Association Economic Survey, the most
recent survey published, the average hourly
rate for attorneys working on litigation
matters such as this is between $150.00 -
$250.00 per hour.
16. . . . . The only realistic means by
which persons in the position of Plaintiffs
can prosecute their claims is by entering into
a contingency fee agreement with lawyers
willing to advance the costs and expenses of
the litigation and with the law firm assuming
the risk that there might be no recovery.
. . .
19. To successfully prosecute a complex
case, including a class action such as this
one, a law firm would likely need the
assistance of expert witnesses. The hourly
fees of experts in the fields of economics,
lending practices, and credit insurance can
range from $150.00 to $300.00 per hour, plus
expenses. In complex cases, litigation costs
and expenses, including deposition costs,
travel expenses, and expert witness fees, caneasily run into thousands of dollars. The
class action mechanism allows persons with
relatively small claims to pool their
resources and have those litigation expenses
and costs shared among all class members. The
class action device provides a means by which
consumers with modest damages claims can
obtain representation by competent counsel
with sufficient resources to afford protracted
litigation in complex cases.
The trial court also made the following findings, portions of
which are disputed by defendants:
13. The compensation rates for American
Arbitration Association (“AAA”) arbitrators in
North Carolina range from $500.00 to $2,380.00
per day. The average daily rate of AAA
arbitrator compensation in North Carolina is
$1,225.00.
. . .
17. Plaintiffs asserted claims for
relief under Chapter 75 of the North Carolina
General Statutes, contending that Defendants'
sale of single-premium credit insurance in
connection with real estate loans constituted
an unfair or deceptive trade practice or act
in or affecting commerce. Plaintiffs seek
damages based upon the amount of premiums
charged for those credit insurance products.
In most cases, the premium charges for
single-premium credit insurance sold by
CitiFinancial Services, Inc. were under
$5,000.00 per loan. Plaintiff Fannie Lee
Tillman was charged $2,064.75 in
single-premium credit insurance premiums in
connection with her September 22, 1998 loan;
Plaintiff Shirley Richardson was charged
$4,208.75 for single-premium credit insurance
with her June 4, 1999 loan. The relatively
modest damages claimed by Plaintiffs make it
unlikely that any attorneys would be willing
to accept the risks attendant to pursuing
claims against one of the nation's largest
lenders, even with the prospect of a treble
damages award and statutory attorney's fees.
It would not be feasible to prosecute the
claims of the named Plaintiffs and of putative
class members on an individual basis.
18. Defendant's arbitration clause
contains features which would deter many
consumers from seeking to vindicate their
rights. These features include the
cost-shifting (“loser pays”) provision with
respect to the initial arbitration proceeding
to the extent it exceeds eight hours, the
cost-shifting provision associated with the de
novo appeal from that initial arbitration
proceeding, and the prohibition on joinder of
claims and class actions. The prohibition on
class actions and the cap of $15,000.00 on the
value of claims that can be pursued outside of
the arbitration process designed by Defendant
makes it unlikely that borrowers would be able
to retain lawyers willing to pursue litigation
against a large commercial entity, such as
CitiFinancial Services, Inc.
Based on these findings, the trial court determined the arbitration
clause to be unconscionable and denied defendants' motion to compel
arbitration. Defendants appeal.
“Although arbitration is favored in the law, in order to be
enforced, the underlying agreement must first be shown to be valid
as determined by a common law contract analysis.” Howard v.
Oakwood Homes Corp., 134 N.C. App. 116, 118, 516 S.E.2d 879, 881
(1999); see also Routh v. Snap-On Tools Corp., 108 N.C. App. 268,
271, 423 S.E.2d 791, 794 (1992) (stating that “before a dispute can
be settled in this manner, there must first exist a valid agreement
to arbitrate”). The party seeking arbitration has the burden of
showing the parties mutually agreed to arbitrate their disputes.
Routh, 108 N.C. App. at 271-72, 423 S.E.2d at 794; King v. Owen,
166 N.C. App. 246, 248, 601 S.E.2d 326, 328 (2004). Arbitration
clauses included in contracts of adhesion are disfavored in law. Routh, 108 N.C. App. at 272, 423 S.E.2d at 794; Blow v.
Shaughnessy, 68 N.C. App. 1, 16, 313 S.E.2d 868, 876-77 (1984).
Where a contract is unconscionable, it is not valid and the
court should not enforce it. Brenner v. School House, Ltd., 302
N.C. 207, 213, 274 S.E.2d 206, 210 (1981). “In determining whether
a contract is unconscionable, a court must consider all the facts
and circumstances of a particular case. If the provisions are then
viewed as so one-sided that the contracting party is denied any
opportunity for a meaningful choice, the contract should be found
unconscionable.” Id. (holding that, as there was no inequality of
bargaining power between the parties, the contract was not
unconscionable).
In the present case, the trial court concluded the arbitration
clause was unconscionable on the grounds that (1) it exposed
borrowers to prohibitively high arbitration costs; (2) was
excessively one-sided and lacked mutuality; and (3) prohibited
class actions. Although any one of these factors, standing alone,
might withstand judicial scrutiny, the trial court concluded that
“[t]he combination of these factors, taken on the whole, render the
Commercial Credit arbitration clause unconscionable.” In
separately rejecting each ground as a basis for the trial court's
decision, the majority fails to recognize or address the combined
impact of these three factors on the fundamental fairness of the
contracts at issue.
With regard to the costs of arbitration, the majority rejects
the trial court's conclusion that the costs of arbitration would be“prohibitive” as unsupported by the evidence. The majority
overlooks numerous key and uncontradicted findings by the trial
court, however, and misapplies the law to the case at hand.
For example, the majority complains that “[p]laintiffs . . .
failed to address or quantify the costs of litigation associated
with this lawsuit if they were not successful in the superior court
or the costs of an appeal.” However, as recognized by the majority
and expressly found by the trial court, plaintiffs entered into a
contingency fee contract with their attorneys. The contingency fee
contract provides that “no attorney's fee will be charged Client at
any time unless and until a recovery is obtained from Creditor.”
The agreement further provides that the law firm representing
plaintiffs shall advance the costs and expenses incurred in
prosecuting the action. Thus, under the contingency fee contract,
if litigation was not successful and plaintiffs recovered nothing,
they would owe no attorneys' fees. Under such a scheme,
plaintiffs' attorneys bear the risk of any unsuccessful litigation.
The majority cites Bradford v. Rockwell Semiconductor Systems,
Inc., 238 F.3d 549, 556 n.5 (4th Cir. 2001), as authority for the
proposition that “an appropriate case-by-case inquiry must focus
upon a claimant's expected or actual arbitration costs and his
ability to pay those costs, measured against a baseline of the
claimant's expected costs for litigation and his ability to pay
those costs.” Id. (emphasis added). The majority fails to recite
the extensive findings made by the trial court which were
unchallenged by defendants, detailing plaintiffs' extremely limitedfinancial resources and their inability to pay the costs associated
with arbitration. Indeed, the trial court found that
[t]he only realistic means by which persons in
the position of [p]laintiffs can prosecute
their claims is by entering into a contingency
fee agreement with lawyers willing to advance
the costs and expenses of the litigation and
with the law firm assuming the risk that there
might be no recovery.
In addition, the majority's selective reference to Bradford omits
language immediately following the statement quoted above:
“Another factor to consider in the cost-differential analysis is
whether the arbitration agreement provides for fee-shifting,
including the ability to shift forum fees based upon the inability
to pay.” Id.
The arbitration agreement here provides for no fee-shifting
based on plaintiffs' inability to pay -- just the opposite. It
includes a cost-shifting “loser pays” provision that exposes
plaintiffs to potentially substantial arbitration costs. “[I]t is
undisputed that fee splitting can render an arbitration agreement
unenforceable where the arbitration fees and costs are so
prohibitive as to effectively deny the employee access to the
arbitral forum.” Id. at 554 (citing Green Tree Financial
Corp.-Alabama v. Randolph, 531 U.S. 79, 148 L. Ed. 2d 373 (2000)),
(“[i]t may well be that the existence of large arbitration costs
could preclude a litigant . . . from effectively vindicating her
federal statutory rights in the arbitral forum”).
The Court in Bradford ultimately rejected the plaintiff's
claim because he offered “no evidence that he was unable to pay the$4,470.88 that he was billed by the [arbitration], or that the
fee-splitting provision deterred him from pursuing his statutory
claim or would have deterred others similarly situated.” Id. at
558 (footnote omitted). Unlike Bradford, plaintiffs here presented
substantial evidence, and the trial court found, that they were
unable to pay the arbitration fees and costs, and that the
arbitration clause contained features, such as the cost-shifting
provision, that would deter many similarly-situated consumers from
seeking to vindicate their rights. Such deterrence is evident from
the uncontradicted fact that:
Since the time CitiFinancial Services, Inc.
began including an arbitration provision in
its loan agreements, there have been no
arbitration proceedings in North Carolina
involving CitiFinancial Services, Inc. and any
of its borrowers. Since introduction of the
arbitration clause, no North Carolina borrower
has requested arbitration of any dispute with
CitiFinancial Services, Inc., nor has
CitiFinancial Services, Inc. demanded
arbitration of any dispute involving any North
Carolina borrower. The only legal redress
sought has been the collection and foreclosure
actions pursued in civil court by Defendant
against its borrowers.
The trial court also found that the “average daily rate of AAA
arbitrator compensation in North Carolina is $1,225.00.” The trial
court concluded that:
The Commercial Credit arbitration clause, as
written, exposes borrowers to prohibitively
high arbitration costs. The arbitration
clause exposes consumers to arbitrator fees,
based upon the AAA average for North Carolina,
of $1,225.00 per day after the first eight
hours of hearings. For example, a three-day
arbitration with an arbitrator charging the
average AAA hourly fee in North Carolina could
cost a borrower $2,450.00, plus costs andattorneys' fees. If the arbitrator charged
the high end of the range in North Carolina, a
borrower could face arbitration fees of
$4,760.00 for a three-day arbitration, plus
costs and attorneys' fees.
Plaintiffs also presented substantial evidence of the expected
costs of litigation and their ability to pay such costs. The trial
court made detailed findings therefrom which supported its
conclusions of law. I therefore disagree with the majority's
conclusion that the trial court erred in finding the costs of
arbitration to be prohibitive for these plaintiffs.
The majority also finds fault with the trial court's
conclusion regarding lack of mutuality and the one-sided nature of
the arbitration clause. After the majority cites and relies upon
cases from the United States Courts of Appeal of the Third, Fourth,
Seventh, and Eleventh Circuits, and the appellate courts of
Illinois, Alabama, Colorado, Delaware, and Texas, the majority
chides the trial court for failing to cite to North Carolina
precedent. The majority then applies an appellate decision from
Maryland to the issue.
The majority unfairly characterizes the trial court's
conclusions regarding the one-sidedness of the arbitration clause
as “applying a requirement of mutuality to the arbitration
agreement that is contrary to North Carolina law.” The trial
court, however, never concluded that the contract terms contained
in the arbitration agreement had to apply equally to both parties
to be enforceable. Rather, the trial court properly concluded that
the one-sidedness and lack of mutuality of the arbitration clausewas one factor in determining that the contract was unconscionable.
As noted supra, where provisions in a contract are “so one-sided
that the contracting party is denied any opportunity for a
meaningful choice, the contract should be found unconscionable.”
Brenner, 302 N.C. at 213, 274 S.E.2d at 210.
Here, the trial court found that “CitiFinancial Services, Inc.
is a subprime lender which typically loans money to borrowers, such
as Plaintiffs Tillman and Richardson, with impaired credit who
oftentimes would not qualify for financing at lending institutions
primarily making loans in the prime, or conventional, lending
market.” The trial court made further findings detailing the
inequality of the bargaining power between the parties as follows:
9. The Commercial Credit arbitration
clause is a standard-form contract of
adhesion. The borrower is given no
opportunity to negotiate out of the
arbitration provision, and CitiFinancial
Services, Inc. would not make a loan if the
loan agreement did not include the arbitration
provision. The loan documents, including the
arbitration provision at issue, were drafted
by Defendant.
10. Since the time CitiFinancial
Services, Inc. began including an arbitration
clause in its loan agreements, the lender has
made more than 68,000 loans in North Carolina.
During that time, CitiFinancial Services has
pursued lawsuits in civil court against more
than 3,700 borrowers in North Carolina,
including over 2,000 collection actions and
more than 1,700 foreclosure actions.
Defendant has been able to pursue claims in
civil court by virtue of two exceptions within
the arbitration clause, which Defendant
drafted, for (1) foreclosure actions and (2)
matters in which less than $15,000.00 in
damages, including costs and fees, are sought.
The average amount in dispute in matters in
which CitiFinancial Services, Inc. pursuedlegal action against North Carolina borrowers
is under $7,000.00.
11. Since the time CitiFinancial
Services, Inc. began including an arbitration
provision in its loan agreements, there have
been no arbitration proceedings in North
Carolina involving CitiFinancial Services,
Inc. and any of its borrowers. Since
introduction of the arbitration clause, no
North Carolina borrower has requested
arbitration of any dispute with CitiFinancial
Services, Inc., nor has CitiFinancial
Services, Inc. demanded arbitration of any
dispute involving any North Carolina borrower.
The only legal redress sought has been the
collection and foreclosure actions pursued in
civil court by Defendant against its
borrowers.
Based in part on these uncontradicted findings, the trial court
concluded that the arbitration clause was
one-sided and lacks mutuality, in that it
preserves for the lender the right to pursue
almost all claims it would choose to pursue in
civil court while denying that right to
borrowers in most instances. The arbitration
clause contains exceptions for foreclosure
actions and claims in which the amount sought,
including costs and attorneys' fees, is under
$15,000.00. This portion of the clause
preserves for the lender the only remedies it
would be likely to assert against borrowers --
foreclosure and collection actions. A
foreclosure action, coupled with or preceding
a collection action for any shortfall, is all
Defendant would need to enforce its rights
under the real estate secured loans against
its customers. Defendant has pursued such
actions more than 3,700 times against North
Carolina borrowers since the arbitration
clause has been included in Defendant's loan
agreements.
This conclusion is fully supported by the trial court's
unchallenged findings of fact and should be upheld. The majority nevertheless asserts that the arbitration clause
is perfectly mutual because the exclusions “apply equally” to
plaintiffs and defendants. This assertion completely fails to
acknowledge that only defendants would have any interest in
pursuing most actions under the exclusions. Quite obviously,
plaintiffs would never be in a position to bring an “action to
effect a foreclosure.” The fact that plaintiffs could not be
forced to arbitrate such an action is therefore of no benefit
whatsoever to plaintiffs and entirely to the benefit of defendants.
Likewise, the exclusion of actions worth less than $15,000.00 is of
most benefit to defendants, who have regularly used the exclusion
in their collection actions. Plaintiffs meanwhile are faced with
the difficulty of finding an attorney willing to pursue a claim
where relatively modest damages are at stake. The “mutuality”
found by the majority is therefore illusory.
Finally, the majority takes issue with the trial court's
conclusion that “[a] prohibition on the right to join claims and
participate in class action lawsuits is a factor to be considered
in determining whether an arbitration provision is unconscionable.”
The majority asserts that, in accepting plaintiffs' position that
the preclusion of class actions deters them from bringing claims
against defendants due to the modest damages at stake, the trial
court “ignore[d] the fact that the consumer protection statute
underlying plaintiffs' claims provides for the recovery of
plaintiffs' costs and attorney's fees[.]” The trial court,
however, specifically found that “[t]he relatively modest damagesclaimed by Plaintiffs make it unlikely that any attorneys would be
willing to accept the risks attendant to pursuing claims against
one of the nation's largest lenders, even with the prospect of a
treble damages award and statutory attorney's fees.” (Emphasis
added.) Thus the trial court specifically considered the
possibility of the statutory recovery of costs and attorneys' fees
and nevertheless found that the preclusion of class action would
make it difficult for plaintiffs to enforce their rights.
The majority cites numerous cases from other jurisdictions in
which the courts have upheld arbitration clauses which contained
class action waivers. The majority acknowledges that these cases
are not binding on this Court. Moreover, in many of the cases
cited by the majority, the claimants' arguments were rejected
because they failed to offer any evidence regarding the financial
burden arbitration would pose. See, e.g., Livingston v. Associates
Finance, Inc., 339 F.3d 553, 557 (7th Cir. 2003) (holding that,
because the plaintiffs failed to offer “any specific evidence of
arbitration costs that they may face in this litigation,
prohibitive or otherwise, and . . . failed to provide any evidence
of their inability to pay such costs,” they could not avoid
arbitration); Adkins v. Labor Ready, Inc., 303 F.3d 496, 503 (4th
Cir. 2002) (concluding that the plaintiff's failure to offer any
evidence regarding the costs of arbitration “renders his further
complaint about the inability to bring a class action moot”);
Bradford, 238 F.3d at 554; Rains v. Foundation Health Systems, 23
P.3d 1249, 1253 (Colo. Ct. App. 2001) (same); see also Jenkins v.First American Cash Advance of Georgia, 400 F.3d 868, 878 n.8 (11th
Cir. 2005) (noting that the plaintiff's arbitration costs would not
be burdensome); Autonation USA Corp. v. Leroy, 105 S.W.3d 190, 200
(Tex. Ct. App. 2003) (footnote omitted) (acknowledging that
“[w]hile there may be circumstances in which a prohibition on class
treatment may rise to the level of fundamental unfairness,
[plaintiff]'s generalizations do not satisfy her burden to
demonstrate that the arbitration provision is invalid here”). In
contrast to these cases, the present plaintiffs offered substantial
evidence of their limited financial resources and the prohibitive
costs of arbitration.
Other cases cited by the majority never address the issue of
unconscionability. See, e.g., Livingston, 339 F.3d 553; Johnson v.
West Suburban Bank, 225 F.3d 366 (3d Cir. 2000). The majority does
not acknowledge the many decisions with remarkably similar facts
holding that the presence of a class action waiver may render an
arbitration agreement unenforceable. See, e.g., Kristian v.
Comcast Corp., 2006 U.S. App. LEXIS 9881 (1st Cir. Apr. 20, 2006)
(“a class mechanism bar can impermissibly frustrate the prosecution
of claims in any forum, arbitral or judicial”); Ting v. AT&T, 319
F.3d 1126, 1150 (9th Cir. 2003) (footnote omitted) (“we affirm the
district court's conclusion that the class-action ban violates
California's unconscionability law”); Luna v. Household Finance
Corp. III, 236 F. Supp. 2d 1166, 1179 (W.D. Wash. 2002)
(prohibition on class actions rendered arbitration clause
unconscionable); Lozada v. Dale Baker Oldsmobile, Inc., 91 F. Supp.2d 1087, 1105 (W.D. Mich. 2000) (same); Leonard v. Terminix Intern.
Co., L.P., 854 So. 2d 529, 539 (Ala. 2002) (“[t]his arbitration
agreement is unconscionable because it is a contract of adhesion
that restricts the [plaintiffs] to a forum where the expense of
pursuing their claim far exceeds the amount in controversy. The
arbitration agreement achieves this result by foreclosing the
[plaintiffs] from an attempt to seek practical redress through a
class action and restricting them to a disproportionately expensive
individual arbitration”); Powertel, Inc. v. Bexley, 743 So. 2d 570,
576 (Fla. Dist. Ct. App. 1999); State ex rel. Dunlap v. Berger, 211
W. Va. 549, 567 S.E.2d 265 (W. Va. 2002). The majority's statement
that “[t]he great majority of federal and state jurisdictions who
have addressed this issue are directly contrary to the trial
court's findings and conclusions” is therefore unsupported. I
would affirm the trial court's conclusion that the arbitration
clause's prohibition on class actions is one factor supporting the
ultimate determination of unconscionability.
Where there is “an absence of meaningful choice on part of one
of the parties together with contract terms which are unreasonably
favorable to the other” a contract may be found unconscionable.
Martin v. Sheffer, 102 N.C. App. 802, 805, 403 S.E.2d 555, 557
(1991). The trial court here found both procedural and substantive
unconscionability. The trial court found as undisputed fact that
plaintiffs “were rushed through the loan closings[.]” The loan
officer did not mention or explain the arbitration clause, but
simply indicated where plaintiffs were to sign or initial the loandocuments. The arbitration clause at issue here was a standard
form contract of adhesion disfavored in law, the practical effects
of which prevented plaintiffs from effectively vindicating their
rights.
In their suit against defendants, plaintiffs are seeking
relief from an insurance product so abusive that the General
Assembly has now outlawed its sale under North Carolina's Predatory
Lending Law. See N.C. Gen. Stat. § 24-1.1E (2005) (effective 1
July 2000). The record in this case demonstrates that the trial
court considered all the relevant facts and circumstances in
assessing the enforceability of the arbitration clause at issue.
Brenner, 302 N.C. at 213, 274 S.E.2d at 210. The trial court made
findings of fact detailing plaintiffs' limited financial resources,
the costs that would be incurred by plaintiffs through arbitration,
the effect of the arbitration provision upon plaintiffs' ability to
seek redress for grievances, and the importance of class action
lawsuits in cases involving relatively modest damages. Plaintiffs
presented substantial evidence to support the trial court's
findings. Based on the evidence and the findings, the trial court
concluded that “[t]he combination of these factors, taken on the
whole, render the Commercial Credit arbitration clause
unconscionable. Because the arbitration provision is
unconscionable, it is unenforceable.” The trial court therefore
denied defendants' motion to compel arbitration. The trial court's
decision is supported by the law of North Carolina. See id. (“[i]f
the provisions [of a contract] are . . . so one-sided that thecontracting party is denied any opportunity for a meaningful
choice, the contract should be found unconscionable”). As the
trial court's decision is supported by the evidence and the law, I
would affirm the decision of the trial court.
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