No. 04-716 IN THE SUPREME COURT OF THE STATE OF MONTANA 2006 MT 94

TIMOTHY D. MARTZ and ROBIN JE AN MARTZ, Plaintiffs and Appellants,

v. BENEFICI AL MONT ANA, INC., d/b/a BENEFICI AL MORT GAGE CO., a Delaware corporation; HOUSEHOLD INTER NATIONAL, INC., a Delaware corporation; EMMET MATHE W S and JOHN DOES I – X, Defendants and Respondents.

APPEAL FROM: The District Court of the Sixth Judicial District, In and For the County of Park, Cause No. DV 2004-191, Honorable Wm. Nels Swandal, Presiding Judge COUNSEL OF RE CORD: For Appellants: Thom as E. Boland, Attorney at Law, Great Falls, Montana Jerem i ah C. Lynch, Attorney at Law, Great Falls, Montana For Respondents: Dan G. Cederberg and Benjam in P. Hursh, Cederberg Law Office, Missoula, Montana

Subm itted on Brief s : Novem b er 9, 2005 Decided: May 4, 2006 Filed:

__________________________________________ Clerk2 Justice Jim Rice delivered the Opinion of the Court. ¶1 Appellants Timothy and Robin Martz appeal from the order of the Sixth Judicial District Court granting Respondent Benefici al Montana, Inc.’s motion to compel arbitration. Appellants contend that arbitrati on is inappropriate because the contract is void ab initio and the arbitration provision is unconscionable. We affirm. ¶2 In reviewing the District Court’s order compelling arbitration, we consider the following issues on appeal: ¶3 (1) When a contract containi ng an arbitration clause is challenged in its entirety, who is the appropriate adjudicator, an arbitrator or the district court? ¶4 (2) Have Appellants preserved for appeal the issue of the arbitration clause’s unconscionability? BACKGROUND ¶5 Licensed as a consumer loan business in Montana, Beneficial Montana, Inc. (Beneficial) loaned $25,000 to Timothy and Robin Martz (the Martzes) in November of 1997. The loan includ ed a “loan origination fee” of $ 500, a “document preparation fee” of $350, and a substantial “Prepayment Penalty Charge.” Thereafter, and over the course of the next three years, the Martzes refinan ced their Beneficial loan on two occasions, the second of which occurred on or about October 18, 2000. After the second refinancing, the Martzes’ loan principal rose to approximately $112,000. Pursuant to the contracts, the Martzes pledged their home as collateral.3 ¶6 Critical to the present dispute, Beneficial incorporated an arbitr ation rider into the refinancing loan agreement of October 18, 20 00. The Martzes were not represented by counsel at that time, and signed that agreem ent without discussion. Beneficial has since admitted that the contract of October 18, 2000, was one of adhesion as defined by Montana law. ¶7 The Martzes defaulted on their loan in mi d-2004, after which Beneficial initiated non-judicial foreclosure proceedings upon th e Martzes’ home. In response, the Martzes initiated the present proceedings in the Sixth Judicial District Court, alleging that the loan contracts were void ab initio , as violative of Montana’s Co nsumer Loan Act, Montana’s Unfair Trade Practices Act, and various othe r laws. Importantly, the Martzes’ complaint challenged the validity of the contracts as a whole, and did not challenge the arbitration clause specifically. ¶8 In response to the Martzes’ co mplaint, Beneficial moved to compel arbitration. In support, Beneficial argued that where contra cts contain arbitration provisions, challenges to the contract as a whole are to be decide d by an arbitrator. The Martzes countered on July 7, 2004, arguing that th e motion to compel arbitration should be denied because the

“ underlying contract made by Beneficial to the Martze s is the product of illegality, fraud, and unconscionability.” (Em phasis added.) Notwithstanding the Martzes’ arguments, the District Court granted Beneficial ’s motion to comp el arbitration. ¶9 In response to the District Court’ s order, the Martzes filed a motion for reconsideration. In that motion, the Martzes renewed their objections to the contract as a4 whole, but further, specifically challenged the validity of the arbitra tion provision for the first time, alleging that the provision was void as unconsciona ble. Beneficial responded to that motion shortly thereafter by noting th at, “[a] review of these arguments shows Plaintiffs have used the request for reconsider ation to revisit matter s previously ruled on and to present [two] new theori es in support of their pos ition,” and asked the District Court to “decline Plaintiff’s request for a second bite at the apple . . . .” The District Court, however, did not rule on the motion. Instead, two weeks after filing the motion, the Martzes appealed to this Court, thereby depriving the District Court of jurisdiction over their pending motion. STANDARDS OF REVIEW ¶10 We review a district court’s order gr anting a motion to compel arbitration de novo

. Iwen v. U.S. West Direct , 1999 MT 63, ¶ 17, 293 Mont. 512, ¶ 17, 977 P.2d 989, ¶ 17. We review a district court’s conclusions of law to determine if they are correct. Steer, Inc. v. Department of Revenue (1990), 245 Mont. 470, 474, 803 P.2d 601, 603. DISCUSSION Issue #1: When a contract co ntaining an arbitration clau se is challenged in its entirety, who is the appropriate adjudicator, an arbitrator or the district court? ¶11 The initial question presented here is whethe r a court or an arbitrator decides the question of a contract’s validity where the co ntract contains an arbitration provision. Beneficial argues that federal law requires that challenges to contracts in their entirety be made to an arbitrator, even where those contracts contain arbitration provisions. The Martzes, on the other hand, argue that ev en where contracts contain arbitration5 provisions, challenges to the contract as a whole must be heard by courts, since void contracts would necessarily invalidate any in cluded arbitration provisions. In light of rulings by the United States Supreme Court, we conclude that Beneficial’s argument must prevail. ¶12 The law governing arbitra tion is expansive and co mplicated. Initially, and undisputed by the parties here, it is clear that the Federal Arbitration Act (FAA) governs the arbitration clause at issu e, since the clause arose w ithin a transaction “involving commerce.” See Federal Arbitration Act, 9 U.S.C. § 2; Iwen , ¶ 23; Prima Paint Corp. v. Flood & Conklin MFG. Co. (1967), 388 U.S. 395, 401, 87 S.Ct. 1801, 1804-05, 18 L.Ed.2d 1270, 1275-76. As we have noted in the past, the Federal Arbitration Act evidences a federal policy in favor of arbitration. Iwen , ¶ 26; see also Buckeye Check Cashing, Inc. v. Cardegna (2006), 546 U.S. ____, 126 S.Ct. 1204, 1207-08, 163 L.Ed.2d 1038, 1042. Further, of utmost importance here, the FAA “create[d] a body of federal substantive law” which is “applicable in state and federal courts.” Southland Corp. v. Keating (1984), 465 U.S. 1, 12, 104 S.Ct. 8 52, 859, 79 L.Ed.2d 1, 13; see also Buckeye Check Cashing , 546 U.S. at ___, 126 S.Ct. at 1208-09, 163 L.Ed.2d at 1044. ¶13 The parties vigorously dispute whether a challenge to the entirety of a contract ought to be heard by an arbitrator or a cour t where the contract contains an arbitration provision. Further, both parties cite case s which are supportive of their respective positions. The United States Supreme Court, however, recently considered an issue nearly identical to the one be fore us today, namely, whet her and when an arbitrator6 should hear challenges to a contract’s validity when the contract contains an arbitration clause and one party brings suit in federal or state court. Buckeye Check Cashing , 546 U.S. at ___, 126 S.Ct. at 1207, 163 L.Ed.2d at 1041. Notwithstanding the parties’ arguments, this case answers the question presented. ¶14 In Buckeye Check Cashing , respondents Cardegna and Re uter entered into various deferred-payment transactions with petitio ner Buckeye Check Cashing, allowing respondents to receive cash in exchange for personal checks. Buckeye Check Cashing , 546 U.S. at ___, 126 S.Ct. at 1207, 163 L. Ed.2d at 1041. Importantly, each time the respondents cashed a check, they signed a form contract which included an arbitration provision. Buckeye Check Cashing , 546 U.S. at ___, 126 S.Ct. at 1207, 163 L.Ed.2d at 1041. Thereafter, the respondent s brought suit in Florida state court, alleging that the contracts violated various Florida lending and consumer-protecti on laws, rendering the contracts criminal on their face. Buckeye Check Cashing , 546 U.S. at __ _, 126 S.Ct. at 1207, 163 L.Ed.2d at 1042. As in the case before us, the petitioner moved to compel arbitration pursuant to the arb itration provision, resulting in a dispute regarding a district court’s power to hear challenges to c ontracts containing arbitration clauses. Buckeye Check Cashing , 546 U.S. at ___, 126 S.Ct. at 1207, 163 L. Ed.2d at 1042. ¶15 The United States Supreme Court, in a seven-to-one decision, defined key parameters of arbitration law, and outlined three relevant principles. Buckeye Check Cashing , 546 U.S. at ___, 126 S.Ct. at 1209, 16 3 L.Ed.2d at 1044. First, the Court reaffirmed a principle first articulated in Prima Paint , stating that “as a matter of7 substantive federal arbitration law, an ar bitration provision is severable from the remainder of the contract.” 1 Buckeye Check Cashing , 546 U.S. at ___, 126 S.Ct. at 1209, 163 L.Ed.2d at 1044; see also Prima Paint Corp. , 388 U.S. at 403-04, 87 S.Ct. at 1805- 06, 18 L.Ed.2d at 1276-77. Seco nd, and critical to the issue before us today, the Court held that “unless the challenge is to the arbitr ation clause itself, the issue of the contract’s validity is considered by the arbitr ator in the first instance.” Buckeye Check Cashing , 546 U.S. at ___, 126 S.Ct. at 1209, 163 L.Ed.2d at 1044; see also Prima Paint Corp. , 388 U.S. at 403-04, 87 S.Ct. at 1806, 18 L.Ed.2d at 1277. The coro llary to that, of course, is that where one challenges an arbitration clau se specifically, a court may adjudicate the challenge. Buckeye Check Cashing , 546 U.S. at ___, 126 S.Ct. at 1209, 163 L.Ed.2d at 1043-44; see also Prima Paint Corp. , 388 U.S. at 403-04, 87 S.Ct. at 1806, 18 L.Ed.2d at 1277. Finally, the Court reiterate d that these principles applied in state as well as federal

courts. Buckeye Check Cashing , 546 U.S. at ___, 126 S.Ct . at 1209, 163 L.Ed.2d at 1044; Southland Corp. , 465 U.S. at 12, 104 S.Ct. at 859, 79 L.Ed.2d at 13. ¶16 In support of their argument that the District Court e rred in compelling arbitration of their general contract claims, the Martzes ar gue that “[w]hile some federal courts have broadly construed Prima Paint to require the arbitration of any claim unless there has

1 The Court noted that this principle supe rsedes any state law on severability. Therefore, regardless of whether state law al lows severability, severability of arbitration clauses is always possible in state and federal court. Buckeye Check Cashing , 546 U.S. at ___, 126 S.Ct. at 1208, 163 L.Ed.2d at 1043 (“[In Prima Paint ] [w]e rejected the view that the question of ‘severability’ was one of state law, so that if state law held the arbitration provision not to be severable a ch allenge to the contract as a whole would be decided by the court.”).8 been an independent challenge to the making of the arbitrati on clause itself, other federal courts have, on better reasoning, read Prima Paint more narrowly, limiting its application to challenges based solely upon fraud in th e inducement of the underlying contract.” Recognizing that Buckeye Check Cashing was yet undecided when the Martzes filed their brief in this matter, we are neverthe less forced to conclude that, after Buckeye Check Cashing , the Martzes’ argument is without merit. ¶17 The United States Supreme Court stated cl early that, “regardless of whether the challenge is brought in federal or state court, a challenge to the validity of the contract as a whole, and not specifically to the arbitra tion clause, must go to the arbitrator.” Buckeye Check Cashing , 546 U.S. at ___, 126 S.Ct. at 1210, 163 L.Ed.2d at 1046. It further implied that this has been the law since its 1967 decision in Prima Paint

. Buckeye Check Cashing , 546 U.S. at ___, 126 S.Ct. at 1209-10, 163 L.Ed.2d at 1044-45. Finally, in response to a policy argument similar to the one the Martzes make today—that it would be unfair to force arbitration upon a party wh en the underlying contract’s validity is in question—the Court made the following observation: [i]t is true, as respondents assert, that the Prima Paint rule permits a court to enforce an arbitration agreement in a contract th at the arbitrator later finds to be void. But it is equally tr ue that respondents’ approach permits a court to deny effect to an arbitration provision in a contract that the court later finds to be perfectly enforceable. Prima Paint resolved this conundrum—and resolved it in favor of the separate enforceability of arbitration provisions. Buckeye Check Cashing , 546 U.S. at ___, 1 26 S.Ct. at 1210, 163 L. Ed.2d at 1045-46. Thus, the United States Supreme Court made cl ear that arbitration, not court, is the9 proper forum for challenges to contracts as a whole where those contracts contain arbitration provisions. ¶18 As a result of the Prima Paint, Sou thland Corp., and Buckeye Check Cashing line of cases, we can say the following with cert ainty, if not enthus iasm: (1) Where a complaint challenges a contract’s ar bitration clause specifically, the Prima Paint doctrine of severability in conjunction with the FAA a llows a court to hear the challenge, and (2) where a complaint challenges a contract as a whole, Prima Paint and Buckeye Check Cashing require a court to grant a mo tion to compel arbitration if the contract contains an arbitration provision. Thus, bound as it was by the Martzes’ challenge to the contract as a whole, the District Court’s order granting Be neficial’s motion to compel arbitration was correct. On appeal, the Martzes continue to argue that the loan contracts which they signed violate the proscriptions of the Montana Consumer Loan Act, and therefore, are void ab initio . However, for the reasons stated above, we hold that such challenges to the contract as a whole are properly decided vi a arbitration, given the existence of an arbitration clause. Issue #2: Have Appellants preserved for appeal the issue of the arbitration clause’s unconscionability? ¶19 Before this Court, the Martzes challenge no t only the validity of the contract as a whole, but the conscionab ility of the arbitration clause as well. After Buckeye Check Cashing , it is evident that the latte r issue is to be adjudica ted by a district court. Buckeye Check Cashing , 546 U.S. at ___, 126 S.Ct. at 120 9, 163 L.Ed.2d at 1043-44. However, Beneficial argues that the conscionability of the arbitration clause was never properly10 raised before the District Court, and therefor e, urges us not to review the matter for the first time on appeal. After reviewing the reco rd and the order of the District Court, we must agree with Beneficial—the conscionab ility of the arbitration clause was never properly before the District Court. ¶20 The Martzes initiated this action in the Si xth Judicial District Court on June 11, 2004. In their complaint, th e Martzes challenged the Benefici al contracts as violating the Montana Consumer Loan Act, the Montana Un fair Trade Practices Act, and other state laws, and further, prayed for punitive and exempl ary damages, as well as attorney fees. However, while it is clear that the Martzes cha llenged the contract as a whole as violating state law, the complaint simply cannot be construed as having challenged the conscionability of the arbitration clause specif ically. Indeed, the co mplaint says nothing of the arbitration clause itself, and though it does use the word “unconscionable” once, the context is in a challenge to the contract as a whole. ¶21 In response to the Martzes’ complaint, Beneficial moved to compel arbitration on June 22, 2004. The Martzes then filed responsive pleadi ngs opposing the motion, but again failed to challenge the arbitration clause as unconscionable. We note that, although the Martzes’ brief in opposition to Beneficial ’s motion to compel arbitration included a section entitled “ THE ARBITRATION PROVIS ION IS UNENFORCEABLE ,” the argument offered therein by the Martzes was that the arbitration clause was invalid because the underlying contract violated the Montana Cons umer Lending Act, the same argument we addressed above. Nowhere in the Martzes’ responsive pleading did they11 argue that the arbitration clause itself, se parate from the contract as a whole, was unconscionable. ¶22 This Court has previously addressed the co nscionability of arbitration clauses, and further, has outlined the factual issues th at should accompany such arguments. See Kloss v. Edward D. Jones & Co. , 2002 MT 129, ¶ 30, 310 Mont. 123, ¶ 30, 54 P.3d 1, ¶ 30. However, we have also advised claimants “not to come to this Court with claims of oppression or unconscionability unless the record in regard to these issues has been adequately developed.” Kloss , ¶ 31. Here, there is no record on unconscionability, which is not surprising—the Martzes simply di d not make such arguments in the District Court. ¶23 We note that the District Court, with out mention of unco nscionability, briefly discussed two of this Court’s seminal cases on unconscionability, Iwen and Kloss , in its order. However, that brief discussion was directed to contracts of adhesion and reasonable expectations, and the District C ourt did not mention unconscionability of the arbitration clause at all, which, given the Martzes’ arguments, was not surprising. The District Court characterized the Martzes’ ar gument as follows: “[the Martzes’] main argument is that the underlying loan agre ements are void as a matter of law, and therefore, the arbitration prov ision which was incorporated into the last loan, is void as well.” Upon that characterization, the Dist rict Court proceeded to order arbitration—it was bound by federal law to do so under th e circumstances—and further, concluded that12 “[t]he plaintiffs have not shown that if the unde rlying contract is alle ged to be void, they can then avoid arbitration pursua nt to the arbitration clause.” ¶24 The unfortunate fact of this case is that it was not until after the District Court’s order compelling arbitration that the Martzes a sserted that the arbitration clause itself was unconscionable. Complicating things further, the Martzes accomplished this challenge in a motion for reconsideration in the District C ourt. As we have said previously, a motion for reconsideration is not a motion authorized by the Montana Rules of Civil Procedure, and furthermore, often presents “a procedural trap for the unwary and a grave risk that an otherwise meritorious appeal will be dismissed . . . .” Nelson v. Driscoll (1997), 285 Mont. 355, 359-60, 948 P.2d 256, 258-59. Wh ile this Court will, at times, construe a motion for reconsideration as a Rule 59 motion to alter or amend a judgment, Nelson , 285 Mont. at 360, 948 P.2d at 259, we will not do so where th e motion presents the case under new theories. Nelson , 285 Mont. at 360-61, 948 P.2d at 259. As a result, where, as here, new theories are argued under the ausp ices of a motion for reconsideration and ignored by the district court, we will not construe them as prop erly pled before the district

court. ¶25 As we have previously stated, “[i]t is well established that this Court will not review an issue that was not ra ised in the district court. ‘It is fundamentally unfair to fault the trial court for failing to rule co rrectly on an issue it was never given the opportunity to consider.’” Paulson v. Flathead Conservation District , 2004 MT 136, ¶ 37, 321 Mont. 364, ¶ 37, 91 P. 3d 569, ¶ 37. That is the situ ation before us today. As a13 result, we hold that the issue is not properly before us, and therefore, we cannot undertake its review. CONCLUSION ¶26 The Martzes’ complaint alleged that the series of loan contracts made with Beneficial were void as a ma tter of state law. After Buckeye Check Cashing , this is a question which is appropriately heard by an arbitrator wher e, as here, the underlying contract includes an arbitration provision. Consequently, the District Court’s order compelling arbitration is affirmed.

/S/ JIM RICE

We concur: /S/ KARLA M. GRAY /S/ W. WILLIAM LEAPHART /S/ JOHN WARNER

Justice James C. Nelson specially concurs. ¶27 Albeit very reluctantly, I concur in our Op inion. To say that my concurrence is without enthusiasm, however, (see ¶ 18 of th e Court’s Opinion) grossly overstates my exuberance for our decision. Unfortunately, our ability to co me to any other conclusion is cabined by the United States Supreme Court’s recent decision in Buckeye Check Cashing, Inc. v. Cardegna (2006), 546 U.S. ___, 126 S.Ct. 1204, 16 3 L.Ed.2d 1038, and the procedural quirk in the Martzes’ own pleadings.14 ¶28 My frustration with our inability to reach a legally correct , fair and just result in this case stems directly from the fact that the United States Supreme Court has, from the beginning, improperly conflated the Federal Arbitration Act (FAA) into something which Congress never intended it to be. Allied-Bruce Terminix Companies, Inc. v. Dobson (1995), 513 U.S. 265, 283, 115 S.Ct. 83 4, 844, 130 L.Ed.2d 753 (O’Connor, J., concurring) (“I continue to believe that Co ngress never intended the Federal Arbitration Act to apply in state courts, and that this Co urt has strayed far afield in giving the Act so broad a compass.”). See also Buckeye, 546 U.S. at ___, 126 S.Ct. at 1211 (Thomas, J., dissenting), and Kloss v. Edward D. Jones & Co., 2002 MT 129, ¶ 61 n.3, 310 Mont 123, ¶ 61 n.3, 54 P.3d 1, ¶ 61 n.3 (Nelson, J., concurring). ¶29 Indeed, under the High Court’s jurisprude nce, the FAA and pre-dispute arbitration clauses in contracts of adhesion have no w become little more th an instruments of economic Darwinism by which predatory lende rs—such as Beneficial and Buckeye—and other large corporations victim ize main-street businesses, the unsophisticated, the elderly, the poor, and what is left of the middle class. ¶30 I concur only because a highe r authority than this Cour t has declared the law of the land on these issues.

/S/ JAMES C. NELSON15 Justice Patricia O. Cotter dissents. ¶31 I dissent. Contrary to the decision reached by this Cour t as to Issue Two, I would conclude that the conscionability of the arbitr ation rider was sufficiently presented to and aired by the District Court so as to permit our consideration of th e question of whether the arbitration clause was unconscionable. I would reach that issue on the merits, and reverse the District Court’s Order compelling arbitration. ¶32 As the Court points out at ¶ 10, we review a district court’s order granting a motion to compel arbitration de novo . This means, presumab ly, that we review the entirety of the District Court’s Order. In conc luding that the Plainti ffs did not sufficiently preserve for our review the issue of the ar bitration clause’s unconscionability, the Court ignores, or at the least misconstrues, much of the District Court’s analysis. While the District Court did refer to “the plainti ffs main argument” in its Order Granting Defendants’ Motion to Compel Arbitration, the court preced ed this reference with the following two sentences: The plaintiffs state that a wr itten arbitration [sic] cannot be compelled unless there is a valid and enforceable contractual agreement to arbitrate. 9 U.S.C. § 2. They point out that generally applicable contract defenses such as fraud, duress, and unconscionability may be applied to invalidate arbitration agreements with out contravening § 2 of the FAA. Then, after citing the Plaintiffs’ “main argume nt,” the court went on to say that “[t]he plaintiffs argue that under Kloss and Iwen (citations omitted), the arbitration rider is unenforceable at law and, therefore, the C ourt may not grant the defendants’ motion to compel.”16 ¶33 Against the foregoing backdr op, the District Court went on to address what it saw as the distinctions between this case on the one hand, and Kloss and Iwen on the other. The court concluded that the arbitration clause here did not take advantage of any party, nor did it place either party in a superior barg aining position. Based upon this analysis and the fact that the Plaintiffs signed an ar bitration rider of which they were personally aware, the court granted the Defendant’s motion to compel arbitration. ¶34 When we review a matter de novo , our task is to review the correctness of the district court’s decision. Cole v. Valley Ice Garden, L.L.C. , 2005 MT 115, ¶¶ 3-4, 327 Mont. 99, ¶¶ 3-4, 113 P.3d 275, ¶¶ 3-4. While we generally refuse to consider on appeal matters that are not properly raised by the pa rties’ pleadings, we usually do address those matters which the district court considered in entering its decision. Here, the District Court obviously entertained ar guments regarding the consci onability of the arbitration rider and factored those arguments into its deci sion that the arbitration clause did not take unfair advantage of the Plaintiffs or place Be neficial in a superior bargaining position. The District Court concluded there was an enforceable conscionable agreement to arbitrate . It is the correctness of this conclu sion, supported by the District Court’s attempt to distingu ish this case from Kloss and Iwen, that we should be reviewing here. Instead, the Court concludes that the determin ation at the heart of the District Court’s Order compelling arbitration wa s not preserved for appeal. I am at a loss to understand why we should refuse to reach the very issues the District Court considered dispositive in concluding that the arbitration order was conscionable.17 ¶35 I would address the court’s resolution of the question of whether the arbitration rider was enforceable. Because, as this Court concedes at ¶ 21, the conscionability of an arbitration clause is a matter to be adj udicated by a court, I would not consider Buckeye Check Cashing . I would squarely reject the Distri ct Court’s logic and legal analysis relative to the enforceability of the arbitration rider, and reverse the court’s order compelling arbitration. I dissent from our refusal to do so.

/S/ PATRICIA COTTER

Justice Brian Morris joins in the dissent of Justice Patricia O. Cotter.

/S/ BRIAN MORRIS