Opinion ID: 1844233
Heading Depth: 1
Heading Rank: 7

Heading: Severability Provision

Text: American General Finance and Anderson next argue that, even assuming that the trial court properly concluded that the arbitration agreement included in the note and security agreement contains some unconscionable provisions, the trial court erred by not striking only those provisions it found to be unconscionable while enforcing the remainder of the arbitration agreement, pursuant to the severability clause included in that arbitration agreement. American General Finance and Anderson rely upon Cavalier Mfg., Inc. v. Jackson, 823 So.2d 1237 (Ala.2001), overruled on other grounds, Ex parte Thicklin, 824 So.2d 723 (Ala.2002); and on Ex parte Thicklin, supra , as authority for their argument. In Cavalier Manufacturing and Ex parte Thicklin this Court struck only the offensive provisions of the arbitration agreements under consideration in those cases and upheld the remainder of those agreements. However, the arbitration agreements considered in those cases contained only one unconscionable provision; the arbitration agreement in this case is unconscionable in numerous aspects. For this reason alone, Cavalier Manufacturing and Ex parte Thicklin are distinguishable. Additionally, in Ex parte Thicklin, this Court expressly recognized: This Court has limited authority to deal with the enforceability of contract terms. It can nullify or reform a contract on the basis of fraud; it can also nullify or reform a contract to eliminate any unconscionable provisions or terms that violate public policy. 824 So.2d at 732 (citing in a footnote Ex parte State Farm Fire & Cas. Co., 764 So.2d 543, 546 (Ala.2000) (Lyons, J., concurring specially)). See also § 5-19-16, Ala.Code 1975, which states, in pertinent part: With respect to a consumer credit transaction, if the court as a matter of law finds the contract or any provision of the contract to have been unconscionable at the time it was made, the court may refuse to enforce the contract, or it may enforce the remainder of the contract without the unconscionable provision, or it may so limit the application of any unconscionable provision so as to avoid any unconscionable result. We conclude that the arbitration agreement included in American General Finance's note and security agreement meets the two-part test for unconscionability set forth in Branch. The entire arbitration agreement is unconscionable and therefore unenforceable. We affirm the trial court's order denying the motion to compel the Ashbys' claims against American General Finance and Anderson to arbitrate under that agreement.
Mrs. Ashby alleges that the arbitration agreement executed in connection with the Merit Life application for credit-life insurance was obtained by fraud. [9] The trial court concluded that Mrs. Ashby presented substantial evidence of fraud in the factum and, therefore, that her claims must be resolved by a jury. Merit Life appeals. We affirm. Whether we view Mrs. Ashby's fraud claim as one of fraudulent inducement or as one of fraud in the factum, we conclude that the claim presents a jury question. If we construe the claim as alleging that Mr. Ashby was fraudulently induced into signing the arbitration agreement presented in conjunction with Merit Life's credit-life insurance application, that claim is not subject to arbitration because it is directed at the arbitration agreement itself. [10] In Investment Management & Research, Inc. v. Hamilton, 727 So.2d 71 (Ala.1999), this Court stated: [W]hen a claim of fraud in the inducement is directed toward the arbitration clause itself, the issue is adjudicated by the court. On the other hand, when a claim of fraud in the inducement is directed toward the entire contract ... the issue is subject to arbitration. 727 So.2d at 78 (relying on Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395, 87 S.Ct. 1801, 18 L.Ed.2d 1270 (1967)). Conversely, if we construe the claim as alleging that Mr. Ashby was deceived as to the character or basic nature of the document (i.e., the arbitration agreement) he signed, the claim is one of fraud in the factum. Claims of fraud in the factum are likewise not subject to arbitration. As this Court recognized in Harold Allen's Mobile Home Factory Outlet, Inc. v. Early, 776 So.2d 777 (Ala.2000): We do not interpret the Earlys' allegations as falling within the class of fraud termed fraud in the factum, or execution, as distinguished from fraud in the inducement, or treaty, and, thus, as permitting the Earlys to avoid the obligation to arbitrate. See Drinkard v. Embalmers Supply Co., 244 Ala. 619, 14 So.2d 585 (1943) (explaining distinction between fraud in the factum and fraud in the inducement). As Professor Farnsworth explains in his treatise, fraud in the factum applies only `[i]n rare cases [where] the misrepresentation is regarded as going to the very character of the proposed contract itself....' E. Allen Farnsworth, Contracts, § 4.10 (1982); see also Restatement (Second) of Contracts § 163 & cmt. a (1981) (`If a misrepresentation as to the character or essential terms of a proposed contract induces conduct that appears to be a manifestation of assent by one who neither knows nor has reasonable opportunity to know of the character or essential terms of the proposed contract, his conduct is not effective as a manifestation of assent.'). These rare cases `include situations involving blind persons, illiterate persons, [and] foreign speaking persons.' Alfa Mutual Ins. Co. v. Northington, 561 So.2d 1041, 1049 (on application for rehearing) (Houston, J., concurring specially) (citations omitted); see, e.g., Cancanon v. Smith Barney, Harris, Upham & Co., 805 F.2d 998 (11th Cir.1986) (case involving persons who `[had] no knowledge of the English language' 805 F.2d at 999). Alabama law has a long line of cases recognizing the following rule regarding fraud in the factum: ``When the execution of an instrument, which the party signing did not intend to sign, and did not know he was signing, is procured by a misrepresentation of its contents, and the party signing it does so without reading it or having it read, relying upon such misrepresentations and fraud, and believing he is signing a different instrument, he can avoid the effect of his signature notwithstanding he was able to read and had an opportunity to read the instrument.''  Willcutt v. Union Oil Co. of California, 432 So.2d 1217, 1220 (Ala.1983) (quoting earlier cases and collecting cases). See also W.T. Rawleigh Medical Co. v. Wilson, 7 Ala.App. 242, 252, 60 So. 1001, 1005 (1912), and cases cited therein. Alabama caselaw, like the Restatement, recognizes that to constitute fraud in the factum, and thereby to prevent the formation of a contract, the misrepresentation must go to the essential nature or existence of the contract itself, for example, a misrepresentation that an instrument is a promissory note when in fact it is a mortgage, see Edwards v. Tabb, 242 Ala. 209, 210, 5 So.2d 770, 771 (1942). A misrepresentation that concerns a misapprehension of the legal meaning of a term or provision in a contract does not constitute fraud in the factum. See Rutter & Hendrix v. Hanover Fire Ins. Co., 138 Ala. 202, 215, 35 So. 33, 37 (1903) (`[A]ll our decisions hold, that in the absence of a relation of trust and confidence, or of some other peculiar fact or circumstance, a misrepresentation of [a] matter of law, or of [a] matter of judgment equally open to the observation or inquiries of both parties, or of mere opinion, will not vitiate a contract. ... [A] misrepresentation of the legal effect of a written instrument was, from its very nature, but the expression of an opinion upon a question of law, equally open to the observation and inquiries of both parties, and as to which, the law presumes that the party to whom it was made had knowledge.') (citations omitted); see also Restatement (Second) of Contract § 164 & cmt. b, illus. 2 & 3 (1981). The Earlys do not allege that they did not know they were signing an arbitration agreement (indeed, their question to Harold Allen's salesman makes it clear they were aware of the arbitration agreement) or that the salesman represented that the document they were signing was not an arbitration agreement or that it had no legal effect. Instead, they allege that Harold Allen's salesman misrepresented the legal meaning of the arbitration agreement and that they relied on that misrepresentation. However, under the rule of Rutter & Hendrix, absent a confidential relationship or other special circumstances between the Earlys and Harold Allen, the salesman's misrepresentation of the legal meaning of the arbitration agreement cannot form the basis for a claim of fraud in the factum. Accordingly, we would interpret the Earlys' allegations as going to inducement. 776 So.2d at 783 n. 6. Although Mrs. Ashby's allegations could fit under either type of case, her allegations appear to be virtually identical to those presented in Oakwood Mobile Homes, Inc. v. Barger, 773 So.2d 454 (Ala. 2000), which this Court characterized as involving fraud in the factum. In that case, this Court stated: Fraud in the inducement consists of one party's misrepresenting a material fact concerning the subject matter of the underlying transaction and the other party's relying on the misrepresentation to his, her, or its detriment in executing a document or taking a course of action. See Reynolds v. Mitchell, 529 So.2d 227 (Ala.1988). Larry Barger's assertionthat he signed the arbitration agreement in reliance upon Clary's [Oakwood's manager's] statement that Larry was signing papers for insurance purposes so that the mobile home could be movedis better characterized as a claim of fraud in the factum. Fraud in the factum occurs when a party `procures a[nother] party's signature to an instrument without knowledge of its true nature or contents.' Langley v. Federal Deposit Ins. Corp., 484 U.S. 86, 93, 108 S.Ct. 396, 98 L.Ed.2d 340 (1987). See also Drinkard v. Embalmers Supply Co., 244 Ala. 619, 14 So.2d 585 (1943), and Burroughs v. Pacific Guano Co., 81 Ala. 255, 1 So. 212 (1887). Fraud in the factum constitutes ineffective assent to the contract. Cancanon v. Smith Barney, Harris, Upham & Co., 805 F.2d 998 (11th Cir.1986). . . . . In Shearson Lehman Bros. [, Inc. v. Crisp, 646 So.2d 613 (Ala.1994)], this Court recognized that a challenge to avoid or to rescind a contract is subject to arbitration but a challenge to the very existence of a contract is not subject to arbitration. A claim of fraud in the factum is a challenge to the very existence of the contract.... [B]ecause this Court has adopted the rationale of Three Valleys [Municipal Water District v. E.F. Hutton & Co., 925 F.2d 1136 (9th Cir.1991)], a claim of fraud in the factum is to be decided by a trial court or a jury. The Bargers claim that Clary represented the documents as being `for insurance purposes,' when, in fact, one of the documents was an arbitration agreement, which Larry never knowingly signed as an arbitration agreement. Therefore, we treat the Bargers' claim of fraud in the inducement as a claim of fraud in the factum. The critical issue is whether the Bargers presented substantial evidence to support a claim of fraud in the factum. Fraud in the factum is a traditional fraud. A claim of fraud, including such fraud as fraud in the factum, requires the party making the claim to prove by substantial evidence that he or she reasonably relied on the alleged misrepresentation. 773 So.2d at 459-61. In addressing the merits of Barger's fraud claim, the Barger Court pointed out that the arbitration agreement signed by Larry was clearly marked ARBITRATION AGREEMENT; that Larry did not state in his affidavit that he could not read; and that Larry did not state that Clary had prevented him from reading the documents he signed. 773 So.2d at 461. Because of those factors, the Barger Court concluded that Larry would have had to close his eyes to the truth to believe that the documents he signed did not include an arbitration agreement and that, therefore, Larry could not establish the necessary element of reasonable reliance to support his fraud claim. For that reason, the Barger Court held that Barger's fraud claim lacked merit and that the trial court had erred in denying Oakwood's motion to compel Barger's claims to arbitration. Implicit in the Court's holding in Barger was the recognition that Oakwood's agentClaryhad no duty to expressly disclose the existence of the arbitration agreement to Barger because Barger was capable of reading the documents himself. This is consistent with Alabama contract law. See, e.g., Rutter & Hendrix v. Hanover Fire Ins. Co., 138 Ala. 202, 215, 35 So. 33, 37 (1903), quoted in Harold Allen's Mobile Home Factory Outlet, 776 So.2d at 783 n. 6. This case shares some similarities with Barger. Mrs. Ashby, as Mr. Ashby's personal representative, acknowledges that Mr. Ashby intended to sign the credit-life insurance application and that Anderson told him he was signing an application for credit-life insurance. As did the plaintiff in Barger, Mrs. Ashby alleges that Mr. Ashby was not told that one of the documents he was signing was an arbitration agreement; Mrs. Ashby alleges that Mr. Ashby had no knowledge that he was entering into such an agreement. Here the similarities to Barger end. Unlike the plaintiff in Barger, Mr. Ashby could not read. Anderson knew that Mr. Ashby could not read, and, under the facts of this case, Mr. Ashby had no way to determine for himself that he was signing, in addition to an application for credit-life insurance, an agreement to arbitrate any claim he might have against Merit Life. We cannot say, as we could and did in Barger, that Mr. Ashby must have closed his eyes to the truth to believe the document he signed was not an arbitration agreement. We conclude that whether Mr. Ashby's reliance upon Anderson's representations was reasonable must be determined by the finder of fact. Moreover, we are presented with allegations that, if meritorious, give rise to the special circumstances absent in Barger: the Ashbys were unable to read the documents for themselves; Anderson was aware of the fact that the Ashbys could not read the documents; Mrs. Ashby alleges that she and Mr. Ashby asked Anderson to explain the documents to them but, she alleges, he failed to do so; and American General Finance's own internal operating procedures required Anderson to explain the documents to any customers who indicated that they were unable to read. The parties dispute whether such an explanation was given. Further, Anderson wrote at the bottom of the arbitration agreement: THIS DOCUMENT EXPLAINED AND UNDERSTOOD BY APPLICANT. However, Mrs. Ashby alleges that this statement is false because, she says, the arbitration agreement was never explained or mentioned to them. Again, a factual dispute exists. These circumstances present a question of fact as to whether, under the circumstances of this case, Anderson had a duty to disclose the existence of the arbitration agreement to Mr. Ashby and, if so, whether he did in fact make such a disclosure. Because these issues address the validity of the Ashbys' agreement to arbitrate, they are to be resolved by the fact-finder.