Opinion ID: 891680
Heading Depth: 3
Heading Rank: 4

Heading: The Court of Appeals Construed Too Narrowly This Court's Opinion in Cordova.

Text: {39} Rivera has argued throughout this litigation that the arbitration provisions are unenforceable under the generally applicable contract defense of unconscionability because the title loan contract requires the borrower to arbitrate any and all claims but allows the lender to go to court for its preferred remedies. Although the district court made its ruling without the benefit of our opinion in Cordova, 2009-NMSC-021, 146 N.M. 256, 208 P.3d 901, holding a similar arbitration provision of a small loan agreement void for unconscionability, Cordova had been decided before the Court of Appeals issued its opinion rejecting Rivera's argument. One of the issues on which we granted certiorari was whether the Court of Appeals misapplied our Cordova holding by upholding a clause that required a borrower to arbitrate all her claims, but reserved to the lender the right to a judicial determination of its most important claims. Rivera argues in this Court that the Court of Appeals misstated Cordova's holding as requiring complet[e] one-sidedness before an arbitration clause can be found unconscionable. Defendants argue that the Court of Appeals was correct and that the arbitration provisions are enforceable under New Mexico law. {40} A threshold issue we must address is whether Rivera's challenge to the Court of Appeals' interpretation of Cordova and resolution of the unconscionability issue are now moot in light of our holding that there is no longer an arbitrator eligible to arbitrate either the substance of the dispute or the threshold issue of unconscionability under the terms of the agreement by the parties. While as a prudential matter we normally will not address moot issues that will have no practical impact on the parties before us, we will address issues of substantial public interest or issues that are capable of repetition yet evading review. Cobb v. State Canvassing Bd., 2006-NMSC-034, ¶ 14, 140 N.M. 77, 140 P.3d 498 (deciding issues of election recount and recheck even though it was no longer possible to affect the election results); Howell v. Heim, 118 N.M. 500, 503-04, 882 P.2d 541, 544-45 (1994) (addressing legality of a superseded regulation where similar issues could arise in future cases yet evade appellate review). {41} The issues regarding the Court of Appeals' published interpretation of Cordova in the context of one-sided arbitration clauses represent the kinds of issues that are capable of repetition yet likely to evade our appellate review. This is particularly so in light of the inevitable jurisprudential effect of the United States Supreme Court's recent decision in Rent-A-Center, which held that where a delegation clause within the arbitration agreement clearly and unmistakably delegates the issue of unconscionability to the arbitrator, that issue should be decided by the arbitrator, instead of by a court, unless the party opposing arbitration has specifically challenged the validity of the delegation clause. 561 U.S. at ___, 130 S.Ct. at 2775-76, 2780-81; see, e.g., Momot v. Mastro, ___ F.3d ___, ___, 2011 WL 2464781, at  (9th Cir.2011) (applying Rent-A-Center to hold that general language giving the arbitrator authority to determine the validity or application of any of the provisions of the arbitration clause was sufficient to take that issue away from a court of law (internal quotation marks and citation omitted)). Given the predictable result that arbitration clauses in form contracts between large corporations and individual consumers will assign such unconscionability determinations to arbitrators, this Court and other courts will have few, if any, future opportunities to participate in the development of our published common law related to unconscionability doctrines in those contexts. Because arbitrators will have to rely on the common law that was developed before Rent-A-Center, it is particularly important that we correct a judicial misinterpretation of our caselaw that may otherwise remain on the books as an erroneous precedent. We therefore will address the correctness of the interpretation of Cordova contained in the Court of Appeals opinion in this case. {42} Whether a contract provision is unconscionable and unenforceable is a question of law that we review de novo. See Cordova, 2009-NMSC-021, ¶ 11, 146 N.M. 256, 208 P.3d 901. Although we have already concluded that the arbitration provisions are unenforceable due to the unavailability of the NAF to arbitrate the dispute, we agree with Rivera that the Court of Appeals in this case misapplied the central holding of Cordova. We formally reverse the Court of Appeals opinion and hold that the arbitration provisions are unfairly one-sided and substantively unconscionable. {43} Unconscionability is an equitable doctrine, rooted in public policy, which allows courts to render unenforceable an agreement that is unreasonably favorable to one party while precluding a meaningful choice of the other party. Id. ¶ 21. The doctrine of contractual unconscionability can be analyzed from both procedural and substantive perspectives. Id. {44} Procedural unconscionability... examines the particular factual circumstances surrounding the formation of the contract, including the relative bargaining strength, sophistication of the parties, and the extent to which either party felt free to accept or decline terms demanded by the other. Id. ¶ 23. When assessing procedural unconscionability, courts should consider whether the contract is one of adhesion. An adhesion contract is a standardized contract offered by a transacting party with superior bargaining strength to a weaker party on a take-it-or-leave-it basis, without opportunity for bargaining. Id. ¶ 33. Adhesion contracts generally warrant heightened judicial scrutiny because the drafting party is in a superior bargaining position. See Wis. Auto Title Loans, Inc. v. Jones, 290 Wis.2d 514, 714 N.W.2d 155, 170 (2006). Although not all adhesion contracts are unconscionable, an adhesion contract is procedurally unconscionable and unenforceable when the terms are patently unfair to the weaker party. Cordova, 2009-NMSC-021, ¶ 33, 146 N.M. 256, 208 P.3d 901; see also Guthmann v. La Vida Llena, 103 N.M. 506, 509, 709 P.2d 675, 678 (1985), disapproved of on other grounds by Cordova, 2009-NMSC-021, ¶ 31, 146 N.M. 256, 208 P.3d 901. {45} Substantive unconscionability concerns the legality and fairness of the contract terms themselves, and the analysis focuses on such issues as whether the contract terms are commercially reasonable and fair, the purpose and effect of the terms, the one-sidedness of the terms, and other similar public policy concerns. Cordova, 2009-NMSC-021, ¶ 22, 146 N.M. 256, 208 P.3d 901. A contract provision is substantively unconscionable if it is grossly unreasonable and against our public policy under the circumstances. Id. ¶¶ 22, 31. {46} Contract provisions that unreasonably benefit one party over another are substantively unconscionable. Id. ¶ 25. For example, where a lender imposes on a borrower a contract that requires the borrower to settle all claims it may have against the lender through arbitration while reserving for the lender the exclusive option of access to the courts for all remedies the lender is most likely to pursue against the borrower, the contract is against New Mexico public policy and is therefore void as unconscionable. Id. ¶ 1; see also Padilla v. State Farm Mut. Auto. Ins. Co., 2003-NMSC-011, ¶ 10, 133 N.M. 661, 68 P.3d 901 (striking down a facially neutral contract provision because application of the provision benefitted only the insurer, not the insured). {47} Under New Mexico principles of contract law, a finding of unconscionability may be based on either procedural or substantive unconscionability, or a combination of both. While there is a greater likelihood of a contract's being invalidated for unconscionability if there is a combination of both procedural and substantive unconscionability, there is no absolute requirement in our law that both must be present to the same degree or that they both be present at all. Cordova, 2009-NMSC-021, ¶ 24, 146 N.M. 256, 208 P.3d 901. The more substantively oppressive a contract term, the less procedural unconscionability may be required for a court to conclude that the offending term is unenforceable. Id. {48} The arbitration provisions analyzed in Cordova broadly stated that the parties must arbitrate all disputes, id. ¶ 3, but also provided that if the borrower defaulted on the loan, the lender could `seek its remedies in an action at law or in equity, including but not limited to, judicial foreclosure or repossession,' id. ¶ 4. Cordova concluded that the arbitration clause was so unfairly and unreasonably one-sided that it [wa]s substantively unconscionable. Id. ¶ 32. This Court determined that the substantive unconscionability of the one-sided contract provisions was so compelling that we found it unnecessary to address whether the provisions were also procedurally unconscionable. Id. {49} Other jurisdictions have concurred that unfairly one-sided contract provisions are unconscionable. See, e.g., Batory v. Sears, Roebuck & Co., 456 F.Supp.2d 1137, 1139-40 (D.Ariz.2006) (concluding that a one-sided provision was substantively unconscionable under Arizona law); Iwen v. U.S. West Direct, 293 Mont. 512, 977 P.2d 989, 995-96 (1999) (holding a contract provision unconscionable where the weaker bargaining party ha[d] no choice but to settle all claims ... through ... arbitration, whereas the more powerful bargaining party and drafter [of the agreement] ha[d] the unilateral right to settle a dispute ... in a court of law); Williams v. Aetna Fin. Co., 83 Ohio St.3d 464, 700 N.E.2d 859, 866-67 (1998) (refusing to enforce a provision in a consumer loan that allowed the finance company to obtain the judicial remedy of foreclosure but required the borrower to arbitrate all claims); Taylor v. Butler, 142 S.W.3d 277, 280 (Tenn. 2004) ([T]he arbitration clause ... is unconscionable and therefore void because it reserves the right to a judicial forum for the defendants while requiring the plaintiff to submit all claims to arbitration.); Arnold v. United Cos. Lending Corp., 204 W.Va. 229, 511 S.E.2d 854, 862 (1998) (holding unconscionable and unenforceable a contract provision that waived the borrower's right to access the courts while preserving the lender's right to obtain relief in a judicial forum); Wis. Auto Title Loans, Inc., 714 N.W.2d at 172-73 (holding that a contract provision that unfairly limited the debtor's remedies, as compared to those available to the creditor, was substantively unconscionable). {50} In this case the Court of Appeals concluded that American General reasonably excepted judicial foreclosure and repossession from the claims covered by arbitration because (1) judicial actions for foreclosure and repossession are highly regulated by the statutory provisions governing secured transactions of the Uniform Commercial Code and (2) without access to these judicial and extra-judicial procedures, American General would lose many of the statutory protections it enjoyed as a secured creditor. Rivera, 2010-NMCA-046, ¶ 13, 148 N.M. 784, 242 P.3d 351. We disagree. {51} As a matter of law arbitrators have broad authority and are deemed capable of granting any remedy necessary to resolve a case. See Thomas E. Carbonneau, The Law and Practice of Arbitration 48-49 (3d ed. 2009) (citing, for example, Rodriguez v. Prudential-Bache Secs., Inc., 882 F.Supp. 1202, 1209-10 (D.P.R.1995)); 4 Am.Jur.2d Alternative Dispute Resolution § 193 (2007) (explaining that [a]n arbitrator's judgment has the same effect as a judgment of a court of last resort). The arbitrator's power includes the authority to arbitrate and resolve statutory claims. By agreeing to arbitrate a statutory claim, a party does not forgo the substantive rights afforded by the statute; it only submits to their resolution in an arbitral, rather than a judicial, forum. Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614, 628, 105 S.Ct. 3346, 87 L.Ed.2d 444 (1985); see also Shearson/Am. Express, Inc. v. McMahon, 482 U.S. 220, 226-27, 107 S.Ct. 2332, 96 L.Ed.2d 185 (1987) (explaining that the FAA mandates enforcement of agreements to arbitrate statutory claims but providing that the mandate may be overridden by a contrary congressional command and that the burden is on the party opposing arbitration ... to show that Congress intended to preclude a waiver of judicial remedies for the statutory rights at issue). {52} Both the 2008 NAF Code of Procedure and the contract in this case reflect the principle that an arbitrator has broad power to resolve claims involving a lender's security interest in collateral. The NAF Code of Procedure expressly provides that [a]ll types of legal and equitable remedies and relief available in court are available in arbitration.... Parties may effectively pursue any remedy or relief in arbitration including statutory, common law, injunctive, equitable, and all other lawful remedies and relief. NAF Code of Procedure, supra, at 10. And the contract at issue in this case specifically states that the Lender can enforce its rights to [the borrower's] property in court or can elect to arbitrate such claims. We conclude that an arbitrator can be given the authority to address any claims a lender may have against a borrower. {53} In its form loan contract, American General unilaterally chose the forum in which it wanted to resolve its disputes, ensuring that it could enforce its rights to [Rivera's] property in court or as otherwise provided by law while extinguishing Rivera's right to access the courts for any reason. By excepting foreclosure and repossession from arbitration, American General retained the right to obtain through the judicial system the only remedies it was likely to need. If Rivera's truck had not been destroyed and still had been worth $15,500, American General easily could have recouped the loan principal of $6,517 through repossession. American General's ability under the arbitration clause to seek judicial redress of its likeliest claims while forcing Rivera to arbitrate any claim she may have is unreasonably one-sided. See Flores v. Transamerica HomeFirst, Inc., 93 Cal.App.4th 846, 854-55, 113 Cal.Rptr.2d 376 (Cal.Ct.App.2001) (concluding that a contract provision that forced the borrower to arbitrate all claims but allowed the lender to obtain foreclosure, the only remedy the lender was likely to need, was so one-sided as to be substantively unconscionable); Iwen, 977 P.2d at 995-96 (explaining that the more powerful bargaining party unfairly reserved the right to go to court and obtain the only remedy it was likely to need). {54} We therefore determine that the arbitration provisions are unfairly one-sided and void under New Mexico law. As in Cordova, the arbitration provisions in this case are so substantively unconscionable that we need not consider whether the provisions are also procedurally unconscionable.