Court Opinion

ID: 9862722
Source: CourtListenerOpinion
Date Created: 2023-09-25 01:59:58.219432+00
Date Added: 2024-06-11T11:31:09.958470
License: Public Domain

Justice ZAZZALI,
concurring in part and dissenting in part.
To the extent that the majority opinion strikes down certain provisions of the arbitration agreement as unconscionable, I concur. However, I disagree with the majority’s conclusions regarding certain other provisions and would find them unconscionable. Additionally, even if I were to accept the majority’s conclusions regarding the individual provisions, I nonetheless believe that the objectionable provisions cannot be severed from the agreement and that the agreement as a whole should be held cumulatively unconscionable. For those reasons, I respectfully dissent.
I.
As Justice LaVecchia notes, this matter comes before the Court on a narrow question: “Is the arbitration agreement at issue, or any provision thereof, unconscionable under New Jersey law, and, if so, should such provision or provisions be severed?” 185 N.J. 255, 888 A.2d 1055 (2005). Because of our limited inquiry, the facts of the matter are neither controlling nor essential to my analysis. Nonetheless, they provide a context for the discussion, and therefore I will briefly recite them.
According to the certification of defendant Alberta Harris, at the time of the events in this matter, Harris was a seventy-eight year old widow living alone in her home in Newark. She has lived in that home for over thirty years and did not have a mortgage until she entered into the transaction that is the subject of this matter. Harris was educated only until the sixth grade, at which time she began working in Georgia cotton fields. Eventually, she moved north and worked in.laundries pressing clothes and as a home health aide. She now lives on her monthly social security checks in the amount of $988. Out of that monthly payment, Harris must pay for heat, electricity, food, water, telephone ser*52vice, life insurance, and any necessary house repairs. Harris only has one relative living in the State, in Toms River.
Based on its 2005 annual Form 10-K, plaintiff Delta Funding Corporation (Delta) “is a national specialty consumer finance company that originates, securitizes and sells ... non-conforming mortgage loans.” According to the 10-K, Delta’s
loans primarily are secured by first mortgages on one- to four-family residential properties. Throughout our 24-year operating history, we have focused on lending to individuals who generally do not satisfy the credit, documentation or other underwriting standards set by more traditional sources of mortgage credit, including those entities that make loans in compliance with the conforming lending guidelines of Fannie Mae and Freddie Mac. We make mortgage loans to these borrowers for purposes such as debt consolidation, refinancing, education and home improvements.
[Emphasis added.]
Delta states that, during 2005, its weighted average interest rate was eight percent. Delta has enjoyed considerable success and growth in the industry. Its 10-K reports that, “[f]or the year ended December 31, 2005, we originated $3.8 billion of loans, an increase of $1.2 billion, or 46.9%, over the $2.6 billion of loans originated in the year ended December 31, 2004.”
The issue in this matter arises out of a loan entered into by Harris and Delta in 1999. According to her answer, counterclaim and third-party complaint, in December 1999, Kim Stewart of The Lending Source, Ltd. (Lending Source) contacted Harris and asked her if she needed money. Harris answered yes and explained that her income consisted of her monthly social security check and that, due to her financial situation, she only could afford a limited amount each month in payments. Stewart then arranged for a representative of Universal Window Products, Inc. (Universal) to come to Harris’s house. Once at the house, the representative had Harris sign a contract to install fifteen windows and a door. That contract did not stipulate a price for the work.
After Harris signed the contract, a representative from Advanced Title Agency, Inc., apparently acting on behalf of Delta, came to her home at approximately 10 p.m. to have Harris sign *53loan papers to cover the cost of the windows and door. Harris was sick in bed but was told by the representative that the loan papers had to be signed at that time. Harris also alleges that she was rushed when signing the papers because the representative was “running late.” The loan entered into by Harris was in the amount of $37,700 with an annual interest rate of around fourteen percent and was secured by a mortgage on Harris’s home. According to Harris’s complaint, at least $11,000 of the loan went to Universal and $4,000 went to points, fees, and closing costs. Of that $4,000, Harris avers that almost $2,000 went to Lending Source. As a result of the loan, Harris became responsible for a $444.44 monthly payment to Delta.
Delta subsequently assigned the loan to Wells Fargo Bank (Wells Fargo) as trustee and, when Harris was unable to make the necessary payments, Wells Fargo initiated foreclosure proceedings on her home by filing a complaint in the Superior Court. In response, Harris filed an answer, counterclaim, and third-party complaint, naming, among others, Delta, Lending Source, Universal, and Advanced Title Agency. Harris raised three affirmative defenses and seven counterclaims, essentially arguing that the loan was unconscionable and unenforceable because it was made with the knowledge that Harris could not repay it and with the intent of allowing the lender to obtain her house. As per the terms of the arbitration agreement, Delta filed a petition in federal district court seeking to compel arbitration of the counterclaims. Harris then moved for summary judgment dismissing Delta’s petition, and Delta cross-moved to compel arbitration. The district court granted Delta’s motion, concluding that the arbitration agreement was not unconscionable. On appeal, the Third Circuit Court of Appeals asked this Court to resolve the instant question of law. 185 N.J. 255, 883 A.2d 1055 (2005).
II.
As a general matter, the arbitration agreement at issue in this case has three major components. First, the agreement sets the *54terms of arbitration through the “Resolution of Claims,” “Hearing Location and Arbitration Costs,” and “Federal Arbitration Act and Appeals” provisions. Second, through the “Excluded Claims” clause and accompanying definitions, the agreement explains that certain claims arising out of the transaction must be brought in arbitration while others must be brought in court, thereby creating a bifurcated claims structure. Third, the “No Class Actions, Etc.” provision prohibits the arbitration of claims on a class action or class-wide basis. Apart from the definitions section, the only remaining provisions of the agreement are the severability clause, explaining that if one provision of the agreement is deemed unenforceable the other provisions continue in effect, and the “Important Additional Disclosures” provision, which explains that arbitration decisions are final.
In reaching its decision, the majority concludes that certain clauses of the “Hearing Location and Arbitration Costs” and “Federal Arbitration Act and Appeals” provisions are unconscionable; that the agreement’s creation of a bifurcated structure for litigating claims arising out of the same transaction — although “burdensome” on borrowers, ante at 48, 912 A.2d at 116 is not in and of itself unconscionable; that although class action waivers can be unconscionable under our decision in Muhammad v. County Bank of Rehoboth Beach, 189 N.J. 1, 912 A.2d 88, 2006 WL 2273448 (2006), the provision in this case is not unconscionable; and, finally, that the objectionable provisions of the agreement are severable and the agreement itself is not cumulatively unconscionable. As stated, I agree with the majority in so far as it strikes down certain provisions as unconscionable. However, I also would find the provisions creating a bifurcated foreclosure structure and prohibiting class actions unconscionable. Moreover, even if I were to accept the majority’s view of the individual provisions, I would nonetheless find that the objectionable provisions of the agreement cannot be severed and that, as a whole, the agreement should be held unconscionable.
*55III.
A.
In determining whether a contract is unconscionable, courts have focused on two factors: “(1) unfairness in the formation of the contract; and (2) excessively disproportionate terms.” Sitogum Holdings, Inc. v. Ropes, 352 N.J.Super. 555, 564, 800 A.2d 915 (Ch.Div.2002). Those factors have been labeled “procedural” and “substantive” unconseionability. Ibid.
The first factor — procedural unconseionability — can include a variety of inadequacies, such as age, literacy, lack of sophistication, hidden or unduly complex contract terms, bargaining tactics, and the particular setting existing during the contract formation process. The second factor — substantive unconseionability — simply suggests the exchange of obligations so one-sided as to shock the court’s conscience.
[Id. at 564-65, 800 A.2d 915 (citations omitted).]
Some courts have required that both factors be present for a finding of unconseionability, while other courts have found uncon-seionability based only on substantive unconseionability, and others still have used a “sliding scale” approach. Id. at 565-66, 800 A.2d 915.
As it pertains to contracts of adhesion, such as the arbitration agreement in this matter, this Court has identified four particularly relevant factors for determining unconseionability: “the subject matter of the contract, the parties’ relative bargaining positions, the degree of economic compulsion motivating the ‘adhering' party, and the public interests affected by the contract.” Rudbart v. N. Jersey Dist. Water Supply Comm’n, 127 N.J. 344, 356, 605 A.2d 681, cert. denied, 506 U.S. 871, 113 S.Ct. 203, 121 L.Ed.2d 145 (1992). According to the majority, those “factors focus on the procedural and substantive aspects of a contract of adhesion in order to determine whether the contract is so oppressive or inconsistent with the vindication of public policy that it would be unconscionable to permit its enforcement.” Ante at 40, 912 A.2d at 111 (internal citations omitted).
*56B.
As the majority notes, at a minimum, “contracts of adhesion necessarily involve indicia of procedural unconscionability.” Id. at 39, 912 A.2d at 111. The circumstances under which this matter comes before the Court — on a sparse record that consists of mere allegations — preclude the Court from properly examining whether other factors such as age, literacy, lack of sophistication, unfair bargaining tactics, or the particular setting of the contract formation affect the determination of procedural unconscionability. See Sitogum, supra, 352 N.J.Super. at 564, 800 A.2d 915. Suffice it to note that the allegations, if proven true, including the late night visit to Harris’s home and the rushed nature of her signing the documents, could have a significant effect on future unconsciona-bility determinations, such as whether the loan agreement itself is unconscionable.
However, some considerations of procedural unconscionability are still apparent on the record before us and are relevant to two of Budbart’s factors, namely, the parties’ relative bargaining positions and the public interests affected by the contract. In that respect, it is significant that Delta is a subprime lender that, in its own words, “focuse[s] on lending to individuals who generally do not satisfy the credit, documentation or other underwriting standards set by more traditional sources of mortgage credit, including those entities that make loans in compliance with the conforming lending guidelines of Fannie Mae and Freddie Mac.” Accordingly, in considering this arbitration agreement, we should not lose sight of the context in which Delta operates.
C.
Turning to considerations of substantive unconscionability, I first disagree with the majority’s holding that the excluded claims provision is not unconscionable. That provision, read in conjunction with the agreement’s definitions of “Claim” and “Excluded Claims,” as well as the opening paragraph of the agreement, creates a peculiar situation whereby certain claims arising out of *57the transaction are litigated in arbitration while other claims, arising out of the same transaction, must be litigated in court.
The agreement begins by “set[ting] forth the circumstances and procedures under which Claims (as defined below) may be arbitrated instead of litigated in court.” “Claim” is then defined as
any claim, dispute or controversy between you and us (except for any Excluded Claims, as defined below) arising from or relating to the Credit Transaction or the relationships resulting from the Credit Transaction, including the validity, enforceability or scope of this Agreement, or the Credit Transaction. “Claim” includes claims of every kind and nature, including but not limited to initial claims, counterclaims, cross-claims and third-party claims and claims based upon contract, tort, fraud and other intentional torts, constitution, statute, regulation, common law and equity. The term “Claim” is to be given the broadest possible meaning and includes, by way of example and without limitation, any claim, dispute or controversy that arises under or relates to the Truth in Lending Act, the Home Owners and Equity Protection Act and Regulation Z (including any purported election to rescind the Credit Transaction); the Equal Credit Opportunity Act and Regulation B; the Real Estate Settlement Procedures Act and Regulation X; the Fair Credit Reporting Act; the Fair Debt Collection Practices Act; state insurance, usury and lending laws; fraud or misrepresentation, including claims for failing to disclose material facts; other federal or state consumer protection statutes or regulations; any party’s execution of this Agreement and/or willingness to be bound by the terms of this Agreement; or any dispute about soliciting, originating, making, closing, servicing, collecting or enforcing the Credit Transaction.
However, the “Excluded Claims” provision then explains that “[notwithstanding the foregoing or any other term in this Agreement, Excluded Claims ... are excluded from arbitration. This means that neither you nor us can require the other to arbitrate any Excluded Claims.” Those claims that are excluded are:
(a) any action to effect a judicial or non-judicial foreclosure or to establish a deficiency judgment; (b) any action arising out of unlawful detainer; (c) eviction or other summary proceeding to secure possession of real property securing the Credit Transaction; (d) any action to assert, collect, protect, realize upon or obtain possession of the collateral for the Credit Transaction in any bankruptcy proceeding; (e) any action to quiet title; (f) all rights of self-help including peaceful occupation of real property and collection of rents, set-off and peaceful possession of personal property; (g) obtaining a deed in lieu of foreclosure; (h) obtaining provisional or ancillary remedies in connection with the foregoing; (i) Claims that you or we individually filed in court before the effective date of this Agreement; and (j) Claims advanced in any judicial class actions that have been finally certified as class actions before the effective date of this Agreement.
The agreement attempts to clarify the above by providing:
For example, if we were to commence a foreclosure action against you in court, that action and any defenses asserted by you in that action would be adjudicated in *58court; however, if you asserted a counterclaim against us in that action which was covered by the scope of this Agreement, we would have the right to demand that the counterclaim be arbitrated (you would also have the right to arbitrate the counterclaim rather than asserting it in court).
Putting aside the question whether the above clauses are comprehensible — a debatable proposition — those provisions create a situation “so one-sided as to shock the ... conscience,” Sitogum, supra, 352 N.J.Super. at 565, 800 A.2d 915; see, e.g., Iberia Credit Bureau, Inc. v. Cingular Wireless L.L.C., 379 F.3d 159, 169-70 (5th Cir.2004) (holding, under Louisiana law, that arbitration provision requiring that any claim customer is likely to bring be raised in arbitration while allowing cellular telephone provider to raise its claims against customer in court unconscionable); Wisconsin Auto Title Loans, Inc. v. Jones, 714 N.W.2d 155, 173 (Wis.2006) (analyzing similar provisions and stating that “[w]hile we appreciate that a one-sided arbitration provision may not be unconscionable under the facts of all cases, we conclude that the overly one-sidedness of the arbitration provision at issue in the instant case renders the arbitration provision substantially unconscionable”).
As the majority recognizes, the provisions are “burdensome,” ante at 48, 912 A.2d at 116, because they require a borrower to litigate the foreclosure action and any claims permitted under the arbitration agreement in court while requiring certain other claims, arising out of the same transaction, to be brought in arbitration. See Jones, supra, 714 N.W.2d at 174 (“The possibility of dual forums for intertwined defenses and counterclaims imposes an unnecessary and undue burden on the borrower____ Uncon-templated inconvenience ... is a factor in deciding whether a clause is unconscionable.” (citation omitted)). That leads to the incongruous result that a borrower defending against a foreclosure action will be forced to raise affirmative defenses in court but counterclaims, perhaps based on the same legal theory, in arbitration. In effect, by precluding counterclaims, the provision insulates Delta from damages in the court action. More important, the bifurcated process not only burdens the borrower but acts to *59substantially preclude vindication of his or her rights. Indeed, as noted, Delta seeks out customers in financial straits, who are exactly the type of individuals who would find it difficult, if not entirely impossible, to litigate their claims in one forum, to say nothing of having to litigate simultaneously in two.
Finally, the majority’s explanation that the provision is not unconscionable because a borrower may be able to obtain attorneys’ fees if he or she successfully argues a New Jersey Consumer Fraud Act (CFA), N.J.S.A. 56:8-1 to -135, claim or defense is unpersuasive. The availability of attorneys’ fees in this context places the proverbial cart before the horse because it does not remedy the burden of having to litigate one’s rights in two forums. Rather, it provides relief to a borrower only if he or she proves a CFA claim or defense. As such, a borrower must gamble that he or she will not only prevail but also prevail under a CFA claim or defense and then be awarded attorneys’ fees. I cannot understand how such a series of assumptions protects a borrower. Further, although the majority is correct in noting that foreclosure actions are properly commenced in court, that fact does not give Delta the right to exclude claims that it finds unfavorable from that court action by forcing them into arbitration. Nor does it lessen the burden that such a bifurcated claims resolution structure imposes on borrowers. Ultimately, I see no reason for the majority’s conclusion and would strike this provision down as unconscionable.
D.
The “No Class Actions, Etc.” provision of the arbitration agreement prohibits borrowers from engaging in class actions or consolidated claims:
There shall be no right or authority for any Claims to be arbitrated on a class action or class-wide basis. There shall be no right to arbitrate a claim as a representative of others or in a private attorney general capacity. Furthermore, Claims brought by or on behalf of other borrowers may not be consolidated with or arbitrated in any arbitration proceeding that is considering your Claims unless said other borrowers are parties to the same Credit Transaction. Similarly, you may *60not join with other borrowers to bring Claims in the same arbitration proceeding unless all of the borrowers are parties to the same Credit Transaction.
This Court has explained the importance of class action lawsuits, stating that “[b]y permitting claimants to band together, class actions equalize adversaries and provide a procedure to remedy a wrong that might otherwise go unredressed.” In re Cadillac V86-4 Class Action, 93 N.J. 412, 424, 461 A.2d 736 (1983). For example, one of the advantages of class action lawsuits is that they allow litigants with small claims to join together to litigate an action. Id at 424-25, 461 A.2d 736. In our contemporaneous decision in Muhammad, supra, 189 N.J. at 22, 912 A.2d 101, we held that class action waivers are not per se objectionable but nonetheless invalidated the waiver in that appeal because it prohibited the joining together of small claims, thereby depriving individuals of their “statutory rights under this State’s consumer protection laws.” In the instant matter, the majority distinguishes Muhammad on the grounds that Harris is seeking $100,000 in damages, that she may be able to recover attorneys’ fees, and that she has ample incentive to hire a lawyer in light of the fact that foreclosure proceedings have been initiated against her home.
I do not disagree with the majority that the facts of this matter are distinguishable from those in Muhammad. Rather, I simply find that the specific facts here are irrelevant to a proper resolution of the issue. As the majority notes, Harris is not seeking to bring a class action claim. Ante at 46, 912 A.2d at 115. Therefore, as I see it, the issue is not whether the class action waiver is unconscionable in this limited situation. Instead, the question is whether the class action waiver is unconscionable in the context in which Delta concededly conducts its business, that is, Delta’s business model seeks out those who are in financial difficulty. It is precisely those types of individuals who would benefit from being able to enter into class action suits and minimize the expense of litigation. Further, although Harris is seeking $100,000 in damages, one can expect that the same issue will arise in the context of smaller claims that are in greater need of the benefits of class action litigation. Accordingly, as with the exclud*61ed claims provision, I would find the arbitration agreement’s class action waiver unconscionable.
IV.
Additionally, even if I were to accept the majority’s conclusion that the excluded claims and class action provisions are not unconscionable, I nonetheless would find that the provisions the majority finds objectionable are not severable from the agreement and, in any event, that the arbitration agreement is so biased in favor of Delta that it is cumulatively unconscionable.
On the subject of severability, this Court has stated:
If striking the illegal portion defeats the primary purpose of the contract, we must deem the entire contract unenforceable. However, if the illegal portion does not defeat the central purpose of the contract, we can sever it and enforce the rest of the contract.
[Jacob v. Norris, McLaughlin & Marcus, 128 N.J. 10, 33, 607 A.2d 142 (1992) (emphasis added).]
Delta argues that the central purpose of the agreement is “arbitration which is both lawful and highly favored.” I disagree. To maintain that the central purpose of the agreement is arbitration is to confuse the agreement’s subject matter with its provisions. Indeed, the agreement does set up an arbitration proceeding. That much is obvious. However, it does so under rules and circumstances that are overwhelmingly beneficial to Delta, such as through the bifurcated foreclosure proceeding set up by the excluded claims provision. In other words, the purpose of the agreement is not merely to arbitrate claims; it is to arbitrate claims in a way that significantly advantages Delta at the expense of borrowers. In my view, the majority’s striking down of various arbitration provisions is a sufficient basis for finding that the “primary purpose of the contract,” ibid., has been defeated, thereby compelling the conclusion that the entire agreement is unenforceable because the offending provisions cannot be severed.
Further, the fact that the primary purpose of the agreement is to significantly advantage Delta at the expense of borrowers supports the conclusion that the entire agreement should be held *62cumulatively unconscionable. At a minimum, the majority has found that certain provisions relating to the rules of arbitration are unconscionable. Additionally, even if the excluded claims and class action waiver provisions are not unconscionable, as the majority finds, they are intended to provide a benefit to Delta at the expense of borrowers. Therefore, all three of the major components of the arbitration agreement are designed to benefit Delta. The only “advantage” to the borrower that I can find in the agreement is that it allows the borrower to choose which arbitration administrator to use. I conclude that such an arbitration agreement is “so one-sided,” Sitogum, supra, 352 N.J.Super. at 565, 800 A.2d 915, that we should reject it in its entirety.
V.
Although I agree with the majority’s conclusions regarding certain provisions of the agreement, I also would find the excluded claims and class action waiver provisions unconscionable. Additionally, I would strike down the entire arbitration agreement on the grounds that the provisions found objectionable by the majority are not severable and that the agreement is cumulatively unconscionable. In these circumstances we must be mindful that “[Ijaymen cannot be expected to know how to protect their rights when dealing with practiced and carefully counseled adversaries.” Brotherhood of R.R. Trainmen v. Virginia, 377 U.S. 1, 7, 84 S.Ct. 1113, 1117, 12 L.Ed.2d 89, 94 (1964).
Because I believe that this agreement exploits the individual and manipulates the process, I respectfully concur in part and dissent in part.