AA A lert Mortgage Banking Commentary
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A lert Mortgage Banking Commentary DECEMBER 11, 2000 Implications of U.S. Supreme Court Decision on Arbitration Agreements in Green Tree Financial Corp. Alabama v. Randolph In its December 11, 2000, decision in Green Tree Financial Corp. Alabama v. Randolph, No. 99-1235, the United States Supreme Court has given lenders guidance regarding when arbitration clauses in consumer contracts will be enforceable. The decision, which appears at first blush to be a victory for the lender, might better be characterized as a road map for consumer lenders who include arbitration clauses in their contracts. Larketta Randolph bought a mobile home and financed the purchase through a loan from Green Tree Financial Corp. Alabama. The installment contract between Ms. Randolph and Green Tree called for all disputes arising from that contract to be resolved by binding arbitration. Ms. Randolph ultimately sued Green Tree and alleged that it violated the Truth in Lending Act (TILA), 15 U.S.C. §§ 1601, et seq., and the Equal Credit Opportunity Act, 15 U.S.C. §§ 1691, et seq. Green Tree asked the federal trial court to compel arbitration, and the court agreed and dismissed the case. The U.S. Court of Appeals for the Eleventh Circuit disagreed. It held that the arbitration agreement failed to provide minimum guarantees that Ms. Randolph would be able to vindicate her rights under TILA. Randolph v. Green Tree Financial Corp. Alabama, 178 F.3d 1149 (11th Cir. 1999). The appeals court explained that the arbitration agreement was silent regarding who would pay the arbitration filing fee, the arbitrators fee and other costs associated with the process, and that the agreements silence caused the court serious concerns that those expenses might curtail or bar a plaintiffs access to the arbitral forum. 178 F.3d at 1158. Because of those concerns, the appeals court reversed the decision of the trial court to compel arbitration. The Supreme Court accepted two issues for review, the second of which addressed the enforceability of the arbitration clause (the first issue was a procedural issue not particularly relevant to this discussion). In a majority opinion written by Chief Justice William H. Rehnquist, the Court first reiterated that there is a liberal federal policy favoring arbitration agreements. The Court held that 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. The Chief Justice wrote that, in the Green Tree case, the plaintiff had failed to offer any real evidence about what costs she might incur, and, so, she had failed to meet her burden. The Court explained that the appeals court erred in assuming that the arbitration agreements silence on the issue of costs and fees was itself enough to find the agreement unenforceable. Kirkpatrick & Lockhart LLP The decision in Green Tree is unusual for the Supreme Court in that the conclusion is entirely case-specific. The Court did not hold that all arbitration clauses in consumer contracts would be enforceable, it simply described the burden a plaintiff will bear in any particular case in which the plaintiff challenges the enforceability of such a provision. What does that mean for lenders? For one thing, it means that courts will not determine that all arbitration clauses in consumer contracts are necessarily unenforceable.1 Even if those clauses are silent about who pays arbitration expenses, the plaintiff will still have to prove that it is likely that he will have to pay and that those costs will be prohibitively high. A lender who has a strong interest in arbitration could also tip the scales even further in its direction by carefully reviewing and perhaps revising its loan contract. The ultimate question, as defined by Green Tree, will be whether the consumer can prove that the costs of arbitration are so high that he would essentially be dissuaded from seeking a remedy. If a lender were to include in its standard contract a provision allowing the arbitrator discretion to award fees to the prevailing party, the existence of that provision might help convince a court that arbitration would not necessarily impose great expense on a plaintiff. That was the case in Rosenberg v. Merrill Lynch Pierce Fenner & Smith, Inc., 170 F.3d 1, 15-16 (1st Cir. 1999). In that case, the arbitration provision called for arbitration according to the rules of the New York Stock Exchange. Those rules allow the arbitrator to award fees and, in part based on that provision, the court of appeals determined that the agreement was enforceable. In fact, when a different court of appeals determined that the agreement in Green Tree was unenforceable, it essentially held that the result might have been different had the agreement included discretion for the arbitrator to award fees as was the case in Rosenberg. The Supreme Courts decision in Green Tree is important for lenders not so much because of the result as for how the Court reached that result. Arbitration provisions will be reviewed on a case-by-case basis and the prudent lender will take a lesson from the Supreme Courts analysis in Green Tree in order to maximize the likelihood that its arbitration clause is given effect by the courts. It is important to note, however, that the plaintiff in Green Tree also alleged that the arbitration clause was unenforceable because it precluded her from bringing a class action. The Supreme Court declined to address that argument. That argument will have to be decided another day. 1 2 Kirkpatrick & Lockhart LLP MORTGAGE BANKING/CONSUMER FINANCE GROUP Kirkpatrick & Lockhart LLP was founded in 1946, and, with approximately 600 lawyers, is one of the thirty-five largest law firms in the United States. K&L attorneys are based in nine offices in key US cities Boston, Harrisburg, Los Angeles, Miami, Newark, New York, Pittsburgh, San Francisco, and Washington. Our firm represents a broad range of clients in a wide variety of matters, including corporate and securities, e-commerce, investment management, insurance coverage, financial institutions, mortgage banking and consumer finance, creditors rights, intellectual property, tax, labor, environmental, antitrust, health care, and government contracts. More than half our attorneys are litigators. We litigate class actions on a range of financial issues, generally defending financial institutions, broker-dealers, public companies, and investment companies and their officers and directors against claims of violations of securities laws, consumer credit laws, and common law tort and contract claims. You can learn more about our firm by visiting our Internet website at www.kl.com. The Mortgage Banking/Consumer Finance Group provides legal advice and licensing services to the consumer lending industry. We counsel clients engaged in the full range of mortgage banking activities, including the origination, processing, underwriting, closing, funding, insuring, selling, and servicing of residential mortgage loans and consumer loans, from both a transactional and regulatory compliance perspective. Our focus includes both first- and subordinate-lien residential mortgage loans, as well as open-end home equity, property improvement loans and other forms of consumer loans. We also have experience in multi-family and commercial mortgage loans. Our clients include mortgage companies, depository institutions, consumer finance companies, investment bankers, insurance companies, real estate agencies, homebuilders, and venture capital funds. Members of the Mortgage Banking/Consumer Finance Group and their telephone numbers and e-mail addresses are listed below: ATTORNEYS Laurence E. Platt Phillip L. Schulman Thomas J. Noto Costas A. Avrakotos R. Bruce Allensworth Daniel J. Tobin Anthony P. La Rocco Emily J. Booth Eric J. Edwardson Irene C. Freidel Erin J. Fucci Suzanne F. Garwood Melanie L. Hibbs Steven M. Kaplan Kristie D. Kully Carol M. Tomaszczuk Nanci L. Weissgold 3 (202) 778-9034 (202) 778-9027 (202) 778-9114 (202) 778-9075 (617) 261-3119 (202) 778-9074 (973) 848-4014 (202) 778-9112 (202) 778-9387 (617) 261-3115 (202) 778-9437 (202) 778-9892 (202) 778-9203 (202) 778-9204 (202) 778-9301 (202) 778-9206 (202) 778-9314 lplatt@kl.com pschulman@kl.com tnoto@kl.com cavrakotos@kl.com ballensworth@kl.com dtobin@kl.com alarocco@kl.com ebooth@kl.com eedwardson@kl.com ifreidel@kl.com efucci@kl.com sgarwood@kl.com mhibbs@kl.com skaplan@kl.com kkully@kl.com ctomaszczuk@kl.com nweissgold@kl.com Kirkpatrick & Lockhart LLP DIRECTOR OF LICENSING Stacey L. Riggin (202) 778-9202 sriggin@kl.com REGULATORY COMPLIANCE ANALYSTS Dana L. Lopez Nancy J. Butler Susan C. Grassmann Joelle Myers Marguerite T. Frampton Allison Wise (202) 778-9383 (202) 778-9374 (202) 778-9129 (202) 778-9093 (202) 778-9253 (202) 778-9477 dschmitz@kl.com nbutler@kl.com sgrassmann@kl.com jmyers@kl.com mframpton@kl.com awise@kl.com (202) 778-9261 tgoebel@kl.com LAW CLERKS Tara L. Goebel Kirkpatrick & Lockhart LLP Challenge us. BOSTON n HARRISBURG n LOS ANGELES n MIAMI n NEWARK n NEW YORK n PITTSBURGH n SAN FRANCISCO n WASHINGTON ............................................................................................................................................................ This publication/newsletter is for informational purposes and does not contain or convey legal advice. The information herein should not be used or relied upon in regard to any particular facts or circumstances without first consulting with a lawyer. © 2000 KIRKPATRICK & LOCKHART LLP. ALL RIGHTS RESERVED.
