Page 1
177 of 377 DOCUMENTS
View U.S. District Court Opinion
View Original Source Image of This Document
ACORN, an unincorporated organization; JULIO and IRENE REYES;
SUZANNE ALEXANDER; SONYA and FREDRICK BYERS; and
CYNTHIA and LEON BOUDREAUX; on behalf of themselves and all
others similarly situated, Plaintiffs vs. HOUSEHOLD INTERNATIONAL,
INC., HOUSEHOLD FINANCE CORPORATION OF CALIFORNIA,
BENEFICIAL CALIFORNIA, INC., and DOES 1 through 50, inclusive,
Defendants.
Case No.: C 02-1240 CW
UNITED STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF CALIFORNIA
2002 U.S. Dist. Ct. Motions 1240; 2002 U.S. Dist. Ct. Motions LEXIS 8735
April 30, 2002
Motion to Compel
VIEW OTHER AVAILABLE CONTENT RELATED TO THIS DOCUMENT: U.S. District
Court: Motion(s); Pleading(s)
COUNSEL: [**1] SARAH E. SISKIND, CHARLES BARNHILL, WILLIAM P. DIXON,
ELIZABETH J. EBERLE (State Bar # 196914), Miner, Barnhill & Galland, P.C., 44 East Mifflin
Street; Suite 803, Madison, WI 53703, (608) 255-5200 (telephone), (608) 255-5380 (telefacsimile).
H. TIM HOFFMAN (State Bar # 049141), ARTHUR W. LAZEAR (State Bar # 083603), ERIN C.
DAY (State Bar # 184401), Hoffman & Lazear, Attorneys, 180 Grand Avenue, Suite 1550, Oakland, California 94612, (510) 763-5700 (telephone), (510) 835-1311 (telefacsimile).
Attorneys for Plaintiff.
JUDGES: The Honorable Claudia Wilken
Page 2
2002 U.S. Dist. Ct. Motions 1240, *; 2002 U.S. Dist. Ct. Motions LEXIS 8735, **
TITLE: PLAINTIFFS' OPPOSITION TO DEFENDANTS' MOTION TO COMPEL ARBITRATION OF CERTAIN CLAIMS OR ALTERNATIVELY [**5] CROSS MOTION TO
STAY DISPOSITION PENDING DISCOVERY AND TRIAL UNDER 9 U.S.C. § 4
TEXT: [*2] INTRODUCTION
This action is brought by ACORN (the nation's largest community organization of low-and
moderate-income families) and seven individual plaintiffs (Julio and Irene Reyes, Suzanne Alexander, Sonya and Fredrick Byers, and Cynthia and Leon Boudreaux) as a representative action under
the California Unfair Competition Act (UCA), Bus. & Prof. Code § 17200, et seq., and a class action under Civ. Code § 1781 for violations of the California Consumers Legal Remedies Act
(CLRA), Civ. Code § 1750, et seq., and Civ. Code § 382 for violations of common law. n1
n1 Contrary to defendants' account in their memorandum (See e.g., Defs' Mot., pp.3-4),
plaintiffs' claims -- as presently asserted -- are brought exclusively under state law. While
some aspects of plaintiffs' UCA Section 17200 claims assert independent state law violations
for acts that are unlawful under federal law, no federal law claims have as yet been asserted.
(See FAC P 65)
[**6]
In their Complaint, plaintiffs allege that the defendants Household International, Inc., Household Finance Corporation of California, and Beneficial California, Inc., engage jointly, and
throughout the State of California, in a course of predatory lending to moderate-income homeowners. (See First Amended Complaint ("FAC"), P 2) Plaintiffs claim that defendants' corporate strategy is to: (a) target as potential customers homeowners who are struggling with high credit card
debt, (b) trick them into consolidated their debt into high-cost loans with defendants, secured
against their homes, by misrepresenting that they can save money by doing so based on both false
information in their sales presentations and deliberate omission of material information about the
costs and terms of debt consolidation, and in the process (c) trap their customers into their new
consolidated loans by "upselling" the loans to amounts so high in relation to the value of the borrowers' homes (e.g., up to 125% of value) that the borrowers cannot refinance with defendants'
competitors. (FAC P 2, 23)
Plaintiffs claim that these business practices and promotions violate the Unfair Competition
[**7] Act and the Consumers Legal Remedies Act and constitute common law [*3] fraud and
deceit, negligent misrepresentation and unjust enrichment. (FAC PP 63-92) They seek classwide
damages and equitable relief, including injunctive relief, rescission of their loan agreements, restitution, and disgorgement of profits. (Id.)
In the present motion, the defendants are asking the Court to stay the claims of five of the eight
plaintiffs under the Federal Arbitration Act ("FAA"), based on adhesive arbitration agreements that
those plaintiffs signed in connection with some of their loans, and to order the those claims to arbitration. n2 Plaintiffs will demonstrate that defendants' motion has no merit, as the underlying arbitration agreements are procedurally and substantively unconscionable, and therefore unenforceable
under governing federal and state law. The Court should therefore either deny the motion outright
based on the record already developed and presented with this motion, or stay disposition of this
motion pending discovery and trial under Section 4 of the FAA, 9 U.S.C. § 4.
Page 3
2002 U.S. Dist. Ct. Motions 1240, *; 2002 U.S. Dist. Ct. Motions LEXIS 8735, **
n2 Defendants do not contend that the Boudreaux plaintiffs -- whose loans predate defendants' late 1999 introduction of the arbitration agreements (Siskind Decl. P 6) -- have ever
agreed to arbitrate any of their claims. (See Defs. Mot., p.1) In addition, at least some of the
claims of Plaintiff Alexander (who undisputedly did not sign an arbitration agreement covering her August 1999 loan consolidation) (Defs. Mot., p.6), are not subject to arbitration. The
Boudreaux Plaintiffs and Alexander are therefore free to proceed with these pre-arbitration
claims on behalf of themselves and other borrowers whose loans also pre-date late 1999.
Further, plaintiff ACORN, never having agreed to arbitrate any claims, has representative
claims under UCA Section 17200, that are unaffected by the arbitration agreements. (FAC P
9) ACORN may therefore proceed under EEOC v. Waffle House, Inc., 534 U.S. 279 (2002),
as the representative of all borrowers (including both those from the pre-arbitration period
and those, including the Plaintiffs Reyes and Byers and Alexander, who took loans after the
arbitration clause was introduced). As a consequence, plaintiffs' § 17200 claims -- and all of
the legal issues they raise on behalf of defendants' borrowers as a class -- will remain for decision in this Court.
[**8]
STATEMENT OF FACTS
I. The Parties
Defendants are $ 101 billion (managed assets) consumer lenders. (Barnhill Decl., Ex. E, p. 1)
They are involved in a variety of activities, including extending secured loans to moderate-income
homeowners on the sub-prime market. (Barnhill Decl., Ex. A, p. 4). They operate 1,400 lending
branches throughout the country (Barnhill Decl., Ex. F, p.1), with 15% of their business in the state
of California. (Barnhill Decl., Ex. A, p. 4). The [*4] arbitration rider at issue in this motion was
first introduced by defendants as part of their lending package in late 1999. (Siskind Decl. P 6)
The Reyes, the Byers, and Alexander are all homeowners who, having accumulated significant
consumer debt and therefore struggling to make their monthly payments, consolidated some of their
debt into loans with defendants in the years 2000 and 2001. (Reyes Decl. P 6; Alexander Decl. P 2;
Byers Decl. P 2) The claims defendants seek to compel to arbitration (plaintiffs' fraud claims under
the CLRA, UCA Section 17200, and the common law) arise from these transactions. (FAC P 63-92;
Reyes Decl. P 6; Alexander Decl. P 2; Byers Decl. P 2)
II. The [**9]
Arbitration Rider
The standard documentation for defendants' loan consolidation transactions after the end of
1999 included the form arbitration agreements upon which defendants base their motion to compel
arbitration. n3 (Defs. Mot., p.4-7) These agreements, as plaintiffs will show, were classic contracts
of adhesion. That is, prior to the closing of plaintiffs' loans, the plaintiffs were not shown the arbitration agreements and the subject of arbitration was not discussed, and the arbitration agreements
were not negotiated. (Reyes Decl. P 9; Alexander Decl. P 5; Byers Decl. P 5) The agreements were
simply presented to plaintiffs for signature at the bottom of a stack of legal documents that plaintiffs
had to sign to close the loan. (Reyes Decl. P 8; Alexander Decl. P 4; Byers Decl. P 4) Defendants'
closing checklist confirms that signing the arbitration rider was required. It states: "THE ARBI-
Page 4
2002 U.S. Dist. Ct. Motions 1240, *; 2002 U.S. Dist. Ct. Motions LEXIS 8735, **
TRATION RIDER IS REQUIRED ON ALL LOANS; ENSURE THAT IT IS SIGNED AND
ORIGINAL IS INCLUDED WITH THE LOAN FILE." (Alexander Decl. P 4 & Ex. A; Byers Decl.
P 4 & Ex. A)
n3 Alexander's sole arbitration agreement is not signed by a representative of the lender,
defendant Beneficial. (See Def. Ex. F, p.6) Further, defendants mistakenly assert that according to the complaint, Alexander's approximately $ 12,000 loan (which did not include an arbitration rider) was consolidated into the approximately $ 127,000 loan (which they allege did
include an arbitration rider). (Defs Mot., p.6) However, plaintiffs have not alleged that the $
12,000 loan was ever consolidated, but only her first mortgage and other consumer debts.
(FAC, P 42)
[**10]
[*5] The form arbitration rider covers many topics, but plaintiffs submit that the following
four terms make the agreement entirely one-sided and, therefore, substantively unconscionable.
These are (1) the broad scope of the arbitration obligation and exceptions to it carved out for defendants, (2) a prohibition against class action, joinder, or consolidation of claims, (3) the duty to
keep the arbitration awards confidential, and (4) the allocation of arbitration costs between the parties.
A. Scope of Arbitration
Regarding the scope of the arbitration obligation, the rider begins by purporting to commit all
claims to arbitration:
By signing this Arbitration Rider, you agree that either Lender or you may require that
any claim, dispute, or controversy (whether based upon contract; tort, intentional or
otherwise; constitution; statute; common law; or equity and whether pre-existing, present or future), including initial claims, counterclaims, and third party claims, arising
from or relating to this agreement or the relationships which result from this agreement,
including the validity or enforceability of this arbitration clause, any part thereof or the
entire [**11] Agreement ("Claim"), shall be resolved, upon the election of you or us,
by binding arbitration . . . .
(E.g., Schneider Decl. Ex. A, p.7) Several paragraphs later, however, the rider carves out the right to
seek judicial or other remedies for the purpose of foreclosure:
No provision of, nor the exercise of any rights under this Arbitration Rider shall limit
the right of any party during the pendency of any Claim, to seek and use ancillary or
preliminary remedies, judicial or otherwise, for the purposes of realizing upon, preserving, protecting or foreclosing upon any property involved in any Claim or subject
to the loan documents.
Page 5
2002 U.S. Dist. Ct. Motions 1240, *; 2002 U.S. Dist. Ct. Motions LEXIS 8735, **
(Id.) (emphasis added) These exceptions are not mentioned, however, in the summary statement
printed in all capital letters on the signature page of the rider. It states simply that both parties have
agreed to give up the right to litigate claims in court upon either party's request for arbitration. (Id.
at p.8)
[*6] B. Class Actions
The rider prohibits class actions unless defendants provide their consent in writing. It also bars
the joinder or consolidation of more than one borrower's claims. It states: [**12]
No class actions or joiner [sic] or consolidation of any Claim with the claim of any
other person are permitted in arbitration without the written consent of you and us.
(Id. at p.7) Defendants have already asserted that they will not consent to the plaintiffs' class action.
(Hayden Decl., Exs. A, B, C, p.2)
C. Secrecy
The rider states that "[t]he parties agree that the award shall be kept confidential." (E.g.,
Schneider Decl. Ex. A, p.7).
D. Costs
Finally, without providing any intelligible information about what the costs of an arbitration
might actually be, the rider splits the costs of arbitration between the parties. With respect to fee
charged for filing a claim, it provides:
If you [borrower] file a Claim, the filing costs shall be paid as follows: (a) Lender
agrees to pay for the initial cost of the [sic] filing the Claim up to the maximum amount
$ 100.00; (b) for the filing costs over $ 100.00, such additional cost shall be divided
equally between us up to the amount charged by the arbitration administrator for a
Claim equal to your loan amount; and (c) all costs over the amount charged by the arbitration administrator [**13] for a Claim equal to your loan amount shall be paid by
you.
(E.g., Schneider Decl. Ex. A, p.7) With respect to the cost of the actual hearings, it provides:
The cost of up to one full day of arbitration hearings will be shared equally between us.
Fees for hearings that exceed one day will be paid by the requesting party.
(Id.)
Page 6
2002 U.S. Dist. Ct. Motions 1240, *; 2002 U.S. Dist. Ct. Motions LEXIS 8735, **
A month ago, after the plaintiffs' Complaint was filed, defendants offered to modify these cost
provisions by advancing plaintiffs' share of the arbitrator's fees and [*7] costs until the arbitration
was decided, but reserving the right to recover the advanced costs if defendants prevailed. (Hayden
Decl., Exs. A, B, C, p.2-3) The offer has not been accepted.
In any event, the arbitration rider provides no basis for estimating what arbitration would actually cost. (The only dollar amount it mentions is the unilluminating $ 100 portion of the filing fee.)
(E.g., Schneider Decl. Ex. A, p.7) Plaintiffs' counsel, after investigating each of the three named
providers' pricing systems, estimate that arbitrating plaintiffs' claims would require plaintiffs to pay
at least $ 4,000, as opposed to the one-time court filing fee ($ [**14] 150 in federal court, $ 201
in state court). (Siskind Decl., PP 15-62) For plaintiffs, this is unaffordable. (Reyes Decl. PP 10-11;
Alexander Decl. PP 6-7; Byers Decl. PP 6-7)
ARGUMENT
I. The Enforceability of the Arbitration Agreement is Governed by State-Law Principles of
Contract Formation
Plaintiffs begin with a discussion of general principles. The first principle is that the law favors
enforcement of valid agreements to arbitrate. Allied-Bruce Terminix Cos. v. Dobson, 513 U.S. 265,
270-71 (1995); Circuit City Stores v. Adams, 279 F.3d 889, 892 (9th Cir. 2002). The purpose of the
FAA was to place such agreements "upon the same footing as other contracts." Id. Section 2 of the
Act states that an agreement to arbitrate "shall be valid, irrevocable and enforceable, save upon such
grounds as exist in law or in equity for the revocation of any contract." 9 U.S.C. § 2 (emphasis
added)
Second, the FAA provides that where "the making of the agreement" is in issue, the court must
decide that issue before deciding whether to order the parties to arbitration. 9 U.S.C. § 4 The term
"making [**15] of the agreement" encompasses any challenge to the validity of the agreement
even where there is no disagreement an agreement was "made." See Matterhorn, Inc. v. NCR Corporation, 763 F.2d 866, 868 (7th Cir. 1986); Hooters of America v. Phillips, 39 F. Supp. 2d 582
(D.S.C. 1998), aff'd 173 F.3d 933 (4th Cir. 1999). As the Fourth Circuit explained in Hooters:
[*8] The judicial inquiry, while highly circumscribed, is not focused solely on an
examination for contractual formation defects such as lack of mutual assent and want of
consideration. Courts also can investigate the existence of such grounds as exist at law
or in equity for the revocation of any contract.
173 F.3d at 938 (citations omitted). See also Sydnor v. Conseco Financial Servicing Corporation,
252 F.3d 302, 305 (4th Cir. 2001) (holding that as Congress did not intend for the FAA to force
parties who had not agreed to arbitrate into a non-judicial forum, federal courts must first whether
the parties executed a valid agreement to arbitrate); Paine Webber Inc. v. Hartmann, 921 F.2d 507,
511 (3d Cir. 1990) [**16] n4
n4 It is critical in this regard that the challenge is to the validity to the arbitration clause,
as opposed to the validity of the contract as a whole. Prima Paint Corp. v. Flood & Conklin
Page 7
2002 U.S. Dist. Ct. Motions 1240, *; 2002 U.S. Dist. Ct. Motions LEXIS 8735, **
Mfg. Co., 388 U.S. 395 (1967); Matterhorn, 763 F.2d at 868; Wright v. SFX Entertainment
Inc., 2001 U.S. Dist. LEXIS 1000 at *11 (February 8, 2001, S.D. N.Y.); Hooters, 173 F.3d at
938; Wick v. Atlantic Marine, Inc., 605 F.2d 166, 168 (5th Cir. 1979); Sydnor, 252 F.3d at
305. Under these cases, challenges (like plaintiffs') to the validity of arbitration agreements
are for the court to decide before arbitration can be ordered, but challenges to the validity of
contract as a whole can be decided by the arbitrator.
Finally, federal courts must, in determining whether an arbitration agreement is valid, "apply
ordinary state-law principles that govern the formation of contracts." Circuit City, 279 F.3d at 892
(9th Cir. 2002). [**17] "General contract defenses such as fraud, duress, or unconscionability,
grounded in state contract law, may operate to invalidate arbitration agreements" and preclude their
enforcement. Id. (citing Doctor's Assocs., Inc. v. Casarotto, 517 U.S. 681, 687 (1996)) (emphasis
added). See also Ticknor v. Choice Hotels Int'l, Inc., 265 F.3d 931, 935, 942 (9th Cir. 2001) (applying Montana contract law to determine validity of arbitration agreement). n5 Courts have accordingly refused [*9] universally to compel arbitration where the underlying agreement to arbitrate has been found unconscionable. Over the last two years in California alone, such cases are
myriad, including the Ninth Circuit's decision in Circuit City, the Northern District of California's
decision in Ting v. AT&T, 182 F. Supp. 2d 902 (N.D. Cal. 2002), the California Supreme Court's
decision in Armendariz v. Foundation Health Psychcare Servs., 6 P.3d 669 (Cal. 2000), and many
California appellate court decisions including McCoy v. The Superior Court of Orange County, 87
Cal. App. 4th 354, 357-59 (Cal. App. 2001), Flores v. Transamerica HomeFirst, Inc., 113 Cal. Rptr.
2d 376 (Cal. App. 2001), [**18] Mercuro v. The Superior Court of Los Angeles County, 116 Cal.
Rptr. 2d 671 (Cal. App. 2002), Villa Milano Homeowners Ass'n v. Il Davorge, 102 Cal. Rptr. 2d 1,
9 (Cal. App. 2000); Szetela v. Discovery Bank, 2002 Cal. App. LEXIS 4007 (Cal. App. 2002).
n5 Lest there be any question that under California law, the issue of unconscionability
goes to the formation (or making) of the agreement, the California statutes make clear that it
does. A finding that an arbitration agreement is unconscionable makes that agreement "unlawful" under California contract law. Stirlen v. Supercuts, Inc., 60 Cal. Rptr. 2d 138, 153-55
(1997) As discussed in Stirlen, for example, Cal. Civ. Code § 1667 makes a contract unlawful
if it is contrary to the policy of express law or otherwise contrary to good morals. In addition,
Cal. Civ. Code § 1668 proscribes as unlawful any contract designed "to exempt anyone from
responsibility from his own fraud . . . or violation of law," and provides for the revocation of
such contract. Stirlen, 60 Cal. Rptr. 2d at 153-54. Further, Cal. Civ. Code § 1670.50 makes an
agreement that is permeated by unconscionability unenforceable. Id. at 154, 155, n.16. And,
as the court observed in Ting v. ATT, Cal Civ. Code § 1550 makes a "lawful object" an essential element to a contract's existence. 182 F. Supp. 2d at 921.
[**19]
Plaintiffs will show below that the defendants' arbitration agreements are unconscionable, invalid and unenforceable under the FAA. Defendants have no legal authority for their novel claim that
they have stripped the Court of its settled authority under Prima Paint, 388 U.S. 395 (1967) and its
progeny to determine whether the arbitration agreement is valid, merely by inserting bootstrap language into the arbitration rider that gives that question to the arbitrator. (Defs. Mot., p.11-12) Since
the only basis for sending the parties to arbitration is a valid agreement to arbitrate, the arbitrator
Page 8
2002 U.S. Dist. Ct. Motions 1240, *; 2002 U.S. Dist. Ct. Motions LEXIS 8735, **
has no authority, when there is no agreement, to do anything at all. Not surprising, one of the cases
defendants cite referred the question of whether the arbitration agreement was unconscionable to an
arbitrator. Id.
Accordingly, plaintiffs demonstrate below that defendants' arbitration agreements are manifestly
unconscionable, and are therefore invalid and unenforceable under the FAA.
[*10] II. The Arbitration Agreements Defendants Seek to Enforce Are Unconscionable Under California Law
Under California law, a contract is unenforceable if it is both [**20] procedurally and substantively unconscionable. Circuit City, 279 F.3d at 893 (citing Armendariz, 6 P.3d at 689). Procedural
unconscionability focuses on "oppression" or "surprise" due to unequal bargaining power, while
substantive unconscionability focuses on "overly harsh or one-sided results." Armendariz, 6 P.3d at
690 (citing A & M Produce Co v. FMC Corporation, 186 Cal. Rptr. 114, 121 (1982)). While the
elements of procedural and substantive unconscionability must both be present, "[t]he more substantively oppressive the contract term, the less evidence of procedural unconscionability is required
to come to the conclusion that the term is unenforceable, and vice versa." Armendariz, 6 P.3d at 690
(quoting Stirlen v. Supercuts, 60 Cal. Rptr. 2d 138, 146 (1997)). See also McCoy, supra, 104 Cal.
Rptr. 2d at 504, 507.
A. The Arbitration Agreements are Procedurally Unconscionable
Under California law, a contract or provision is procedurally unconscionable where there is either oppression or surprise in the making of the agreement. Flores, 113 Cal. Rptr. 2d at 381. [**21]
Oppression arises from "an inequality of bargaining power which results in no real negotiations and
"an absence of meaningful choice." Id.; Neal v. State Farm Ins. Cos., 10 Cal. Rptr. 781, 784 (1961)
Surprise arises where terms are hidden in a prolix printed form drafted by the party seeking to enforce them (Flores, 113 Cal. Rptr. 2d at 381) or buried in a heap of papers and signed along with a
thick stack of other documents (Villa Milano, 102 Cal. Rptr. 2d at 9). Both elements are deemed
present where the arbitration agreement is a contract of adhesion, defined as "a standard-form contract, drafted by the party with superior bargaining power, which relegates to the other party the option of either adhering to its terms without modification or rejecting the contract entirely." Circuit
City, 279 F.3d at 893; Armendariz, 6 P.3d at 690; Flores, 113 Cal. Rptr. 2d at 381-82. A contract
of adhesion is, necessarily, procedurally unconscionable. Id.
[*11] Defendants' arbitration agreements are classic contracts of adhesion. First, defendants
have all the bargaining power. They maintain [**22] a mammoth finance operation, lending out
billions annually in California alone. (Barnhill Decl. Ex. A) They operate their business in the subprime lending market, targeting borrowers who are carrying significant consumer debt as candidates
for consolidating their loans with defendants. (Reyes Decl. P 6; Alexander Decl. P 2; Byers Decl. P
2) These customers plainly lack bargaining power.
Defendants are therefore able to require that borrowers agree, as a condition of getting their
loans, to arbitrate any claims rather than sue. The requirement is contained in a form rider, drafted
by defendants, and presented to borrowers at the bottom of a stack of legal documents shown to
them for the first time at the closing. (Reyes Decl. P 8; Alexander Decl. P 4; Byers Decl. P 4) n6
They are not negotiated. (Reyes Decl. P 9; Alexander Decl. P 5; Byers Decl. P 5) Borrowers are
neither shown the riders nor informed of their contents before the loan closings, and they sign the
Page 9
2002 U.S. Dist. Ct. Motions 1240, *; 2002 U.S. Dist. Ct. Motions LEXIS 8735, **
riders because they are required to do so in order to close their loans. (Reyes Decl. P 9; Alexander
Decl. P 5; Byers Decl. P 5) As previously noted, the defendants' closing document checklist states
that "THE ARBITRATION [**23] RIDER IS REQUIRED ON ALL LOANS." (Alexander Decl.
P 4 & Ex. A; Byers Decl. P 4 & Ex. A)
n6 For example, the Loan Close Document Checklist given to Alexander with her closing
documents indicate that borrowers are required to sign the following 11 documents at closing: the loan agreement, an insurance application, the deed of trust, a property tax and
homeowners insurance notice, the EZ Pay Plus enrollment form, a form letter to insurance
company, an optional insurance disclosure, a pay-off request letter, a rescission notice, voluntary info for government monitoring, and the arbitration rider. The Loan Close Document
Checklist given to the Byers plaintiffs include the same 11 documents, with the following 3
additional documents: a customer orientation video form, a real estate & PHL loan close
checklist, and a HFC customer satisfaction survey.
The arbitration riders are thus classic contracts of adhesion and, as such, they are procedurally
unconscionable.
B. The Agreements are also Substantively Unconscionable. [**24]
For several reasons, the riders are also substantively unconscionable.
[*12] Substantive unconscionability rests on a finding either that (1) the provision does not
fall within the reasonable expectations of the weaker party; or (2) the provision, even if consistent
with those expectations, is unduly or oppressive or unconscionable. Graham v. Scissor-Tail, 623
P.2d 165, 172-73 (1981); Armendariz, 6 P.3d at 689. Defendants' arbitration agreements are so
thoroughly one-sided that they easily meet both tests.
First, they relegate virtually any claim a borrower might assert to arbitration, while leaving defendants free access to the courts to exercise the only remedy of importance to them: foreclosure.
Second, they prohibit class actions or any consolidation of claims (a vehicle of importance to the
plaintiffs only, not the defendants). Third, they require plaintiffs to keep the results of any arbitration secret from other borrowers -- a benefit to defendants and a clear detriment to their borrowers.
And fourth, they impose costs on plaintiffs that plaintiffs would never have in a court action -- and
which are disproportionately [**25] burdensome to the borrowers who, by dint of defendants'
marketing their loans to the heavily indebted, lack defendants' ample resources. This disproportionate burden renders the vindication of their legal rights economically infeasible.
1. The Scope of the Arbitration Obligation is One-Sided
Defendants' exception from the otherwise all-encompassing scope of the arbitration agreement
for foreclosure-related claims is enough under California case law to make the agreement unconscionably one-sided. In Stirlen, for example, the state court of appeals held that an adhesive arbitration agreement an executive employee was required to sign was unconscionable because it could
"only realistically be seen as applying primarily if not exclusively to claims . . . which are virtually
to be filed against, not by" the [employer that] imposed it." 60 Cal Rptr. 2d at 151. In Armendariz,
the Supreme Court held that an arbitration agreement was unconscionable because it required employees to arbitrate their claims against their employer without requiring their employer to arbitrate
Page 10
2002 U.S. Dist. Ct. Motions 1240, *; 2002 U.S. Dist. Ct. Motions LEXIS 8735, **
its claims against them. 6 P.3d at 691-94. While the parties would have been [**26] free to negotiate an asymmetrical agreement, the Court held, it was [*13] unconscionable for a
non-negotiated, adhesive arbitration agreement to impose non-mutual obligations on the weaker
party:
[I]n the context of an arbitration agreement imposed by the employer on the employee,
such a one-sided term is unconscionable. Although parties are free to contract for
asymmetrical remedies and arbitration clauses of varying scope . . . the doctrine of unconscionability limits the extent to which a stronger party may, through a contract of
adhesion, impose the arbitration forum on the weaker party without accepting that forum for itself.
Id. at 692 (emphasis added).
[A]n arbitration agreement imposed in an adhesive context lacks basic fairness and
mutuality if it requires one contracting party, but not the other, to arbitrate all claims
arising out of the same transaction or occurrence or series of transactions or occurrences.
Id. at 694. Accord, Mercuro, 116 Cal. Rptr. 2d at 677-78; McCoy, 104 Cal. Rptr. 2d at 509-10.
The California Court of Appeals in Flores applied [**27] this non-mutuality principle to an
adhesive arbitration agreement between a lender and a borrower. Much like the defendants' arbitration agreement here, the agreement in Flores required the borrower to arbitrate all of his claims
against the lender but reserved the lender's right to foreclose. 113 Cal. Rptr. 2d at 379. The Court
held that that this was unconscionable:
In the event of a breach by plaintiffs, HomeFirst's remedy is mandatory prepayment
and if plaintiffs do not repay the loan, then HomeFirst is allowed to sell the property. . .
. [W]hile plaintiffs are required to arbitrate "any controversy" arising out of the loan
agreement or deed of trust, HomeFirst is allowed to proceed by judicial or non-judicial
foreclosure, by self-help remedies such as set-off, and by injunctive relief to obtain appointment of a receiver.
****
. . . . Realistically, then, the mandatory arbitration provisions apply to claims of the
borrower against HomeFirst but not vice-versa. We conclude that this unilateral obligation is so one-sided as to be substantively unconscionable.
****
Page 11
2002 U.S. Dist. Ct. Motions 1240, *; 2002 U.S. Dist. Ct. Motions LEXIS 8735, **
[*14] . . . . As a practical matter, by reserving to itself the remedy [**28] of foreclosure, HomeFirst has assured the availability of the only remedy it is likely to need . .
. while plaintiffs are confined to arbitration for all purposes. . . . The clear implication is
that HomeFirst has attempted to maximize its advantage by avoiding arbitration of its
own claims.
Id. at 382-83.
Defendants' arbitration rider presents the same imbalance. It requires the plaintiffs and other
borrowers to arbitrate "any claim, dispute, or controversy. . . . arising from or relating to this
Agreement or the relationships which result from this Agreement," but carves out an exception for
actions brought by defendants to "seek and use ancillary or preliminary remedies, judicial or otherwise, for the purposes of . . . foreclosing upon any property . . . ." n7 Just like the defendant in Flores, defendants have reserved the freedom from having to arbitrate the only remedy they are likely
to need -- foreclosure -- while confining the plaintiffs to arbitration for all purposes. n8 Id. The clear
[*15] implication here, then, as it was in Flores, "is that [defendants have] attempted to maximize
[their] advantage by avoiding arbitration of [**29] [their] own claims." Id.
n7 Like the one in Flores, defendants' deed of trust provides that:
[U]pon Borrower's breach of any covenant or agreement of Borrower in this
Deed of Trust, including the covenants to pay when due any sums secured by this
Dead of Trust, Lender at Lender's option, may declare all of the sums secured by
this Deed of Trust to be immediately due and payable and without further demand and may invoke the power of sale [i.e., foreclosure] and any other remedies
permitted by applicable law.
(Reyes Decl., Ex. K)
n8 Defendants may try to argue, as the defendant did in Flores, that the foreclosure exception is bilateral because it permits the borrower to bring an action to restrain foreclosure in
response to the initiation of foreclosure by the lender. The court in Flores found the arbitration agreement unconscionably one-sided nonetheless. 113 Cal. Rptr. 2d at 383 n. 8.
The court's rejection of the point in Flores makes perfect sense. At best, the rider gives
defendants the cake (the right to foreclose outside of arbitration) and plaintiffs less than the
crumbs (the right to defend themselves when defendants foreclose). Indeed, the plaintiffs'
right to defend is illusory because, as plaintiffs are confident discovery would show, defendants foreclose only after they have determined that the borrower's finances are exhausted and
there is no way to restructure the loan. As defendants have to know, no borrower has the resources in such a case to hire a lawyer to defend against foreclosure.
But even if the right were not illusory, it would still be unconscionable. The Court noted
the difference between the two concepts in Armendariz, holding that while lack of mutuality
may not render the arbitration agreement illusory (i.e., lacking in consideration), a term as
Page 12
2002 U.S. Dist. Ct. Motions 1240, *; 2002 U.S. Dist. Ct. Motions LEXIS 8735, **
one-sided as defendants' carve-out for foreclosure, in the context of an adhesive agreement, is
unconscionable even if not illusory. 6 P.3d at 692.
[**30]
While this imbalance alone is enough to make the agreement unenforceable, other provisions
add further to its unconscionable one-sidedness.
2. The Agreement's Prohibition Against Class Actions is also One-Sided and Unconscionable
The agreement's prohibition against class actions is also unconscionably one-sided. As the District Court observed in Ting v. ATT, "[c]ase law and public policy embrace the importance of class
actions as a vital instrumentality of consumer protection," and the prohibition against class actions
in the arbitration agreements "will prevent class members from effectively vindicating their rights."
182 F. Supp. 2d at 933. n9 The prohibition is thoroughly non-mutual, the court also held, as "it is
hard to conceive of a class action suit that [the defendant] would file against its customers." Id. at
930-31.
n9 The Ting court quoted the U. S. Supreme Court on the substantial advantages of the
class action:
It may motivate [plaintiffs] to bring cases that for economic reasons might not be
brought otherwise, [thereby] vindicating the rights of individuals who otherwise
might not consider it worth the candle to embark on litigation in which the optimum result might be more than consumed by the cost . . . The financial incentive
that class actions offer . . . is a natural outgrowth of the increasing reliance on the
'private attorney general' for the vindication of legal rights . . . Where it is not
economically feasible to obtain relief within the traditional framework of a multiplicity of small individual suits for damages, aggrieved persons may be without
any effective redress unless they may employ the class-action device.
Ting, at 930 (quoting Deposit Guar. Nat'l Bank v. Roper, 445 U.S. 326, 338-39, (1980) (citations omitted)).
[**31]
Only days ago, the California Court of Appeals in Szetela v. Discover Bank reached the same conclusion about another arbitration agreement banning class actions.
[*16] There, the court addressed the issue on an interlocutory appeal taken after the arbitration had already occurred. It held:
The manifest one-sidedness of the non class action provision at issue here is blindingly
obvious.
Page 13
2002 U.S. Dist. Ct. Motions 1240, *; 2002 U.S. Dist. Ct. Motions LEXIS 8735, **
Although styled as a mutual prohibition on representative or class actions, it is difficult
to envision the circumstances under which the provision might negatively impact Discovery, because credit card companies typically do not sue their customers in class action lawsuits . . . .
. . . . By imposing this clause on its customers, Discovery has essentially granted itself a
license to push the boundaries of good business practices to their furthest limits, fully
aware that relatively few, if any, customers will seek legal remedies, and that any remedies obtained will only pertain to that single customer without collateral estoppel effect . . . .
. . . . It provides the customer with no benefit whatsoever; to the contrary, it seriously
jeopardizes customers' consumer [**32] rights by prohibiting any effective means of
litigating Discover's business practices. This is not only substantively unconscionable,
it violates public policy by granting Discover a "get out of jail free" card while compromising important consumer rights.
2002 Cal. App. LEXIS 4007, *12-15, Case No. G029323 (Cal. App. April 22, 2002). n10
n10 The Court noted further in Szetela that the clause violates public policy by wasting
the resources of the courts.
One of the policy reasons for class actions is to promote judicial economy and
streamline the litigation process in appropriate cases. To allow litigants to contract away the court's ability to use a procedural mechanism that benefits the
court system as a whole is no more appropriate than contracting away the right to
bring motions in limine, seek directed verdicts, or use other procedural devices
that allow the courts to operate in an efficient manner.
Szetela, 2002 Cal. App. LEXIS 4007 at *15.
Finally, [**33] the one-sided class action prohibition is unconscionable, also, because it is
within the reasonable expectation of the weaker party to a consumer contract that she can pursue her
rights in a class action. Keating v. Superior Court, 31 Cal.3d 584 (1982), rev'd on other grounds
sub nom. Southland Corp. v. Keating (1984) 465 U.S. 1. Where [*17] an arbitration clause is
"used to insulate the drafter of an adhesive contract from any form of class proceeding" and thus
"effectively foreclosing many individual claims," it is "oppressive and . . . defeats the reasonable
expectations of the non-drafting party." 31 Cal. 3d at 610.
Defendants' rider is plainly drafted to insulate defendants from class actions by their customers.
It is one-sided, utterly contrary to public policy, and therefore unconscionable.
Page 14
2002 U.S. Dist. Ct. Motions 1240, *; 2002 U.S. Dist. Ct. Motions LEXIS 8735, **
3. The Secrecy Required by the Rider is Yet Another Unconscionable, One-Sided Term
The requirement in the arbitration agreement "that [the arbitration] award shall be kept confidential" has similar effects and serves the same purposes as defendants' prohibition against class
actions. As the court observed in Ting:
The [**34] implications of such secrecy to society are troubling. Among many others,
they mean that if consumers obtain determinations that a particular AT&T practice is
unlawful, they are prohibited from alerting other consumers. Since the AAA does not
require the arbitrator to state reasons for the award and does not provide a public record
of arbitrator rulings, this confidentiality provision means that a contract that affects
seven million Californians will be interpreted largely without public scrutiny. This puts
AT&T in a vastly superior legal posture since as a party to every arbitration it will
know every result and be able to guide itself and take legal positions accordingly, while
each class member will have to operate in isolation and largely in the dark.
182 F. Supp. 2d at 932.
The secrecy requirement in defendants' agreement thus ensures, by prohibiting disclosure of any
award, "that any remedies obtained will only pertain to that single customer without collateral estoppel effect." Szetela, 2002 Cal. App. LEXIS 4007 at *13-14. It is "so one-sided, oppressive and
devoid of justification as to be substantively unconscionable." Ting, 182 F. Supp. 2d at 933. [**35]
[*18] 4. The Agreement's Cost Splitting Provisions -- even as Defendants' Has Offered to
Modify Them -- Are Unconscionable
The cost provisions of the arbitration rider add further to its unconscionable character. First,
they are at best uninformative. (See arbitration rider text quoted supra at 6). The borrower cannot
know what he or she is "agreeing" to pay. Second, they impose significant costs that plaintiffs
would not have in a court action.
With respect to the first problem, there is no reason to doubt the plaintiffs' assertion that when
they signed the riders that had no understanding of what it would mean to arbitrate claims rather
than bring them in court (Reyes Decl. P 10; Alexander Decl. P 6; Byers Decl. P 6), much less familiarity with the methods of pricing among the three arbitration agencies identified in the rider,
whose fees (counsel discovered upon investigation) can vary depending on the value of the asserted
claim. (Siskind Decl. at P 18) The rider itself, other than planting the misleading figure of $ 100 in
the borrower's mind, is totally uninformative. Compare Ting, 182 F. Supp. 2d at 934 (observing that
cost information [**36] was not available to defendant's customers when they were given the arbitration agreement.)
Even if the plaintiffs had been able to calculate the costs of arbitration when they closed their
loans and signed the riders, the requirement that they split the costs of with the defendants would
still be enough, under Circuit City, to make the riders unenforceable. Circuit City, 279 F.3d at 894
(citing Cole v. Burns Intern. Security Svcs., 323 U.S. App. D.C. 133, 105 F.3d 1465 (D.C. Cir.
1997)). The District Court in Ting, 182 F. Supp. 2d at 934-35, and the California Court of Appeals
in McCoy, 104 Cal. Rptr. 2d at 508, also held that imposing arbitration costs on the plaintiffs is un-
Page 15
2002 U.S. Dist. Ct. Motions 1240, *; 2002 U.S. Dist. Ct. Motions LEXIS 8735, **
conscionable. And, the Court in Armendariz held, while outside the precise rubric of unconscionability, that "the arbitration agreement or arbitration process cannot generally require the [plaintiff] to
bear any type of expense that [she] would not be required to bear if [she] were free to bring the action in court." 6 P.3d at 685; accord, Mercuro, 116 Cal. Rptr. 2d at 681. In any event, the costs
[**37] are disproportionately burdensome to the borrowers who, [*19] by dint of defendants'
marketing their loans to the heavily indebted, lack the defendants' almost unlimited resources. Since
the cost provisions make plaintiffs liable to pay substantial fees that they would not bear in a court
action (at least $ 4,000, according to their counsel, Siskind Decl. at 16), they render the arbitration
agreement unconscionable.
Defendants' willingness to modify the rider after the fact does not cure the defect. First, under
the proposed new arrangement, plaintiffs would still face the risk that they will be liable for the
costs if they lose the arbitration; and this, according to Mercuro, remains unacceptable:
Back-loading this cost to the employee, does not solve the problem the Supreme Court
was addressing in Armendariz: "the risk that the claimant may have to bear substantial
costs" to have his statutory claims adjudicated. Such a system still poses a significant
risk that employees will have to bear large costs to vindicate their statutory right
against workplace discrimination, and therefore chills the exercise of that right.
Mercuro, 116 Cal. Rptr. 2d at 681. [**38]
Second, an after-the-fact modification cannot save an agreement that was unconscionable when
signed. Armendariz held such an offer ineffective as "at most, an offer to modify the contract; an
offer that was never accepted." 6 P.3d at 697. "No existing rule of contract law permits a party to
resuscitate a legally defective contract merely by offering to change it." Id.; accord, Mercuro, 116
Cal. Rptr. 2d at 682.
III. The Arbitration Clause is Also Unenforceable Because it Requires Plaintiffs to Waive
State Statutory Rights Right to Bring A Class Action and/or a Representative Action
The Supreme Court in Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20, 26 (1991), held
that "[b]y agreeing to arbitrate a statutory claim, [an employee] does not forgo the substantive rights
afforded by the statute; [he] only submits to their resolution in an arbitral, rather than a judicial forum." The Court thus recognized that the arbitral forum must allow the employee to adequately
pursue statutory rights. Id. at 28.
[*20] Courts since Gilmer have interpreted this holding to require basic procedural [**39]
and remedial protections before a dispute can be sent to arbitration. Armendariz, 6 P.3d at 682 (citing Cole, 105 F.3d at 1382). Defendants' arbitration fails to satisfy at least two of these.
First, the prohibition against class actions, joinder or consolidation of claims requires plaintiffs
to waive their statutory right under CLRA § 1781 (a) to bring their consumer claims on a class action basis. Indeed, under CLRA § 1750, that right is not waivable. The prohibition also requires
plaintiffs to waive their right to bring their action as a representative action under UCA § 17200. It
thereby denies plaintiffs a remedial tool that the legislature deemed critical to the protection of
consumer rights. These are tools, moreover, without which it is economically infeasible for plain-
Page 16
2002 U.S. Dist. Ct. Motions 1240, *; 2002 U.S. Dist. Ct. Motions LEXIS 8735, **
tiffs to vindicate their claims. (See, Reyes Decl PP 10-11; Alexander Decl. PP 6-7; Byers Decl PP
6-7; Siskind Decl. PP 12-16; Expert Declaration of James C. Sturdevant with Renuart Report attached as Exhibit C.)
The second failure under Gilmer is the splitting of arbitration costs. An arbitration agreement
may not permissibly require claimants to pay unreasonable [**40] arbitration fees or expenses as a
condition of access to the arbitration forum. Circuit City, 279 F.3d at 894; Amendariz, 6 P.3d at
685; Mercuro, 116 Cal. Rptr. 2d at 681; McCoy, 104 Cal Rptr. 2d at 508; Ting, 182 F. Supp. 2d at
934-35. The fees likely to be charged to arbitrate plaintiffs' claims are unreasonable under Gilmer.
As plaintiffs' counsel have determined, they are estimated to be at least $ 4,000. (Siskind Decl. P
16) Plaintiffs substantiate in their declarations that they cannot afford to pay this (Reyes Decl. P 11;
Alexander Decl. P 7; Byers Decl. P 7), and will be unable pursue their claims if they are required to
do so. (Reyes Decl. P 10; Alexander Decl. P 6; Byers Decl. P 6) n11
n11 It is not clear that the arbitration rules allow for adequate discovery, another of the
minimal requirements of the arbitral forum required by Gilmer. The California Supreme
Court held in Armendariz that "although the employees are correct that they are entitled to
sufficient discovery as a means of vindicating their . . . claims, we hold that the employer, by
agreeing to arbitrate [their] claims, has already impliedly consented to [sufficient discovery]."
6 P.3d at 683-84.
[**41]
[*21] IV. Since Unconscionable and Illegal Terms Pervade the Agreement, Severance is
Unwarranted.
The offending provisions of the rider pervade the agreement, and so taint it with illegality that
severance is impossible. Armendariz, 6 P.3d at 696-99; Mercuro, 116 Cal. Rptr. 2d at 683-84;
McCoy, 104 Cal. Rptr. 2d at 510-11; Ting, 182 F. Supp. at 934. The non-mutual scope of arbitration, the prohibition against class actions, the confidentiality requirement and the cost provisions are
all one-sided, oppressive, and therefore unconscionable. Removing them all would require the rewriting of the contract, which is beyond even the discretionary authority of the Court. Armendariz,
6 P. 3d 696-99 (citing Kolani v. Gluska, 75 Cal. Rptr. 2d at 157) (the power to reform is limited to
instances in which parties make mistakes, not to correct illegal provisions); Ting, 182 F. Supp. at
935.
Indeed, the compounding effect of multiple unconscionable terms "indicate[s] a systematic effort to impose arbitration on [the plaintiffs and other borrowers] not simply [**42] as an alternative to litigation, but as an inferior forum that works to [defendants'] advantage." Armendariz, 6
P.3d at 696-97; Ting, 182 F. Supp. 2d at 935; Mercuro, 116 Cal. Rptr. 2d at 682, 683-84. Since the
agreement therefore has no lawful object, the Court should simply refuse to enforce it. See Cal. Civ.
Code § 1550.
V. The Motion Should Be Denied, Or Alternatively, Decision Stayed Pending Discovery And
Trial
On the record presented with this opposition, defendant's motion can and should be denied.
Plaintiffs believe that they have assembled sufficient evidence to support this result even without
Page 17
2002 U.S. Dist. Ct. Motions 1240, *; 2002 U.S. Dist. Ct. Motions LEXIS 8735, **
benefit of formal discovery. (As counsel's Rule 26(f) meeting is not scheduled until June 4, 2002,
discovery has not yet commenced.)
Should the Court deem the record insufficient, however, then plaintiffs are entitled under the
FAA to a trial on the issue of whether the arbitration agreements were unconscionable, 9 U.S.C. § 4.
In such case, plaintiffs would request a trial, along with [*22] time for discovery on the issues to
be tried. While it is not possible in advance of defendants' reply to identify [**43] precisely what
factual issues will remain disputed, plaintiffs are prepared to proceed with discovery to amplify the
record as necessary. Absent defendants' agreement on the facts, issues for discovery could include:
the formulation of the arbitration rider at the end of 1999, defendants' policies and practices with
respect to its execution by their customers, defendants' practices with respect to court action, foreclosure and/or other remedies for their borrowers' breaches, the nature and frequency of court actions before the introduction of the riders, court actions since that time, and arbitrations since introduction of the riders, the average duration and/or cost entailed in the pursuit of such arbitrations,
and any other matters shown relevant by the Court's ruling on the defendants' motion.
Dated this 30th day of April 2002.
/s/ Sarah E. Siskind
Sarah E. Siskind
Miner, Barnhill & Galland