Tillman v. Commercial Credit Loans, Inc., COA05-924.

• Decision Date: 06 June 2006
• Docket Number: No. COA05-924.,COA05-924.
• Court: North Carolina Court of Appeals
• Parties: Fannie Lee TILLMAN and Shirley Richardson, on behalf of themselves and all others similarly situated, Plaintiffs, v. COMMERCIAL CREDIT LOANS, INC., Commercial Credit Corporation, Citigroup, Inc., Citicorp, Inc., CitiFinancial, Inc., and CitiFinancial Services, Inc., Defendants.

629 S.E.2d 865

Fannie Lee TILLMAN and Shirley Richardson, on behalf of themselves and all others similarly situated, Plaintiffs, v. COMMERCIAL CREDIT LOANS, INC., Commercial Credit Corporation, Citigroup, Inc., Citicorp, Inc., CitiFinancial, Inc., and CitiFinancial Services, Inc., Defendants.

No. COA05-924.

Court of Appeals of North Carolina.

June 6, 2006.

COPYRIGHT MATERIAL OMITTED

Appeal by defendants from orders entered 28 September 2004 and 20 January 2005 by Judge Ronald L. Stephens in Vance County Superior Court. Heard in the Court of Appeals 15 March 2006.

Jones Martin Parris & Tessener Law Offices, P.L.L.C., by John Alan Jones and G. Christopher Olson, Raleigh, for plaintiffs-appellees.

Moore & Van Allen, PLLC, by Jeffrey M. Young, and Rogers & Hardin LLP, by Richard H. Sinkfield and Christopher J. Willis, Atlanta, Georgia, pro hac vice, Morrisville, for defendants-appellants.

Ellis & Winters LLP, by Matthew W. Sawchak, Raleigh, for Amicus Curiae American Financial Services Association.

Wallace & Graham, P.A., by Mona Lisa Wallace and John S. Hughes, and The Jackson Law Group, PLLC, by Gary W. Jackson, Greensboro, for Amicus Curiae The North Carolina Academy of Trial Lawyers.

Carlene McNulty, for Amicus Curiae North Carolina Justice Center.

Mallam J. Maynard, for Amicus Curiae Financial Protection Law Center.

Richard Frankel and F. Paul Bland, Jr., for Amicus Curiae Trial Lawyers for Public Justice, Washington, D.C.

TYSON, Judge.

Commercial Credit Loans, Inc., Commercial Credit Corporation, Citigroup, Inc., Citicorp, Inc., Citifinancial, Inc., and Citifinancial Services, Inc. (collectively, "defendants") appeal from order entered 20 January 2005 denying defendants' motion to compel arbitration, and from order entered 28 September 2004 denying in part defendants' motion to compel and granting in part Fannie Lee Tillman's and Shirley Richardson's, on behalf of all others similarly situated (collectively, "plaintiffs"), motion for protective order. We reverse and remand.

I. Background

Plaintiffs are North Carolina borrowers who obtained financing from or through defendant Commercial Credit Loans, Inc. ("Commercial Credit"). Plaintiffs asserted a class action suit against defendants in the Vance County Superior Court in June 2002 and alleged defendants acted unlawfully in connection with mortgage loans defendants made to plaintiffs. Plaintiffs complain Commercial Credit sold them single premium credit insurance they did not need or want without disclosing such insurance was optional, and that Commercial Credit was the beneficiary of the policies.

Credit insurance was purchased by plaintiffs in connection with their mortgage loans and benefits are paid to the lender if a covered event occurs. Credit insurance coverages include: (1) credit life, which pays off the loan in the event of the borrower's death; (2) credit disability, which makes the monthly mortgage payments if the borrower becomes disabled; and (3) credit involuntary unemployment, which makes the monthly mortgage payments if the borrower becomes involuntarily unemployed. Single premium credit insurance requires the borrower to pay the entire expected term of coverage at the time the mortgage loan is closed. The up-front premium is financed as a part of the loan.

Plaintiffs' loan agreements contain an arbitration provision. The provision is contained in an outlined box with the heading:

"READ THE FOLLOWING ARBITRATION PROVISION CAREFULLY. IT LIMITS CERTAIN OF YOUR RIGHTS, INCLUDING YOUR RIGHT TO OBTAIN REDRESS THROUGH COURT ACTION."

The arbitration provision provides:

Upon written request by either party that is submitted according to the applicable rules for arbitration, any Claim, except those specified below in this Provision, shall be resolved by binding arbitration in accordance with (i) the Federal Arbitration Act; (ii) the Expedited Procedures of the Commercial Arbitration Rules of the American Arbitration Association ("Administrator"); and (iii) this Provision, unless we both agree in writing to forego arbitration.

This provision excludes two types of claims from arbitration: (1) "Any action to effect a foreclosure to transfer title to the property being foreclosed;" and (2) "Any matter where all parties seek monetary damages in the aggregate of $15,000 or less in total damages (compensatory and punitive), costs, and fees." The provision further provides:

No Class Actions/No Joinder of Parties. You agree that any arbitration proceeding will only consider Your Claims. Claims by or on behalf of other borrowers will not be arbitrated in any proceeding that is considering Your Claims. Similarly, You may not join with other borrowers to bring Claims in the same arbitration proceeding, unless all of the borrowers are parties to the same Credit Transaction.

The arbitration provision requires the party initiating the arbitration to pay the first $125.00 toward arbitration costs. Commercial Credit agreed to pay "all other costs for the arbitration proceeding up to a maximum of one day (8 hours) of hearings." It further provides, "All costs of the arbitration proceeding that exceed one day of hearings will be paid by the non-prevailing party."

The arbitration agreements gives either party the right to appeal the arbitrator's award to a three-arbitrator panel "which shall reconsider de novo any aspect of the initial award requested by the appealing party." The appealing party is required to pay the costs of initiating the appeal. The non-prevailing party is required to pay all costs, fees, and expenses of the appeal and may be required to reimburse the prevailing party for the cost of initiating the appeal.

Defendants filed a motion to compel arbitration in the Vance County Superior Court and was heard on 16 December 2004. The trial court made findings of fact and conclusions of law and denied defendants' motion. Defendants appeal.

II. Issues

Defendants argue the trial court erred by: (1) concluding plaintiffs could avoid the agreements to arbitrate because of the alleged costs of arbitration; (2) concluding the parties' arbitration agreements were unenforceable because it precludes class actions; and (3) imposing a "mutuality" requirement on arbitration agreements that does not exist under North Carolina law.

III. Standard of Review

An order denying defendants' motion to compel arbitration is not a final judgment and is interlocutory. However, an order denying arbitration is immediately appealable because it involves a substantial right, the right to arbitrate claims, which might be lost if appeal is delayed. Burke v. Wilkins, 131 N.C.App. 687, 688, 507 S.E.2d 913, 914 (1998).

A dispute can only be settled by arbitration if a valid arbitration agreement exists. The party seeking arbitration must show that the parties mutually agreed to arbitrate their disputes. The trial court's findings regarding the existence of an arbitration agreement are conclusive on appeal where supported by competent evidence, even where the evidence might have supported findings to the contrary. However, the trial court's determination of whether a dispute is subject to arbitration is a conclusion of law that is reviewable de novo on appeal.

Revels v. Miss Am. Org., 165 N.C.App. 181, 188-89, 599 S.E.2d 54, 59 (quoting Slaughter v. Swicegood, 162 N.C.App. 457, 461, 591 S.E.2d 577, 580 (2004)) (internal citations and quotations omitted), disc. rev. denied, 359 N.C. 191, 605 S.E.2d 153 (2004).

IV. Enforceability of Arbitration Agreements

"North Carolina has a strong public policy favoring arbitration." Red Springs Presbyterian Church v. Terminix Co., 119 N.C.App. 299, 303, 458 S.E.2d 270, 273 (1995). "The essential thrust of the Federal Arbitration Act, which is in accord with the law of our state, is to require the application of contract law to determine whether a particular arbitration agreement is enforceable; thereby placing arbitration agreements `upon the same footing as other contracts.'" Futrelle v. Duke University, 127 N.C.App. 244, 247-48, 488 S.E.2d 635, 638 (quoting Doctor's Associates, Inc. v. Casarotto, 517 U.S. 681, 687, 116 S.Ct. 1652, 134 L.Ed.2d 902, 909 (1996)), disc. rev. denied, 347 N.C. 398, 494 S.E.2d 412 (1997).

"The interpretation of the terms of an arbitration agreement are governed by contract principles and parties may specify by contract the rules under which arbitration will be conducted." Trafalgar House Construction v. MSL Enterprises, Inc., 128 N.C.App. 252, 256, 494 S.E.2d 613, 616 (1998). As a general rule, "[p]ersons entering contracts of insurance, like other contracts, have a duty to read them and ordinarily are charged with knowledge of their contents." Nationwide Mut. Insur. Co. v. Edwards, 67 N.C.App. 1, 8, 312 S.E.2d 656, 661 (1984).

Plaintiffs argue they are not bound by the provisions of the agreements to arbitrate because they are unconscionable. Unconscionability is an affirmative defense and the party asserting the defense bears the burden of proof. Rite Color Chemical Co. v. Velvet Textile Co., 105 N.C.App. 14, 20, 411 S.E.2d 645, 649 (1992). In assessing unconscionability, a court is to consider "all the facts and circumstances of a particular case." Brenner v. School House, Ltd., 302 N.C. 207, 213, 274 S.E.2d 206, 210 (1981). This Court has previously held that "to find unconscionability there must be an absence of meaningful choice on part of one of the parties [procedural unconscionability] together with contract terms which are unreasonably favorable to the other [substantive unconscionability]." Rite Color Chemical Co., 105 N.C.App. at 20, 411 S.E.2d at 649 (quoting Martin v. Sheffer, 102 N.C.App. 802, 805, 403 S.E.2d 555, 557 (1991)) (emphasis in original).

Procedural unconscionability involves `bargaining naughtiness' in the formation of the contract, i.e., fraud, coercion, undue influence, misrepresentation, inadequate disclosure. Substantive unconscionability ... involves the...