Arnold v. United Companies Lending Corp.

• Decision Date: 11 December 1998
• Docket Number: No. 25053.,25053.
• Citation: 204 W.Va. 229,511 S.E.2d 854
• Court: West Virginia Supreme Court
• Parties: Orville ARNOLD and Maxine Arnold Plaintiffs, v. UNITED COMPANIES LENDING CORPORATION, a corporation, and Michael T. Searls, an individual, Defendants.

511 S.E.2d 854

204 W.Va. 229

Orville ARNOLD and Maxine Arnold Plaintiffs, v. UNITED COMPANIES LENDING CORPORATION, a corporation, and Michael T. Searls, an individual, Defendants.

No. 25053.

Supreme Court of Appeals of West Virginia.

Submitted September 16, 1998.

Decided December 11, 1998.

Daniel F. Hedges, Esq., Mountain State Justice, Inc., Charleston, West Virginia, Attorney for Plaintiffs.

W. Michael Moore, Esq., Rita Massie Biser, Esq., Kay, Casto, Chaney, Love & Wise, Charleston, West Virginia, Attorneys for Defendant United Companies Lending Corporation.

McCUSKEY, Justice:

This Court is presented with three certified questions from the Circuit Court of Lincoln County. In the action before the circuit court, the plaintiffs, Orville Arnold and Maxine Arnold, seek declaratory and other relief against the defendants, United Companies Lending Corporation (hereinafter "United Lending") and Michael Searls. The Arnolds contend that an arbitration agreement, which they signed as part of a loan transaction, is void and unenforceable on several grounds. The relevant issues concern the validity of an arbitration agreement in the context of a consumer loan and the duties of loan brokers to prospective borrowers. Specifically, the certified questions state:

1. Whether a circuit court, upon being presented with a consumer credit contract requiring compulsory arbitration, should bifurcate the proceedings or otherwise make an initial determination as to the validity of the compulsory arbitration clause prior to proceeding with the remainder of the underlying substantive issues in the case.

2. Whether this compulsory arbitration clause in the context of a form document signed by a consumer in a consumer credit context which contains substantial waiver of substantive rights while preserving to the creditor a judicial forum is so one-sided as to be void as a matter of law.

3. Whether a loan broker owes a fiduciary duty to prospective borrowers (a) to provide a written agreement describing the services and agreements between them, (b) to give them an opportunity to consider and cancel the agreement, (c) to inform them of the cost of the broker's services, (d) to disclose the loan options and risks available to them, and (e) to act as an agent of the borrower and not of the lender.

The circuit court answered each of these questions in the affirmative.

I. Factual and Procedural Background

On September 17, 1996, Michael Searls came to the residence of Orville and Maxine Arnold, an elderly couple living in Lincoln County, West Virginia. Searls offered to arrange a loan for the Arnolds, acting as a loan broker. At the conclusion of this encounter, the Arnolds paid Searls $50.00 to begin processing their loan.¹

Thereafter, Searls procured a loan for the Arnolds from United Lending, and on October 18, 1996, the loan closing occurred. Out of the loan proceeds, a mortgage broker fee of $940.00 was paid to Searls and/or Accent Financial Services, with which Searls is affiliated.

At the loan closing, United Lending had the benefit of legal counsel, while the Arnolds apparently did not. During the course of the transaction, the Arnolds were presented with more than twenty-five documents to sign. Among these documents were a promissory note, reflecting a principal sum of $19,300.00 and a yearly interest rate of 12.990%; a Deed of Trust, giving United Lending a security interest in the Arnolds' real estate; and a two-page form labeled "Acknowledgment and Agreement to Mediate or Arbitrate." It is this arbitration agreement that is at the center of the parties' dispute.

The arbitration agreement stated, in ordinary type, that "all ... legal controversies [that are not resolved by mediation] ... relating to the extension of credit (the `Loan') by Lender to Borrower ... including ... the validity and construction of this arbitration provision shall be resolved solely and exclusively by arbitration." "In addition, the agreement conspicuously stated in all capital letters:

THE ARBITRATION WILL TAKE THE PLACE OF ANY COURT PROCEEDING INCLUDING A TRIAL BEFORE A JUDGE AND JURY DAMAGES SHALL BE LIMITED TO ACTUAL AND DIRECT DAMAGES AND SHALL IN NO EVENT INCLUDE CONSEQUENTIAL, PUNITIVE, EXEMPLARY OR TREBLE DAMAGES AS TO WHICH BORROWER AND LENDER EXPRESSLY WAIVE ANY RIGHT TO CLAIM TO THE FULLEST EXTENT PERMITTED BY LAW.

Returning to regular type, the agreement continued: "The award rendered by the arbitration shall be final, nonappealable and judgment may be entered upon it ... in any court having jurisdiction," and the "arbitration proceedings are confidential." However, application of the agreement was expressly limited by the following language:

[T]his Agreement to ... arbitrate shall not apply with respect to either (i) the Lender's right ... to submit and to pursue in a court of law any actions related to the collection of the debt; (ii) foreclosure proceedings..., proceedings pursuant to which Lender seeks a deficiency judgment, or any comparable procedures allowed under applicable law pursuant to which a lien holder may acquire title to the Property which is security for this loan and any related personal property ... upon a default by the Borrower under the mortgage loan documents; or (iii) an application by or on behalf of the Borrower for relief under the federal bankruptcy laws of [sic] any other similar laws of general application for the relief of debtors ....²

Sometime between January and May of 1997, the Arnolds paid off their loan from United Lending. Although this Court is cognizant of the seeming inconsistency between the Arnolds' repayment of that loan and their maintenance of a lawsuit against United Lending, this matter is before us upon only a limited record for the resolution of certified questions. Thus, we must presume, despite the fact that the loan has been repaid, that some controversy remains before the circuit court.

On July 10, 1997, the Arnolds filed suit against United Lending and Searls, seeking, inter alia, a declaratory judgment adjudging the arbitration agreement to be void and unenforceable. On August 11, 1997, United Lending moved to dismiss the entire action, with prejudice, on the basis of the compulsory arbitration agreement. On September 19, 1997, United Lending filed a notice of withdrawal of its motion to dismiss. On or about September 22, 1997, the Arnolds moved for partial summary judgment against United Lending, seeking a declaratory judgment that the "arbitration clause" is void and unenforceable. As result of United Lending's motion to dismiss and the Arnolds' motion for partial summary judgment, the circuit court certified the above questions to this Court. See W. Va.Code § 58-5-2 (1998).

II. Standard of Review

In Syllabus Point 1 of Gallapoo v. Wal-Mart Stores, Inc., 197 W.Va. 172, 475 S.E.2d 172 (1996), this Court held: "The appellate standard of review of questions of law answered and certified by a circuit court is de novo." Accord King v. Lens Creek Ltd. Partnership, 199 W.Va. 136, 140, 483 S.E.2d 265, 269 (1996).

III. Discussion

A. Certified Question One

Certified question one, as formulated by the circuit court, presents the following query:

Whether a circuit court, upon being presented with a consumer credit contract requiring compulsory arbitration, should bifurcate the proceedings or otherwise make an initial determination as to the validity of the compulsory arbitration clause prior to proceeding with the remainder of the underlying substantive issues in the case.

After careful review and deliberation, this Court concludes that certified question one, as formulated by the circuit court, is unnecessary to the decision of this case. To the extent that certified question one involves the issue of the validity of the arbitration agreement, that issue is fully addressed by certified question two, which we answer below. "`In a certified case, this Court will not consider certified questions not necessary to a decision of the case.' Syllabus Point 6, West Virginia Water Serv. Co. v. Cunningham, 143 W.Va. 1, 98 S.E.2d 891 (1957), Syllabus Point 7, Shell v. Metropolitan Life Ins. Co., 181 W.Va. 16, 380 S.E.2d 183 (1989)." Syl. pt. 5, Anderson v. Moulder, 183 W.Va. 77, 394 S.E.2d 61 (1990). Therefore, we dispense with certified question one without further discussion.

B. Certified Question Two

In considering certified question two, this Court finds it necessary to reframe the issue, at the outset, so that we can fully address the law that is involved.³ We reformulate the question as follows:

Whether an arbitration agreement entered into as part of a consumer loan transaction containing a substantial waiver of the consumer's rights, including access to the courts, while preserving for all practical purposes the lender's right to a judicial forum, is void as a matter of law.

The Arnolds argue that the arbitration agreement is void as a matter of law on the grounds that it is (1) unconscionable, (2) a contract of adhesion, and (3) contravenes public policy. For its counterargument, United Lending avers, in essence, that the waiver and reservation of rights which the agreement purports to effect are lawful and do not render the agreement unconscionable nor legally void.⁴

"Unconscionability" is a general contract law principle, based in equity,⁵ which is deeply ingrained in both the statutory and decisional law of West Virginia. Of particular importance to this case are the provisions contained in the West Virginia Consumer Credit and Protection Act, W. Va.Code § 46A-1-101 et seq. (hereinafter "CCPA"), which were specifically designed to eradicate unconscionability in consumer transactions. W. Va.Code § 46A-2-121 (1996) of the CCPA provides, in relevant part:

(1) With respect to a transaction which is or gives rise to a consumer credit sale, consumer lease or consumer loan, if the court as a matter of law finds:

(a) The agreement or transaction to have been

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