Brown v. Tennessee Title Loans Inc.

Decision Date04 October 2006
Citation216 S.W.3d 780
PartiesDawn BROWN, et al. v. TENNESSEE TITLE LOANS, INC.
CourtTennessee Court of Appeals

James R. Kennamer, Chattanooga, Tennessee, for the Appellants, Dawn Brown, Anne Devries, Carly Hahn, Greg Walton, and others similarly situated who have or had a Title Pledge Loan under T.C.A. § 45-15-111 with the Defendant and have made payments of interest and/or fees within the year preceding the filing of the complaint and thereafter.

J. Bartlett Quinn and Charles D. Lawson, Chattanooga, Tennessee, for the Appellee Tennessee Title Loans, Inc.

OPINION

D. MICHAEL SWINEY, J., delivered the opinion of the court, in which HERSCHEL P. FRANKS, P.J., and SHARON G. LEE, J., joined.

This interlocutory appeal involves a potential class action lawsuit filed by four named plaintiffs against Tennessee Title Loans, Inc. ("Defendant"). The plaintiffs asserted various claims, including a violation of the Tennessee Title Pledge Act, Tenn.Code Ann. § 45-15-101, et seq., and the Tennessee Consumer Protection Act, Tenn.Code Ann. § 47-18-101, et seq. Defendant moved to stay these judicial proceedings and to compel arbitration, relying on identical arbitration clauses contained within the title pledge agreements signed by all four named plaintiffs. The plaintiffs resisted the motion to compel arbitration arguing, among other things, that the arbitration clauses were unconscionable because the clauses reserved only to Defendant the right to a judicial forum. The Trial Court determined that the arbitration clauses were not unconscionable and granted Defendant's motion to compel arbitration. We reverse.

Background

The complaint in this case was filed by Dawn Brown, Anne Devries, Carly Hahn, and Greg Walton ("Plaintiffs"), individually, and on behalf of all other Tennessee residents similarly situated. The putative class comprised all individuals who were customers and borrowers of Defendant within the past one year. In general terms, Plaintiffs claim Defendant charged interest in excess of the statutory maximum amount and/or charged a "redemption premium fee" in excess of that allowed by the Tennessee Title Pledge Act, Tenn. Code Ann. § 45-15-101, et seq. Plaintiffs brought claims pursuant to the Tennessee Title Pledge Act and the Tennessee Consumer Protection Act, Tenn.Code Ann. § 47-18-101, et seq. Plaintiffs sought compensatory and punitive damages.

Defendant filed a motion to stay the judicial proceedings and to compel arbitration. Defendant relied on arbitration clauses contained within each of the contracts signed by the named Plaintiffs. The arbitration clauses provide as follows:

Arbitration Provision. Any and all disputes or disagreements between the parties arising out of this Agreement or any prior agreement between them (save and except the Lender's rights to enforce the Pledgor(s)' payment obligations, in the event of default, by judicial or other process) shall be decided by arbitration and in accordance with the procedural rules of the American Arbitration Association as presently published and existing. The parties agree to be bound by the decision of the arbitrator(s). The arbitration proceeding shall be a condition precedent to any other court proceeding and shall take place in Davidson County, Tennessee. Notwithstanding the applicability of any other law to any other provision of this Agreement, the Federal Arbitration Act ... shall control the construction, interpretation, and application of this paragraph. Any issue as to whether this Agreement is subject to arbitration shall be determined by the arbitrator.

Plaintiffs responded to the motion to compel arbitration claiming, among other things, that the arbitration clause was unconscionable because it reserved only to Defendant the right to a judicial forum in the event of default while limiting Plaintiffs solely to arbitration. Plaintiffs claimed that because the arbitration clause was unconscionable, it also was unenforceable pursuant to the Tennessee Supreme Court's majority opinion in Taylor v. Butler, 142 S.W.3d 277 (Tenn.2004).

The Trial Court entered an order granting Defendant's motion to compel arbitration after determining that the arbitration clause did not run afoul of Taylor v. Butler. Plaintiffs subsequently filed an application for permission to file an interlocutory appeal with the Trial Court. The Trial Court granted Plaintiffs' motion, stating, in part, as follows:

The plaintiffs assert that the subject arbitration provision applicable in this case reserves the right of Tennessee Title to choose a judicial or arbitral forum and restricted the putative class members to only an arbitral forum. The plaintiffs contend that this Court's Order [upholding the validity of the arbitration clause] is in direct contravention of the precedent set by Taylor v. Butler, 142 S.W.3d 277 (Tenn.2004).

Therefore, the Court has given consideration to the elements of Rule 9 of the Tennessee Rules of Appellate Procedure. ... [After giving] consideration to these matters, it is the findings of this Court that

1. Forcing arbitration in this matter will be a deterrent to the Plaintiffs pursuing their claims and that review upon entry of final judgment is, and will be, ineffective;

2. Reversal would prevent the need for needless, extensive, and protracted arbitrations, as a reversal would probably lead to class certification under Rule 23 of the Tennessee Rules of Civil Procedure; and

3. There is a need to develop a uniform body of law as to the enforceability of such arbitration provisions as well as a need to determine whether this Court's Memorandum Order conflicts with the ruling in Taylor.

We granted Plaintiffs' request for a Tenn. R.App. P. 9 interlocutory appeal on the "sole issue of whether the Trial Court's Memorandum Opinion of February 8, 2006 ... was in conflict with Taylor v. Butler, 142 S.W.3d 277 (Tenn.2004), and if so, was that error by the Trial Court." To these two questions contained in the sole issue before us, we answer "yes" and "yes."

Discussion

The issue of whether an arbitration clause is unconscionable is a question of law. See Taylor v. Butler, 142 S.W.3d 277, 284-85 (Tenn.2004)(citing Lewis Refrigeration Co. v. Sawyer Fruit, Vegetable & Cold Storage Co., 709 F.2d 427, 435 n. 12 (6th Cir.1983)). Our review of legal issues is conducted "under a pure de novo standard of review, according no deference to the conclusions of law made by the lower courts." Southern Constructors, Inc. v. Loudon County Bd. Of Educ., 58 S.W.3d 706, 710 (Tenn.2001).

In Taylor v. Butler, 142 S.W.3d 277 (Tenn.2004), our Supreme Court discussed the validity of an arbitration clause contained in a contract titled "As Is Used Vehicle Retail Buyers Order." Id. at 280. As in this case now before us, the arbitration clause in Taylor provided that it was to be governed by the Federal Arbitration Act, 9 U.S.C. § 2. The arbitration clause in Taylor applied to "all claims, demands, disputes or controversies of every kind or nature between [the parties] arising from the [sale of the vehicle]." Id. at 282. However, the arbitration clause further provided that the automobile dealer "may pursue recovery of the vehicle under the Tennessee Uniform Commercial Code and Collection of Debt due by state court action." Id. at 284. In deciding whether the arbitration clause at issue in that case was enforceable, the Taylor Court pointed out that under the Federal Arbitration Act ("FAA"), States are able to regulate the validity of arbitration agreements under general contract law principles. According to the Court:

In determining whether there is a valid agreement to arbitrate, "courts generally ... should apply ordinary state-law principles that govern formation of contracts," First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938, 944, 115 S.Ct. 1920, 131 L.Ed.2d 985 (1995). As the United State Supreme Court noted in Allied-Bruce Terminix Cos. v. Dobson:

Section 2 [of the FAA] gives States a method for protecting consumers against unfair pressure to agree to a contract with an unwanted arbitration provision. States may regulate contracts, including arbitration clauses, under general contract law principles and they may invalidate an arbitration clause "upon such grounds as exist at law or in equity for the revocation of any contract." 9 U.S.C. § 2.

513 U.S. 265, 281, 513 U.S. 265, 115 S.Ct. 834, 130 L.Ed.2d 753 (1995). "[G]enerally applicable contract defenses, such as fraud, duress, or unconscionability, may be applied to invalidate arbitration agreements without contravening" the enforcement provisions of the FAA. Doctor's Assoc., Inc. v. Casarotto, 517 U.S. 681, 687, 116 S.Ct. 1652, 134 L.Ed.2d 902 (1996).

Taylor v. Butler, 142 S.W.3d at 284.

Having determined that state law contract principles such as fraud and unconscionability or the like can be used to invalidate an arbitration clause governed by the FAA, the Taylor Court then proceeded to decide whether the arbitration clause at issue in that particular case was unenforceable in light of Tennessee contract law. The Court stated:

While Tennessee has yet to address the issue of whether an arbitration provision in a consumer contract which reserves a right to access to the courts only for the merchant and not the consumer is voidable on the basis of unconscionability, a number of other jurisdictions have addressed such one-sided arbitration provisions.

For example, the Supreme Court of West Virginia held that:

[W]here an arbitration agreement entered into as part of a consumer loan transaction contains a substantial waiver of the borrower's rights, including access to the courts, while preserving the lender's right to a judicial forum, the agreement is unconscionable and, therefore, void and unenforceable as a matter of law.

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