Coady v. Cross Country Bank

• Citation: 729 N.W.2d 732,2007 WI App 26
• Decision Date: 25 January 2007
• Docket Number: No. 2005AP2770.,2005AP2770.
• Parties: Angeline COADY, Sharon Johnson, Janice Kask, Sue Lubnow, Patrick Peterson, Lori Peterson, Robert Peterson, Richard Steeves, Stacia Stokes and Richard Kask on Behalf of Himself and All Others Similarly Situated, Plaintiffs-Respondents, v. CROSS COUNTRY BANK, Inc. and Applied Card Systems, Inc., Defendants-Appellants.<SMALL><SUP>†</SUP></SMALL>
• Court: Court of Appeals of Wisconsin

729 N.W.2d 732

2007 WI App 26

Angeline COADY, Sharon Johnson, Janice Kask, Sue Lubnow, Patrick Peterson, Lori Peterson, Robert Peterson, Richard Steeves, Stacia Stokes and Richard Kask on Behalf of Himself and All Others Similarly Situated, Plaintiffs-Respondents, v. CROSS COUNTRY BANK, Inc. and Applied Card Systems, Inc., Defendants-Appellants.^†

No. 2005AP2770.

Court of Appeals of Wisconsin.

Submitted on Briefs October 9, 2006.

Opinion Filed January 25, 2007.

On behalf of the defendants-appellants, the cause was submitted on the briefs of Edward J. Heiser, Jr., and Ross A. Anderson of Whyte Hirschboeck Dudek S.C., Milwaukee, and of counsel: Alan S. Kaplinsky, Martin C. Bryce, Jr., and Sally

M. Williams of Ballard Spahr Andrews & Ingersoll, L.L.P., Philadelphia, Pennsylvania.

On behalf of the plaintiffs-respondents, the cause was submitted on the brief of Stephen E. Meili and Sarah N. Mervine of Consumer Law Litigation Clinic of the University of Wisconsin Law School, Madison.

Before LUNDSTEN, P.J., DYKMAN and HIGGINBOTHAM, JJ.

¶ 1 LUNDSTEN, P.J

Cross Country Bank and Applied Card Systems (collectively, "Cross Country") appeal the circuit court's order denying their motion to compel arbitration and stay court proceedings.¹ The plaintiffs, individuals who hold credit cards through Cross Country, sued Cross Country and sought to proceed as a class, alleging that Cross Country engaged in illegal debt collection practices in violation of the Wisconsin Consumer Act. Cross Country argues that the circuit court erred in concluding that the arbitration clause in its credit card agreement with the plaintiffs is unconscionable. We agree with the circuit court that the arbitration clause is unconscionable, and therefore affirm the court's order.

Background

¶ 2 Each of the plaintiffs received a credit card and credit card agreement from Cross Country after responding to a direct mail or other solicitation from Cross Country.² Cross Country subsequently "charged off" all of the plaintiffs' accounts except for one plaintiff, who has two active accounts. The unpaid balances that were "charged off" ranged from approximately $690 to $3800.

¶ 3 The credit card agreement that Cross Country provided to the plaintiffs contains a choice of law clause, which reads:

Governing Law. This Agreement and your Account will be governed by, and interpreted under Federal law and the laws of the State of Delaware without reference to principles of conflict of laws. The legality, enforceability and interpretation of this Agreement and the amounts contracted for, charged and received under this Agreement will be governed by such laws. This Agreement is entered into between you and us in Delaware. We make decisions about granting credit to you from and extend credit to you under this Agreement in Delaware. Federal and Delaware law will also apply to any controversy, Claim or dispute arising from or relating in any way to the subject matter of this Agreement and/or your Account, including, without limitation, statutory, equitable or tort claims.

¶ 4 The credit card agreement also contains a lengthy arbitration clause, which includes provisions requiring that all disputes be arbitrated if either party elects arbitration and that cardholders waive any rights to proceed on a class-wide basis if arbitration is elected. Specifically, the arbitration clause reads:

If you or we elect to arbitrate a Claim, you will not have the right to pursue that Claim in court or have a jury decide the Claim....

If you or we elect to arbitrate a Claim: (1) neither you nor anyone else on your behalf can pursue that Claim in court or in an arbitration proceeding on a class-wide or representative basis; and (2) Claims brought by or against one account holder (or joint account holders) may not be brought together with Claims brought by or against any other account holder.

The arbitration clause contains an additional choice of law provision, which reads:

Governing Law. This Agreement involves interstate commerce and this Arbitration Provision is governed by the Federal Arbitration Act ("FAA"), 9 U.S.C. §§ 1 et seq. The arbitrator must follow: (1) the FAA; (2) the substantive law, consistent with the FAA, related to any Claim....

¶ 5 The plaintiffs sued Cross Country, alleging that Cross Country had engaged in illegal debt collection practices, including harassing phone calls that involved abusive, derogatory, or obscene language and, in some instances, threats. The plaintiffs claimed that Cross Country's debt collection practices violated the Wisconsin Consumer Act, and they sought damages, including double damages under the Act for their finance charges.³

¶ 6 Cross Country moved to compel arbitration and stay all proceedings, asserting that the plaintiffs' claims fell within the scope of the arbitration clause in the credit card agreement. The plaintiffs contended that Cross Country's arbitration clause violated the Wisconsin Consumer Act, that the clause was unconscionable, and that the clause was illusory. In addition, the plaintiffs filed an amended complaint, seeking class certification and adding claims that Cross Country's choice of law and arbitration clauses violated the Act. The plaintiffs sought declaratory relief and to permanently enjoin Cross Country from conducting business operations in Wisconsin in violation of the Act and from including terms in its credit card agreements in violation of the Act.

¶ 7 The circuit court concluded that Cross Country's arbitration clause was unconscionable, struck the clause from the parties' credit card agreements, and denied Cross Country's motion. We reference additional facts as needed in the discussion section of this opinion.

Discussion

A. Whether Wisconsin Or Delaware Law Applies

¶ 8 The central issue in this case is whether the arbitration clause in Cross Country's credit card agreement is unconscionable and, therefore, unenforceable. However, this unconscionability issue presents a preliminary inquiry into the applicable law because Cross Country asserts that the circuit court erred by applying Wisconsin law. Cross Country argues that the credit card agreement's choice of law clause requires that Delaware law be applied to the question of whether the arbitration clause is unconscionable. Cross Country further argues that, under Delaware law, there can be no real dispute that its arbitration clause is not unconscionable and is, therefore, enforceable.

¶ 9 This preliminary choice of law inquiry presents a question of law for our de novo review. Drinkwater v. American Family Mut. Ins. Co., 2006 WI 56, ¶ 14, 290 Wis.2d 642, 714 N.W.2d 568. For the reasons that follow, we conclude that Wisconsin law applies.

¶ 10 Cross Country frames its choice of law argument under Bush v. National School Studios, Inc., 139 Wis.2d 635, 407 N.W.2d 883 (1987). In Bush, the supreme court held that parties are generally free to contract for choice of law, although not "at the expense of important public policies of a state whose law would be applicable if the parties['] choice of law provision were disregarded." Id. at 642, 407 N.W.2d 883; see also General Med. Corp. v. Kobs, 179 Wis.2d 422, 428, 507 N.W.2d 381 (Ct.App. 1993) ("[P]arties cannot, by contract, override fundamental policies of the state whose law would be applicable absent the choice of law provision.").

¶ 11 Among the laws "likely to embody an important state public policy" are those that "are designed to protect a weaker party against the unfair exercise of superior bargaining power by another party." Bush, 139 Wis.2d at 643, 407 N.W.2d 883. The court in Bush disregarded a choice of law clause specifying the application of Minnesota law in order to give effect to the important public policy embodied in the Wisconsin Fair Dealership Law. Id. at 644-45, 407 N.W.2d 883. The court's conclusion rested largely on two facts. First, the legislature enacted the Fair Dealership Law "`[t]o protect dealers against unfair treatment by grantors, who inherently have superior economic power and superior bargaining power in the negotiation of dealerships.'" Id. at 644, 407 N.W.2d 883 (quoting WIS. STAT. § 135.025(2)(b)). Second, the Fair Dealership Law expressly states that it cannot "`be varied by contract or agreement'" and that any such contract or agreement attempting to do so is "`void and unenforceable to that extent.'" Bush, 139 Wis.2d at 644-45, 407 N.W.2d 883 (quoting § 135.025(3)).

¶ 12 We conclude that the Wisconsin Consumer Act embodies an important state public policy under the logic of Bush. The Act is analogous to the Wisconsin Fair Dealership Law in key respects. Like the Fair Dealership Law, the Act is plainly designed to protect a weaker party against the unfair exercise of superior bargaining power by another party. The legislature has expressly stated that the purposes of the Wisconsin Consumer Act include the protection of "customers against unfair, deceptive, false, misleading and unconscionable practices by merchants" and the encouragement of "the development of fair and economically sound consumer practices in consumer transactions." WIS. STAT. § 421.102(2)(b) and (c). Just as the Wisconsin Fair Dealership Law expressly provides that it cannot be varied by contract or agreement and that an attempt at such variation is unenforceable, see WIS. STAT. § 135.025(3), the Wisconsin Consumer Act expressly invalidates choice of law clauses specifying that the law of another state will apply, see WIS. STAT. § 421.201(10)(a).⁴

¶ 13 Cross Country nonetheless argues that its choice of law clause does not run afoul of the Bush rule. Cross Country's argument, so far as we understand it, is divided into two main sub-arguments. Cross Country first argues that the choice of law clause does not run afoul of the Bush rule because Delaware law would apply to the question of the arbitration clause's enforceability even absent the choice of law clause in the...