Dalton v. Santander Consumer USA, Inc.

• Decision Date: 30 December 2014
• Docket Number: No. 35,101.,33,136.,35,101.
• Citation: 345 P.3d 1086
• Parties: Eileen J. DALTON, Plaintiff–Appellee, v. SANTANDER CONSUMER USA, INC., Defendant–Appellant, and Performance Automotive Group, Inc. d/b/a Performance Buick Pontiac Gmc; Lawrence Barela; Jason Hicks; BDF Acquisitions of New Mexico, Inc. d/b/a Sierra Santa Fe Gmc Buick; Travelers Casualty and Surety Company; and Bradford D. Furry, Defendants.
• Court: Court of Appeals of New Mexico

345 P.3d 1086

Eileen J. DALTON, Plaintiff–Appellee

v. SANTANDER CONSUMER USA, INC., Defendant–AppellantandPerformance Automotive Group, Inc. d/b/a Performance Buick Pontiac Gmc; Lawrence Barela; Jason Hicks; BDF Acquisitions of New Mexico, Inc. d/b/a Sierra Santa Fe Gmc Buick; Travelers Casualty and Surety Company; and Bradford D. Furry, Defendants.

33,136.

No. 35,101.

Court of Appeals of New Mexico.

Dec. 30, 2014.

Certiorari Granted, March 23, 2015,

Treinen Law Office, P.C., Rob Treinen, Albuquerque, NM, Public Justice, P.C., Adrian Alvarez, Washington, D.C., for Appellee.

Lewis Roca Rothgerber LLP, Ross L. Crown, Jason C. Bousliman, Albuquerque, NM, Reed Smith LLP Margaret A. Grignon, Terry B. BatesKasey J. Curtis, Los Angeles, CA, for Appellant.

OPINION

VANZI, Judge.

{1} In this case, we determine whether an arbitration scheme in a vehicle financing contract that carves out exceptions from mandatory arbitration for self-help and small claims remedies is substantively unconscionable. We also determine whether the district court improperly shifted the burden of proof and whether, according to our Supreme Court's interpretation of federal law, a finding of unconscionability under these circumstances is preempted by the Federal Arbitration Act (FAA).

{2} The dispute here arose when Eileen Dalton (Plaintiff) filed suit against Santander Consumer USA, Inc. (Defendant) for fraud, conversion, breach of contract, breach of warranty of title, and various violations of the Uniform Commercial Code (UCC) and the Unfair Practices Act. Defendant moved to compel arbitration of Plaintiff's claims. The district court determined that the self-help and small claims carve-out provisions were unreasonably one-sided, rendering the arbitration clause unenforceable pursuant to Rivera v. American General Financial Services, Inc., 2011–NMSC–033, 150 N.M. 398, 259 P.3d 803, and its progeny. We affirm. We hold that the arbitration clause is substantively unconscionable because the practical effect of the carve-out provisions is to mandate arbitration of Plaintiff's most important and most likely claims while exempting from arbitration Defendant's most important judicial and non-judicial remedies. We further hold that the district court did not shift the burden of proof and that the FAA does not preclude the application of our generally applicable unconscionability doctrine under these circumstances.

BACKGROUND

{3} Defendant is an Illinois-based subprime auto finance entity. Plaintiff's allegations involve a series of at least two finance contracts that were apparently sold to Defendant by a car dealership operated by Performance Automotive Group (Performance). The finance contracts contain identical arbitration clauses, which state, in relevant part:

Any claim or dispute, whether in contract, tort, statute or otherwise ... between you and us or our employees, agents, successors or assigns, which arises out of or relates to your credit application, purchase or condition of this vehicle, this contract or any resulting transaction or relationship (including any such relationship with third parties who do not sign this contract) shall, at your or our election, be resolved by neutral, binding arbitration and not by a court action.

Despite this sweeping language, a separate clause then expressly exempts certain disputes from mandatory arbitration, providing that:

You and we retain any rights to self-help remedies, such as repossession. You and we retain the right to seek remedies in small claims court for disputes or claims within that court's jurisdiction, unless such action is transferred, removed or appealed to a different court. Neither you nor we waive the right to arbitrate by using self-help remedies or filing suit.

The contracts also provide that the arbitration clauses “shall be governed by the [FAA].”

{4} Plaintiff's complaint alleged that she purchased a Cadillac from Performance, who then sold the finance contract to Defendant. Despite Plaintiff's timely payments according to the terms of her contract, the Cadillac was repossessed eight months later by another creditor because Performance had failed to pay off a prior lien on the vehicle. In response to the repossession, Performance agreed to credit Plaintiff the $4,500 she had paid on the Cadillac toward the purchase of a substitute vehicle. Plaintiff returned to Performance, selected a Pontiac G6, and signed a second purchase agreement and finance contract, now providing for a higher monthly payment. Although the facts are in dispute, the Pontiac finance contract, like the Cadillac contract before it, may have been sold to Defendant. Shortly thereafter, and for reasons that are not clear, the Pontiac was also repossessed. Plaintiff was left without a vehicle, and her $4,500 was never returned.

{5} Plaintiff filed suit against a number of corporate entities and individuals involved in these transactions, including Defendant, alleging fraud, conversion, breach of contract, breach of warranty of title, and violations of the UCC and the Unfair Practices Act. Defendant moved to compel arbitration pursuant to the identical arbitration clauses in the Cadillac and Pontiac contracts. The district court denied Defendant's motion, reasoning that the carve-out provisions were substantially similar to the exceptions from arbitration that our Supreme Court examined in Rivera. The district court concluded that self-help remedies are of absolutely no use to consumers like Plaintiff and that small claims remedies are similarly one-sided, rendering the arbitration provision substantively unconscionable. Defendant timely appealed.

DISCUSSION

Standard of Review

{6} This Court reviews de novo both the denial of a motion to compel arbitration and the issue of unconscionability of a contract. Cordova v. World Fin. Corp. of N.M., 2009–NMSC–021, ¶ 11, 146 N.M. 256, 208 P.3d 901. We also apply a de novo standard of review to the interpretation of statutes, including the FAA. Strausberg v. Laurel Healthcare Providers, LLC, 2013–NMSC–032, ¶ 25, 304 P.3d 409.

Unfairly One–Sided Carve–Out Provisions Are Substantively Unconscionable

{7} “[A] finding of unconscionability may be based on either procedural or substantive unconscionability, or a combination of both.” Rivera, 2011–NMSC–033, ¶ 47, 150 N.M. 398, 259 P.3d 803. In this case, the district court's ruling and the arguments on appeal have only addressed the issue of substantive unconscionability. “Substantive unconscionability concerns the legality and fairness of the contract terms themselves, and the analysis focuses on such issues as whether the contract terms are commercially reasonable and fair, the purpose and effect of the terms, the one-sidedness of the terms, and other similar public policy concerns.” Id. ¶ 45 (internal quotation marks and citation omitted). Thus, contract provisions that unreasonably benefit one party over another have been held to be substantively unconscionable. Id. ¶¶ 46, 53–54.

{8} In Cordova, our Supreme Court held that a one-sided arbitration provision in a consumer loan agreement was void as unconscionable. 2009–NMSC–021, ¶ 1, 146 N.M. 256, 208 P.3d 901. The arbitration clause at issue was wholly one-sided on its face. In the event of default, it reserved the lender's option to avail itself of any and all “remedies in an action at law or in equity, including but not limited to, judicial foreclosure or repossession [,]” while simultaneously denying access to the courts to borrowers for any reason whatsoever. Id. ¶¶ 26–27 (internal quotation marks omitted). This “self-serving arbitration scheme” was so unreasonably one-sided that it could not be enforced. Id. ¶¶ 32–34.

{9} Two years later, the Supreme Court reaffirmed this principle in Rivera when it corrected this Court's “overly narrow construction” of the unconscionability doctrine. 2011–NMSC–033, ¶¶ 1, 39–54, 150 N.M. 398, 259 P.3d 803. The arbitration clause in the car title loan contract addressed in Rivera exempted from mandatory arbitration the lender's self-help and judicial remedies, such as repossession or foreclosure, “with respect to any property that secures [the loan.]” Id. ¶ 3. This Court attempted to distinguish Cordova on the basis that the arbitration clause in Rivera was not completely one-sided because it still allowed borrowers to compel arbitration of any of the lender's claims that arose from disputes about the loan note itself. See Rivera v. Am. Gen. Fin. Servs., Inc., 2010–NMCA–046, ¶¶ 9–10, 148 N.M. 784, 242 P.3d 351, rev'd, 2011–NMSC–033, 150 N.M. 398, 259 P.3d 803. We thus reasoned that the exemption only applied to disputes over the lender's interest in the collateral that secured the loan and that those actions were so heavily regulated by Article 9 of the UCC that their exemption was reasonable. Id. ¶¶ 12–13. In upholding the arbitration clause, we expressed concern that, “without access to these judicial and extra-judicial procedures, [the lender] would lose many of the statutory protections it enjoyed as a secured creditor.” Id. ¶ 13.

{10} Our Supreme Court expressly rejected our reasoning and reversed. Rivera, 2011–NMSC–033, ¶¶ 50–52, 150 N.M. 398, 259 P.3d 803. Notwithstanding the lender's status as a secured creditor, the Court held that the lender's ability to access the courts for its likeliest claims while forcing the plaintiff to arbitrate the claims that she may have was unreasonably one-sided. Id. ¶ 53. The Supreme Court explained that “[a]s a matter of law arbitrators have broad authority and are deemed capable of granting any remedy necessary to resolve a case” and that “[p]arties may effectively pursue any remedy or relief in arbitration including statutory, common law, injunctive, equitable, and all other lawful remedies and relief.” Id. ¶¶ 51–52 (internal quotation marks and citation omitted). Thus, since “an arbitrator can be given the authority to address any claims a lender may have against a borrower[,]” including a secured creditor's ...