Felts v. Clk Mgmt. Inc. F/K/A Bat Serv. Inc.

• Decision Date: 08 June 2011
• Docket Number: Nos. 30,142,29,702.,s. 30,142
• Citation: 2011 -NMCA- 062,254 P.3d 124,149 N.M. 681
• Parties: Andrea J. FELTS, on behalf of herself and all others similarly situated, Plaintiff–Appellee,v.CLK MANAGEMENT, INC. f/k/a Bat Services, Inc. and Cash Advance Network, Inc., Defendants–Appellants.
• Court: Court of Appeals of New Mexico

149 N.M. 681

254 P.3d 124

2011 -NMCA- 062

Andrea J. FELTS, on behalf of herself and all others similarly situated, Plaintiff–Appellee,

v.CLK MANAGEMENT, INC. f/k/a Bat Services, Inc. and Cash Advance Network, Inc., Defendants–Appellants.

Nos. 30,142

29,702.

Court of Appeals of New Mexico.

April 8, 2011.Certiorari Granted, June 8, 2011, Nos. 33,011, 33,013.

Feferman Warren & Treinen, P.A., Rob Treinen, Albuquerque, NM, Schaefer Law Firm, L.L.C., Richard J. Fuller, Douglas L. Micko, Minneapolis, MN, Public Justice, P.C., F. Paul Bland, Jr., Amy Radon, Washington, D.C., for Appellee.Fredericks Peebles & Morgan LLP, Conly J. Schulte, Joseph V. Messineo, Omaha, NE, Fredericks Peebles & Morgan LLP, Frances C. Bassett, Louisville, CO, for Appellant CLK Management, Inc. f/k/a Bat Services, Inc.Modrall, Sperling, Roehl, Harris & Sisk, P.A., Jennifer G. Anderson, Emil J. Kiehne, Albuquerque, NM, Weir & Partners, LLP, Susan Verbonitz, Philadelphia, PA, for Appellant Cash Advance Network, Inc.Gary K. King, Attorney General, Karen J. Myers, Assistant Attorney General, Santa Fe, NM, for Amicus Curiae.

OPINION

FRY, Judge.

{1} The opinion filed in this case on March 2, 2011, is hereby withdrawn, and the following opinion is filed in its place. The motions for rehearing filed by Defendants are denied.

{2} In this consolidated case, Defendants CLK Management, Inc.(CLK) and Cash Advance Network, Inc. (CANI) (collectively, Defendants) appeal the district court's denial of their respective motions to compel arbitration and to stay proceedings pursuant to a binding arbitration provision located within three payday-type loan agreements that Plaintiff Andrea J. Felts entered into with Defendants over the Internet. Defendants moved to compel arbitration in response to a putative class action lawsuit filed by Felts in district court, in which she alleged that Defendants' payday lending enterprises are engaged in online lending practices in direct violation of a number of New Mexico laws. The district court declined to order the parties to arbitrate their dispute after agreeing with Felts that the arbitration provision in the loan agreements was unconscionable under New Mexico law.

{3} We conclude that the district court correctly determined that: (1) the threshold question of arbitrability was for the court, and not an arbitrator, to decide; (2) the class action ban in the arbitration provision was unconscionable and in the same vein as the class action waiver invalidated by our Supreme Court in Fiser v. Dell Computer Corp., 2008–NMSC–046, 144 N.M. 464, 188 P.3d 1215; and (3) the class action ban could not be severed from the remainder of the arbitration provision and, therefore, the entire arbitration provision was unenforceable. Accordingly, we affirm the district court's orders denying each Defendant's motion to compel arbitration.

BACKGROUND1. Terms of Loan Agreements and Binding Arbitration Provision

{4} This case stems from three different online loan transactions that Felts entered into with various Internet-based payday lending companies, including Defendants, in which she received immediate electronic deposits of cash into her bank account in exchange for a series of post-dated automatic withdrawals from the account to be applied toward repayment of the loan principal amounts plus interest and/or finance charges. For each separate transaction, she electronically signed a “Loan Note and Disclosure” (Loan Agreement), which was virtually identical across all three transactions and which included two provisions regarding arbitration—an “Agreement to Arbitrate All Disputes” (arbitration provision) and an “Agreement Not to Bring, Join or Participate in Class Actions” (class action waiver provision). Given the similarity of these two provisions across all three Loan Agreements, we rely on the language from Felts' Loan Agreement with “MTE Financial Services, Inc. d/b/a Cash Advance Network” for purposes of this appeal.¹

{5} Under that particular Loan Agreement, the arbitration provision provided that “any and all claims, disputes or controversies [between the borrower and lender] shall be resolved by binding individual (and not class) arbitration by and under the Code of Procedure of the National Arbitration Forum (‘NAF’).” Featured prominently in all capital letters within the arbitration provision was a clause directing that the claims subject to arbitration could not be arbitrated on a class-wide basis: “THE ARBITRATOR SHALL NOT CONDUCT CLASS ARBITRATION; THAT IS, THE ARBITRATOR SHALL NOT ALLOW YOU TO SERVE AS A REPRESENTATIVE, AS A PRIVATE ATTORNEY GENERAL, OR IN ANY OTHER REPRESENTATIVE CAPACITY FOR OTHERS IN THE ARBITRATION” (hereinafter “class action ban”). The arbitration provision also provided, in relevant part, that: (1) the arbitration was to be governed by “the Federal Arbitration Act (FAA), 9 U.S.C. §§ 1 to –16 (2006)”; and (2) both the borrower and lender waived their “right or opportunity to litigate disputes through a court and have a judge or jury decide the disputes [and] agreed instead to resolve disputes through binding arbitration.” The second provision of the Loan Agreement, the class action waiver, directed that “[t]o the extent permitted by law, [the borrower] will not bring, join or participate in any class action as to any claim, dispute or controversy [the borrower] may have against [the lender].” Toward that end, it permitted the lender to seek injunctive relief to end the lawsuit or to remove the borrower as a participant in the class action lawsuit, with the borrower being held responsible for the lender's court costs and attorney fees.

{6} Thus, under the terms of the three Loan Agreements, Felts was precluded from seeking or participating in any type of class-wide action, whether it was in arbitration or in a judicial setting—which, for that matter, was not allowed in any event. We assume without deciding, for the purpose of our analysis, that Felts assented to the terms of the Loan Agreements when she electronically signed and submitted the forms online.

2. Procedural History

{7} On December 15, 2008, Felts filed a putative class action complaint against CLK and other payday lenders purportedly responsible for originating and/or servicing her loans, in which she claimed violations of the New Mexico Unfair Practices Act (UPA), NMSA 1978, §§ 57–12–1 to –26 (1967, as amended through 2009), the New Mexico Small Loans Act (SLA), NMSA 1978, §§ 58–15–1 to –39 (1955, as amended through 2007), and sought equitable relief for unjust enrichment and disgorgement of profits, as well as injunctive relief on behalf of herself and other New Mexico residents who had obtained loans under $2,500 from Defendants. She later amended the complaint to include CANI as a Defendant. We note that Felts' complaints did not make any arguments regarding the validity of the arbitration provision—in fact, the amended complaint included only a one-line statement that the Loan Agreements contained an arbitration provision. Rather, her amended complaint focused on challenging the validity of the Loan Agreements as a whole.

{8} CLK filed its motion to compel arbitration and to stay trial proceedings pursuant to the FAA, 9 U.S.C. Section 3, and NMSA 1978, Section 44–7A–8 (2001). CLK argued that, under the arbitration provision of the Loan Agreements, Felts was required to individually arbitrate her claims and was precluded from seeking class-wide relief. CLK also alleged that because Felts had not challenged the validity of the arbitration provision in her complaint, the district court could not consider any such challenges and was instead required to refer the entire matter to arbitration. Felts opposed CLK's motion, arguing that the arbitration provision was unconscionable and therefore unenforceable pursuant to section 2 of the FAA, which permits a court to refuse to enforce an arbitration agreement based on “generally applicable contract defenses, such as fraud, duress, or unconscionability.” Doctor's Assocs., Inc. v. Casarotto, 517 U.S. 681, 687, 116 S.Ct. 1652, 134 L.Ed.2d 902 (1996). Specifically relying on our Supreme Court's rationale in Fiser, Felts argued that the class action ban in the arbitration provision amounted to an exculpatory clause for CLK and therefore rendered the entire arbitration provision substantively unconscionable and unenforceable under New Mexico law.

{9} After a hearing on CLK's motion, the district court declined to order the parties to arbitrate their disputes. After concluding that it had jurisdiction to decide the validity of the arbitration agreement, the district court found that Felts' claims constituted “small consumer claims within the meaning of Fiser ” and “[a]s such, [the] prohibitions against class relief [in the arbitration provisions were] contrary to New Mexico's fundamental public policy of encouraging the resolution of small consumer claims.” On this basis, the district court declared the entire arbitration provision unenforceable and denied CLK's motion to compel in its entirety.

{10} After it had been added as a Defendant, CANI also filed a motion to compel arbitration and to stay trial proceedings. CANI alleged that the district court lacked jurisdiction to decide the validity of the arbitration provision under existing United States Supreme Court precedent, that Felts was required to arbitrate all of her disputes under the terms of the arbitration provision, and that the district court could sever the unconscionable class action ban and enforce the remainder of the arbitration provision. Felts opposed this motion as well, arguing that: (1) CANI had failed to rebut the evidence she had raised regarding the exculpatory nature of the class action ban in the arbitration provision, (2) the arbitration provision was unenforceable on grounds of impossibility because the NAF—the arbitral forum selected by Defendants under the arbitration provision—was prohibited from...