Luna v. Household Finance Corp. III
| Decision Date | 04 November 2002 |
| Docket Number | No. C02-1635L.,C02-1635L. |
| Parties | Joseph LUNA, et al., Plaintiffs, v. HOUSEHOLD FINANCE CORPORATION III, et al., Defendants. |
| Court | U.S. District Court — Western District of Washington |
Anthony L. Rafel, Riddell & Williams, Seattle, WA, Robert L. Parlette, Wenatchee, WA, for plaintiffs.
Daniel J. Dunne, Jr., Kenneth E. Payson, Heller, Ehrman, White & McAuliffe, Seattle, WA, for defendants.
ORDER DENYING DEFENDANTS' MOTION TO COMPEL ARBITRATION AND TO STAY PROCEEDINGS, GRANTING DEFENDANTS' MOTION TO STRIKE, AND GRANTING PLAINTIFFS' MOTION TO STAY ARBITRATION
This matter comes before the Court on several motions filed by Plaintiffs Joseph Luna, et al. ("Plaintiffs") and Defendants Household Finance Corporation III, Household Realty Corporation, and Beneficial Mortgage Corporation (collectively "Household"), all of which relate to whether this Court should stay proceedings pending resolution of certain Plaintiffs' claims in arbitration. Plaintiffs filed a motion to stay arbitration on September 5, 2002. On the same day Household filed a motion to compel arbitration and stay proceedings pending arbitration. The parties have filed responses, replies, and numerous declarations, producing a voluminous record.1 After review of this extensive record and oral argument, the Court grants Plaintiffs' motion to stay arbitration and Household's motion to strike and denies Household's motion to stay proceedings for the reasons set forth in this Order.
The Plaintiffs, Joseph and Jeanie Luna, Carl and Brenda Bennett, David and Geneveve Murphy, Neil and Elsie Nelson, Bryan and Jeannette Thomson, and Daniel and Mazie James, are all Washington residents who consolidated their debt into loans with Household. Plaintiffs claim that Household mislead them into entering home loan agreements at interest rates higher than those promised. (Third Amended Complaint ¶¶ 2.5, 2.8, 3.4, 4.4). Plaintiffs allege that Household's lending practices violate various state and federal statutes, including the Washington Consumer Protection Act ("CPA"), the Real Estate Settlement Practices Act ("RESPA"), the Truth In Lending Act ("TILA"), and the Homeowners Equity Protection Act ("HOEPA"). Id. ¶¶ 12.1-12.5. Plaintiffs also assert various common law claims, including fraud in the inducement, negligent misrepresentation, reformation or rescission of the loan agreements, and emotional distress. Id. ¶¶ 8.1-11.2. Plaintiffs seek class-wide damages and equitable relief.
All Plaintiffs except the Murphys signed identical arbitration riders (the "Arbitration Rider") when they completed the paperwork required for their loans. Household seeks to stay these proceedings pending arbitration for all of the Plaintiffs except the Murphys.
The Arbitration Rider provides in relevant part:
This Arbitration Rider is signed as part of your Agreement with Lender and is made a part of that Agreement. By signing this Arbitration Rider, you agree that either Lender or you may request that any claim, dispute, or controversy (whether based upon contract; tort, intentional or otherwise; constitution; statute; common law; or equity and whether pre-existing, present or future), including all initial claims, counterclaims, and third party claims, arising from or relating to this Agreement or the relationships which result from this Agreement, including the validity or enforceability of this arbitration clause, any part thereof or the entire Agreement ("Claim"), shall be resolved, upon the election of you or us, by binding arbitration pursuant to this arbitration provision and the applicable rules or procedures of the arbitration administrator selected at the time the Claim is filed. The party initiating the arbitration proceeding shall have the right to select one of the following three arbitration administrators: the National Arbitration Forum ("NAF"), the American Arbitration Association ("AAA") or JAMS/Endispute ("JAMS").
. . . . .
Any participatory arbitration hearing that you attend will take place in the city nearest your residence where a federal district court is located or at such other location as agreed by the parties. If Lender files a Claim, Lender shall pay all the filing costs. If you file a Claim, the filing costs shall be paid as follows: (a) Lender agrees to pay for the initial cost of the filing the [sic] Claim up to the maximum amount $100.00; (b) for the filing costs over $100.00, such additional cost shall be divided equally between us up to the amount charged by the arbitration administrator for a Claim equal to your loan amount; and (c) all costs over the amount charged by the arbitration administrator for a Claim equal to your loan amount shall be paid by you. The cost of up to one full day of arbitration hearings will be shared equally between us. Fees for hearings that exceed one day will be paid by the requesting party.
. . . . .
This Arbitration Rider is made pursuant to a transaction involving interstate commerce, and shall be governed by the Federal Arbitration Act.... The parties agree that the award shall be kept confidential.
. . . . .
In the event of a conflict or inconsistency between the rules and procedures of the arbitration administrator and this Arbitration Rider, this Arbitration Rider shall govern. No class actions or joiner [sic] or consolidation of any Claim with the claim of any other person are permitted in arbitration without the written consent of you and us.
No provision of, nor the exercise of any rights under this Arbitration Rider shall limit the right of any party during the pendency of any Claim, to seek and use ancillary or preliminary remedies, judicial or otherwise, for the purposes of realizing upon, preserving, protecting or foreclosing upon any property involved in any Claim or subject to the loan documents.
(Roberts Decl. Ex. A (Luna Arbitration Rider) at 1). Approximately three inches above the borrower signature line, the Arbitration Rider contains the following acknowledgment in bold, capital letters:
THE PARTIES ACKNOWLEDGE THAT THEY HAD A RIGHT TO LITIGATE CLAIMS THROUGH A COURT BEFORE A JUDGE OR JURY, BUT WILL NOT HAVE THAT RIGHT IF EITHER PARTY ELECTS ARBITRATION. THE PARTIES HEREBY KNOWINGLY AND VOLUNTARILY WAIVE THEIR RIGHTS TO LITIGATE SUCH CLAIMS IN A COURT BEFORE A JUDGE OR A JURY UPON ELECTION OF ARBITRATION BY EITHER PARTY.
Id. at 2 (emphasis omitted). The Arbitration Rider lists contact information regarding the arbitration organizations on this signature page. Id. Household urges that these provisions require the Court to stay these proceedings pending arbitration for all Plaintiffs except the Murphys. Plaintiffs argue that the Arbitration Rider is unenforceable due to procedural and/or substantive unconscionability.
Federal law provides that arbitration agreements are to be enforced by the courts. Section 2 of the Federal Arbitration Act ("FAA") provides that "an agreement in writing to submit to arbitration an existing controversy arising out of ... a contract, transaction, or refusal, shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract." 9 U.S.C. § 2. The Supreme Court has recognized that the FAA clearly enunciates a congressional intention to favor arbitration:2
Section 2 is a congressional declaration of a liberal federal policy favoring arbitration agreements .... [T]he courts of appeals have ... consistently concluded that the questions of arbitrability must be addressed with a healthy regard for the federal policy favoring arbitration. We agree. The Arbitration Act establishes that, as a matter of federal law, any doubts concerning the scope of arbitrable issues should be resolved in favor of arbitration, whether the problem at hand is the construction of the contract language itself, or an allegation of waiver, delay, or a like defense to arbitrability.
Moses H. Cone Mem'l Hosp. v. Mercury Constr., 460 U.S. 1, 24-25, 103 S.Ct. 927, 74 L.Ed.2d 765 (1983). The FAA provides for a stay of judicial proceedings pending arbitration when the judicial proceedings involve issues subject to an arbitration agreement. 9 U.S.C. § 3.
The existence of a signed arbitration agreement does not mean that a court immediately must stay proceedings relating to controversies covered by the arbitration agreement. Rather, a party may challenge the validity of an arbitration agreement. When the validity of an arbitration agreement is challenged, a court should "apply ordinary state-law principles that govern the formation of contracts." Circuit City Stores, Inc. v. Adams, 279 F.3d 889, 892 (9th Cir.2002) (quoting First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938, 944, 115 S.Ct. 1920, 131 L.Ed.2d 985 (1995)). State laws applicable only to arbitration agreements that would invalidate such agreements are preempted by the FAA; however, "general contract defenses, such as fraud, duress, or unconscionability, grounded in state contract law, may operate to invalidate arbitration agreements." Id. (citing Doctor's Assocs., Inc. v. Casarotto, 517 U.S. 681, 687, 116 S.Ct. 1652, 134 L.Ed.2d 902 (1996)).
Household urges the Court not to reach the question of whether the Arbitration Rider is invalid on state law contract grounds because the Rider provides that "the validity or enforceability of this arbitration clause, any part thereof ... shall be resolved, upon the election of you or us, by binding arbitration pursuant to this arbitration provision." (Households' Motion to Compel Arbitration at 11-12). In support of this position Household cites First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938, 942-44, 115 S.Ct. 1920, 131 L.Ed.2d 985 (1995).
In First Options the Supreme Court held that parties may agree to...
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