Martz v. Beneficial Montana, Inc.

• Decision Date: 04 May 2006
• Docket Number: No. 04-716.,04-716.
• Citation: 332 Mont. 93,2006 MT 94,135 P.3d 790
• Court: Montana Supreme Court
• Parties: Timothy D. MARTZ and Robin Jean Martz, Plaintiffs and Appellants, v. BENEFICIAL MONTANA, INC., d/b/a Beneficial Mortgage Co., a Delaware corporation; Household International, Inc., a Delaware corporation; Emmet Mathews and John Does I — X, Defendants and Respondents.

135 P.3d 790

2006 MT 94

332 Mont. 93

Timothy D. MARTZ and Robin Jean Martz, Plaintiffs and Appellants, v. BENEFICIAL MONTANA, INC., d/b/a Beneficial Mortgage Co., a Delaware corporation; Household International, Inc., a Delaware corporation; Emmet Mathews and John Does I — X, Defendants and Respondents.

No. 04-716.

Supreme Court of Montana.

Submitted on Briefs November 9, 2005.

Decided May 4, 2006.

Thomas E. Boland, Attorney at Law, Jeremiah C. Lynch, Attorney at Law, Great Falls, for Appellants.

Dan G. Cederberg and Benjamin P. Hursh, Cederberg Law Office, Missoula, for Respondents.

Justice JIM RICE delivered the Opinion of the Court.

¶ 1 Appellants Timothy and Robin Martz appeal from the order of the Sixth Judicial District Court granting Respondent Beneficial Montana, Inc.'s motion to compel arbitration. Appellants contend that arbitration is inappropriate because the contract is void ab initio and the arbitration provision is unconscionable. We affirm.

¶ 2 In reviewing the District Court's order compelling arbitration, we consider the following issues on appeal:

¶ 3 (1) When a contract containing an arbitration clause is challenged in its entirety, who is the appropriate adjudicator, an arbitrator or the district court?

¶ 4 (2) Have Appellants preserved for appeal the issue of the arbitration clause's unconscionability?

BACKGROUND

¶ 5 Licensed as a consumer loan business in Montana, Beneficial Montana, Inc. (Beneficial) loaned $25,000 to Timothy and Robin Martz (the Martzes) in November of 1997. The loan included a "loan origination fee" of $500, a "document preparation fee" of $350, and a substantial "Prepayment Penalty Charge." Thereafter, and over the course of the next three years, the Martzes refinanced their Beneficial loan on two occasions, the second of which occurred on or about October 18, 2000. After the second refinancing, the Martzes' loan principal rose to approximately $112,000. Pursuant to the contracts, the Martzes pledged their home as collateral.

¶ 6 Critical to the present dispute, Beneficial incorporated an arbitration rider into the refinancing loan agreement of October 18, 2000. The Martzes were not represented by counsel at that time, and signed that agreement without discussion. Beneficial has since admitted that the contract of October 18, 2000, was one of adhesion as defined by Montana law.

¶ 7 The Martzes defaulted on their loan in mid-2004, after which Beneficial initiated non-judicial foreclosure proceedings upon the Martzes' home. In response, the Martzes initiated the present proceedings in the Sixth Judicial District Court, alleging that the loan contracts were void ab initio, as violative of Montana's Consumer Loan Act, Montana's Unfair Trade Practices Act, and various other laws. Importantly, the Martzes' complaint challenged the validity of the contracts as a whole, and did not challenge the arbitration clause specifically.

¶ 8 In response to the Martzes' complaint, Beneficial moved to compel arbitration. In support, Beneficial argued that where contracts contain arbitration provisions, challenges to the contract as a whole are to be decided by an arbitrator. The Martzes countered on July 7, 2004, arguing that the motion to compel arbitration should be denied because the "underlying contract made by Beneficial to the Martzes is the product of illegality, fraud, and unconscionability." (Emphasis added.) Notwithstanding the Martzes' arguments, the District Court granted Beneficial's motion to compel arbitration.

¶ 9 In response to the District Court's order, the Martzes filed a motion for reconsideration. In that motion, the Martzes renewed their objections to the contract as a whole, but further, specifically challenged the validity of the arbitration provision for the first time, alleging that the provision was void as unconscionable. Beneficial responded to that motion shortly thereafter by noting that, "[a] review of these arguments shows Plaintiffs have used the request for reconsideration to revisit matters previously ruled on and to present [two] new theories in support of their position," and asked the District Court to "decline Plaintiff's request for a second bite at the apple. . . ." The District Court, however, did not rule on the motion. Instead, two weeks after filing the motion, the Martzes appealed to this Court, thereby depriving the District Court of jurisdiction over their pending motion.

STANDARDS OF REVIEW

¶ 10 We review a district court's order granting a motion to compel arbitration de novo. Iwen v. U.S. West Direct, 1999 MT 63, ¶ 17, 293 Mont. 512, ¶ 17, 977 P.2d 989, ¶ 17. We review a district court's conclusions of law to determine if they are correct. Steer, Inc. v. Department of Revenue (1990), 245 Mont. 470, 474, 803 P.2d 601, 603.

DISCUSSION

Issue # 1: When a contract containing an arbitration clause is challenged in its entirety, who is the appropriate adjudicator, an arbitrator or the district court?

¶ 11 The initial question presented here is whether a court or an arbitrator decides the question of a contract's validity where the contract contains an arbitration provision. Beneficial argues that federal law requires that challenges to contracts in their entirety be made to an arbitrator, even where those contracts contain arbitration provisions. The Martzes, on the other hand, argue that even where contracts contain arbitration provisions, challenges to the contract as a whole must be heard by courts, since void contracts would necessarily invalidate any included arbitration provisions. In light of rulings by the United States Supreme Court, we conclude that Beneficial's argument must prevail.

¶ 12 The law governing arbitration is expansive and complicated. Initially, and undisputed by the parties here, it is clear that the Federal Arbitration Act (FAA) governs the arbitration clause at issue, since the clause arose within a transaction "involving commerce." See Federal Arbitration Act, 9 U.S.C. § 2; Iwen, ¶ 23; Prima Paint Corp. v. Flood & Conklin Mfg. Co. (1967), 388 U.S. 395, 401, 87 S.Ct. 1801, 1804-05, 18 L.Ed.2d 1270, 1275-76. As we have noted in the past, the Federal Arbitration Act evidences a federal policy in favor of arbitration. Iwen, ¶ 26; see also Buckeye Check Cashing, Inc. v. Cardegna (2006), 546 U.S. ___, 126 S.Ct. 1204, 1207-08, 163 L.Ed.2d 1038, 1042. Further, of utmost importance here, the FAA "create[d] a body of federal substantive law" which is "applicable in state and federal courts." Southland Corp. v. Keating (1984), 465 U.S. 1, 12, 104 S.Ct. 852, 859, 79 L.Ed.2d 1, 13; see also Buckeye Check Cashing, 546 U.S. at ___, 126 S.Ct. at 1208-09, 163 L.Ed.2d at 1044.

¶ 13 The parties vigorously dispute whether a challenge to the entirety of a contract ought to be heard by an arbitrator or a court where the contract contains an arbitration provision. Further, both parties cite cases which are supportive of their respective positions. The United States Supreme Court, however, recently considered an issue nearly identical to the one before us today, namely, whether and when an arbitrator should hear challenges to a contract's validity when the contract contains an arbitration clause and one party brings suit in federal or state court. Buckeye Check Cashing, 546 U.S. at ___, 126 S.Ct. at 1207, 163 L.Ed.2d at 1041. Notwithstanding the parties' arguments, this case answers the question presented.

¶ 14 In Buckeye Check Cashing, respondents Cardegna and Reuter entered into various deferred-payment transactions with petitioner Buckeye Check Cashing, allowing respondents to receive cash in exchange for personal checks. Buckeye Check Cashing, 546 U.S. at ___, 126 S.Ct. at 1207, 163 L.Ed.2d at 1041. Importantly, each time the respondents cashed a check, they signed a form contract which included an arbitration provision. Buckeye Check Cashing, 546 U.S. at ___, 126 S.Ct. at 1207, 163 L.Ed.2d at 1041. Thereafter, the respondents brought suit in Florida state court, alleging that the contracts violated various Florida lending and consumer-protection laws, rendering the contracts criminal on their face. Buckeye Check Cashing, 546 U.S. at ___, 126 S.Ct. at 1207, 163 L.Ed.2d at 1042. As in the case before us, the petitioner moved to compel arbitration pursuant to the arbitration provision, resulting in a dispute regarding a district court's power to hear challenges to contracts containing arbitration clauses. Buckeye Check Cashing, 546 U.S. at ___, 126 S.Ct. at 1207, 163 L.Ed.2d at 1042.

¶ 15 The United States Supreme Court, in a seven-to-one decision, defined key parameters of arbitration law, and outlined three relevant principles. Buckeye Check Cashing, 546 U.S. at ___, 126 S.Ct. at 1209, 163 L.Ed.2d at 1044. First, the Court reaffirmed a principle first articulated in Prima Paint, stating that "as a matter of substantive federal arbitration law, an arbitration provision is severable from the remainder of the contract."¹ Buckeye Check Cashing, 546 U.S. at ___, 126 S.Ct. at 1209, 163 L.Ed.2d at 1044; see also Prima Paint Corp., 388 U.S. at 403-04, 87 S.Ct. at 1805-06, 18 L.Ed.2d at 1276-77. Second, and critical to the issue before us today, the Court held that "unless the challenge is to the arbitration clause itself, the issue of the contract's validity is considered by the arbitrator in the first instance." Buckeye Check Cashing, 546 U.S. at ___, 126 S.Ct. at 1209, 163 L.Ed.2d at 1044; see also Prima Paint Corp., 388 U.S. at 403-04, 87 S.Ct. at 1806, 18 L.Ed.2d at 1277. The corollary to that, of course, is that where one challenges an arbitration clause specifically, a court may adjudicate the challenge. Buckeye Check Cashing, 546 U.S. at ___, 126 S.Ct. at 1209, 163 L.Ed.2d at 1043-44; see also Prima Paint Corp., 388 U.S. at 403-04, 87 S.Ct. at 1806, 18 L.Ed.2d at 1277. Finally, the Court reiterated that these principles applied in state as well as federal courts. Buckeye Check Cashing, 546 U.S. at ___, 126...