Sprague v. Household Intern.

• Court: U.S. District Court — Western District of Missouri
• Writing for the Court: Laughrey
• Citation: Sprague v. Household Intern., 473 F.Supp.2d 966 (W.D. Mo. 2005)
• Decision Date: 15 June 2005
• Docket Number: No. 04-0106-CV-W-NKL.,04-0106-CV-W-NKL.
• Parties: Elmer SPRAGUE, et al., Plaintiffs, v. HOUSEHOLD INTERNATIONAL, et al., Defendants.

473 F.Supp.2d 966

Elmer SPRAGUE, et al., Plaintiffs, v. HOUSEHOLD INTERNATIONAL, et al., Defendants.

No. 04-0106-CV-W-NKL.

United States District Court, W.D. Missouri, Western Division.

June 15, 2005.

COPYRIGHT MATERIAL OMITTED

Paul B. Mengedoth, Mengedoth Law Firm, LLC, Phoenix, AZ, for Plaintiffs.

Clayton T. Norkey, Todd W. Ruskamp, Shook Hardy & Bacon LLP, Daniel L. McClain, Rasmussen, Willis, Dickey & Moore, LLC, Kansas City, MO, Roy W. Arnold, Reed, Smith, LLP, Pittsburgh, PA, for Defendants.

ORDER

LAUGHREY, District Judge.

Pending before the Court are the Defendants' Motions to Compel Arbitration [Does. 45 and 48]. Also pending is a Joint Motion to Amend the Scheduling Order [Doc. 102], and the Plaintiffs' Motion to Amend their Complaint [Doc. 106.] For the reasons stated below, the Court finds that the arbitration agreement is enforceable, except for the cost-splitting and confidentiality provisions, which will be severed. Accordingly, the motions to compel arbitration will be granted, and the other motions will be denied as moot.

I. Background

The claims set forth in the Plaintiffs' Second Amended Complaint include alleged violations of the Real Estate Settlement Procedures. Act, 12 U.S.C. § 2601 et seq. ("RESPA"); the Truth in Lending Act, 15 U.S.C. 1602 et seq. ("TILA"); the Home Ownership Equity Protection Act, 15 U.S.C. § 1635, 1639 et seq. ("HOEPA"); the Missouri Merchandising Practices Act, Mo.Rev.Stat. § § 407.010 et seq. ("MMPA"); as well as common law fraud, negligent misrepresentation, rescission/reformation, and unjust enrichment. The Plaintiffs allege that Household,¹ in addition to performing other loan related services, solicited and sold certain residential real estate secured loans to them. The Plaintiffs further allege that the IRE Defendants,² who used Household employees to conduct loan closings, charged the Plaintiffs fees for services they did not perform.

Household provided the Plaintiffs with a standardized form of an arbitration agreement that Household drafted.³ (Def. Ex. G & H [attached to Doc. 46].) The Arbitration Rider attached to the agreement provides in pertinent part:

This Arbitration Rider is signed as part of your Agreement with Lender and is made part of that Agreement. By signing this Arbitration Rider, you agree that either Lender or you may request that any claim, dispute, or controversy . . . 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 of 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").

. . . . .

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 Claim up to the maximum amount $100; (b) for the filing costs over $100, 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.

. . . . .

The parties agree that the award shall be kept confidential.

. . . . .

No class actions or joiner 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.

. . . . .

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 JURY UPON ELECTION OF ARBITRATION BY EITHER PARTY.

(Def. Ex. G [attached to Doc. 46] ) (emphasis in original).

Pursuant to the terms of the Arbitration Rider, the Defendants have moved to refer the Plaintiffs' claims to arbitration and to dismiss this case without prejudice or to stay the balance of this suit pending completion of the arbitration proceeding.⁴,⁵

On June 22, 2004, this Court issued an order deferring ruling on the pending motions to compel arbitration so that the relevant factual issues could be explored more fully. In particular, the Court noted that the parties had not provided the Court with sufficient information to determine whether the arbitration forum would waive their fees. See Dobbins v. Hawk's Enterprises, 198 F.3d 715 (8th Cir.1999) (failure to fully consider fee waiver procedures is grounds for remand). Now that the parties have explored this issue and have filed supplemental briefings and exhibits, the Court will consider the merits of the pending motions.

II. Discussion

A party may request arbitration of claims when parties have agreed in writing to an arbitration and one party has instead filed its claim in a court. 9 U.S.C. § 4. If the Court determines that the claims are referable to arbitration, the Court must stay the arbitral claims pending the arbitration. 9 U.S.C. § 3.

The federal courts recognize a strong national policy in favor of arbitration. The presumption is that an arbitration agreement will be enforced. See Lyster v. Ryan's Family Steak Houses, Inc., 239 F.3d 943, 945 (8th Cir.2001); see also Dobbins v. Hawk's Enters., 198 F.3d 715, 717 (8th Cir.1999) (courts recognize a "broad principle of enforceability" with respect to arbitration agreements) (quoting Southland Corp. v. Keating, 465 U.S. 1, 11, 104 S.Ct. 852, 79 L.Ed.2d 1 (1984)). Accordingly, "[a] dispute must be submitted to arbitration if there is a valid agreement to arbitrate and the dispute falls within the scope of that agreement." Lyster, 239 F.3d at 945.

The Plaintiffs do not dispute the fact that they signed an arbitration agreement. Nor do they dispute the fact that the loans at issue fall within the scope of and are subject to the arbitration agreement. Rather, the Plaintiffs claim that (1) the agreement is unconscionable and therefore unenforceable; and (2) the IRE Defendants are not parties to the agreement.

A. Whether the Arbitration Agreement is Unconscionable

"Whether an arbitration agreement is valid is a matter of state contract law." Faber v. Menard, Inc., 367 F.3d 1048, 1052 (8th Cir.2004) (citing Lyster, 239 F.3d at 946 (8th Cir.2001)). The Supreme Court has observed that "generally applicable contract defenses, such as fraud, duress, or unconscionability, may be applied to invalidate arbitration agreements . . . ." Doctor's Associates, Inc. v. Casarotto, 517 U.S. 681, 687, 116 S.Ct. 1652, 134 L.Ed.2d 902 (1996).

Missouri cases "give little guidance on the subject of unconscionability." Bracey v. Monsanto Co. 823 S.W.2d 946, 949 (Mo.1992) (en banc). However, Missouri courts have noted that unconscionability has both a procedural and a substantive component. World Enterprises, Inc. v. Midcoast Aviation Services, Inc., 713 S.W.2d 606, 611 (Mo.Ct.App.1986) (citation omitted).⁶ "Substantive unconscionability refers to undue harshness in the contract terms themselves, whereas procedural unconscionability involves examination of the contract formation process, centering on the pressure exerted by the parties, the fine print of the contract, misrepresentation, or unequal bargaining position." Bracey, 823 S.W.2d at 952-53. Although a court will not find an arbitration agreement unconscionable unless both aspects of unconscionability are present, a court should balance the two aspects such that "if there exists gross procedural unconscionability then not much be needed by way of substantive unconscionability [and vice-versa]." Funding Systems Leasing Corp. v. King Louie Int'l., Inc., 597 S.W.2d 624, 634 (Mo.Ct.App.1979); see also Bracey, 823 S.W.2d at 953 ("it has been suggested that there must be a balancing between the substantive and procedural aspects, and that if there exists gross procedural unconscionability, then not much is needed by way of substantive unconscionability, and that the same `sliding scale' be applied if there is great substantive unconscionability but little of a procedural nature.").

1. Procedural Unconscionability

The Defendants do not dispute that the Arbitration Rider is a contract of adhesion. Adhesion contracts, however, are not "inherently sinister and automatically unenforceable." Hartland Computer Leasing Corp. v. Ins. Man, Inc., 770 S.W.2d 525, 527 (MQ.Ct.App.1989); see also Greenpoint Credit, L.L. C. v. Reynolds, 151 S.W.3d 868, 2004 WL 2517930, *4 (Mo.Ct.App.2004) ("Because the bulk of contracts signed in this country are form contracts . . . any rule automatically invalidating adhesion contracts would be `completely unworkable.'") (quoting Hartland Computer Leasing, 770 S.W.2d at 527). Rather, an adhesive provision is unenforceable only if it fails to comport with the parties' reasonable expectations and is unexpected or unconscionably unfair. Id.

The Plaintiffs argue that the agreement to arbitrate is procedurally unconscionable because the Arbitration Rider...