Tillman v. Commercial Credit Loans, Inc.

• Decision Date: 25 January 2008
• Docket Number: No. 360A06.,360A06.
• Citation: 362 N.C. 93,655 S.E.2d 362
• Court: North Carolina Supreme Court
• Parties: Fannie Lee TILLMAN and Shirley Richardson, on behalf of themselves and all others similarly situated v. COMMERCIAL CREDIT LOANS, INC.; Commercial Credit Corporation; Citigroup, Inc.; Citicorp, Inc.; Citifinancial, Inc.; and Citifinancial Services, Inc.

655 S.E.2d 362

362 N.C. 93

Fannie Lee TILLMAN and Shirley Richardson, on behalf of themselves and all others similarly situated v. COMMERCIAL CREDIT LOANS, INC.; Commercial Credit Corporation; Citigroup, Inc.; Citicorp, Inc.; Citifinancial, Inc.; and Citifinancial Services, Inc.

No. 360A06.

Supreme Court of North Carolina.

January 25, 2008.

Appeal pursuant to N.C.G.S. § 7A-30(2) from the decision of a divided panel of the Court of Appeals, 177 N.C.App. 568, 629 S.E.2d 865 (2006), reversing an order denying defendants' motion to compel arbitration entered on 20 January 2005 by Judge Ronald L. Stephens in Superior Court, Vance County, and remanding for entry of an order granting that motion. Heard in the Supreme Court 13 February 2007.

Jones Martin Parris & Tessener Law Offices, P.L.L.C., by John Alan Jones and G. Christopher Olson, Raleigh, for plaintiff-appellants.

Moore & Van Allen, PLLC, by Jeffrey M. Young, Morrisville, and Rogers & Hardin LLP, by Richard H. Sinkfield and Christopher J. Willis, Atlanta, GA, for defendant-appellees.

North Carolina Justice Center, by Carlene McNulty, Raleigh, for North Carolina Justice Center, Financial Protection Law Center, and Trial Lawyers for Public Justice, amici curiae.

Ellis & Winters LLP, by Wendy I. Sexton, Raleigh, for American Financial Services Association, Chamber of Commerce of the United States of America, and Consumer Bankers Association, amici curiae.

The question chiefly presented is whether the arbitration clause contained in the loan agreements that serve as the basis for the instant case is unconscionable. Because the clause is one-sided, prohibits joinder of claims and class actions, and exposes claimants to prohibitively high costs, we hold that the trial court did not err in concluding as a matter of law that the clause is unconscionable.

TIMMONS-GOODSON, Justice.

I. BACKGROUND

Plaintiffs Fannie Lee Tillman and Shirley Richardson ("plaintiffs") are North Carolina residents who obtained loans from defendant Commercial Credit Loans, Inc. (n/k/a CitiFinancial Services, Inc.). On 22 September 1998, Fannie Lee Tillman obtained a loan for a term of 120 months with a principal amount of $18,253.68. In connection with the loan, Commercial Credit sold Mrs. Tillman single premium credit life and disability insurance with premiums of $1,058.80 and $1,005.95, respectively. On 4 June 1999, Shirley Richardson obtained a loan for a term of 180 months with a principal amount of $20,935.57. In connection with the loan, Commercial Credit sold Mrs. Richardson single premium credit life, disability, and involuntary unemployment insurance with premiums of $1,871.54, $1,109.49, and $1,227.72, respectively. Plaintiffs' loan principal amounts included their insurance premiums, which were financed over the life of the loan.

Credit life insurance pays off a borrower's loan if the borrower dies; credit disability pays off the loan if the borrower becomes disabled; and credit involuntary unemployment pays the loan if the borrower becomes involuntarily unemployed. The insurance is referred to as single premium because "the borrower is charged the entire insurance premium at the time the underlying loan is originated, with the premium being financed into and over the life of the loan." In July 1999 the North Carolina General Assembly outlawed single premium credit insurance for loans made or entered into on or after 1 July 2000. Act of July 15, 1999, ch. 332, sec. 5, 1999 N.C. Sess. Laws 1202, 1216 (codified at N.C.G.S. § 24-10.2(b) (2005)).

It is undisputed that both plaintiffs have limited financial resources. Mrs. Tillman's weekly after-tax take-home pay is approximately $258.00. Her husband is deceased, and as a result, Mrs. Tillman also receives $285.60 per month in pension benefits and $1063.00 per month in Social Security benefits. Mrs. Richardson works two jobs where she earns $12.70 per hour and $12.00 per hour. For both plaintiffs, their home is their most significant asset.

Plaintiffs' loan agreements contained the standard arbitration clauses that defendants have included in their loan agreements since 12 February 1996. The arbitration clause was drafted by defendants, and plaintiffs were given no opportunity to negotiate regarding the clause. The clause contains the following relevant provisions:

Agreement to Arbitrate Claims. Upon written request by either party that is submitted according to the applicable rules for arbitration, any Claim, except those specified below in this Provision, shall be resolved by binding arbitration in accordance with (i) the Federal Arbitration Act; (ii) the Expedited Procedures of the Commercial Arbitration Rules of the American Arbitration Association ("Administrator"); and (iii) this Provision, unless we both agree in writing to forgo arbitration. The terms of this Provision shall control any inconsistency between the rules of the Administrator and this Provision....

....

Claims Excluded from Arbitration. The following types of matters will not be arbitrated. This means that neither one of us can require the other to arbitrate:

• Any action to effect a foreclosure to transfer title to the property being foreclosed; or

• Any matter where all parties seek monetary damages in the aggregate of $15,000.00 or less in total damages (compensatory and punitive), costs, and fees.

....

Appeal. Either You or We may appeal the arbitrator's award to a three-arbitrator panel selected through the Administrator, which shall reconsider de novo any aspect of the initial award requested by the appealing party. The expedited procedures of the Administrator shall not govern any appeal. An appeal will be governed by Rule 23 of the Comprehensive Arbitration Rules and Procedures of J*A*M*S/Endispute, Inc.

....

No Class Actions/No Joinder of Parties. You agree that any arbitration proceeding will only consider Your Claims. Claims by or on behalf of other borrowers will not be arbitrated in any proceeding that is considering Your Claims. Similarly, You may not join with other borrowers to bring claims in the same arbitration proceeding, unless all of the borrowers are parties to the same Credit Transaction.

....

Costs. The cost of any arbitration proceeding shall be divided as follows:

• The party making demand upon the Administrator for arbitration shall pay $125.00 to the Administrator when the demand is made.

• We will pay to the Administrator all other costs for the arbitration proceeding up to a maximum of one day (eight hours) of hearings.

• All costs of the arbitration proceeding that exceed one day of hearing will be paid by the non-prevailing party.

• In the case of an appeal, the appealing party will pay any costs of initiating an appeal. The non-prevailing party shall pay all costs, fees, and expenses of the appeal proceeding and, if applicable, shall reimburse the prevailing party for the cost of filing an appeal.

• Each party shall pay his/her own attorney, expert, and witness fees and expenses, unless otherwise required by law.

....

Severability. If the arbitrator or any court determines that one or more terms of this Provision or the arbitration rules are unenforceable, such determination shall not impair or affect the enforceability of the other provisions of this Agreement or the arbitration rules.

In June 2002 plaintiffs commenced this suit¹ against defendants Commercial Credit Loans, Inc., Commercial Credit Corporation, Citigroup, Inc., CitiFinancial, Inc., CitiFinancial Services, Inc., and Citicorp, Inc.,² asserting claims for violations of North Carolina's Unfair and Deceptive Trade Practices Act, N.C.G.S. § 75-1.1, unjust enrichment, and breach of the duties of good faith and fair dealing. The claims rest on plaintiffs' contention that they did not want or need single premium credit insurance and that Commercial Credit did not tell them that the insurance was optional. In addition, plaintiffs claim that Commercial Credit was the sole beneficiary of the insurance policies. Plaintiffs' complaint specifically alleges that "Commercial Credit violated North Carolina law by failing to provide Plaintiffs with requisite disclosures regarding the credit insurance sold to them and by charging fees that were deceptive, unfair, duplicative, imposed without adequate commercial justification or disclosure, and in excess of the fees permitted by North Carolina law." Plaintiffs seek money damages based on the amount of credit insurance premiums collected by defendants.

Beginning in May 2003, defendants filed a series of motions to compel arbitration pursuant to the arbitration clause contained in plaintiffs' loan agreements. In an order entered on 20 January 2005, the trial court denied defendants' motion to compel arbitration dated 17 June 2004. The order included the following findings of fact:

9. The Commercial Credit arbitration clause is a standard-form contract of adhesion. The borrower is given no opportunity to negotiate out of the arbitration provision, and CitiFinancial Services, Inc. would not make a loan if the loan agreement did not include the arbitration provision. The loan documents, including the arbitration provision at issue, were drafted by Defendant.

10. Since the time CitiFinancial Services, Inc. began including an arbitration clause in its loan agreements, the lender has made more than 68,000 loans in North Carolina. During that time, CitiFinancial Services has pursued lawsuits in civil court against more than 3,700 borrowers in North Carolina, including over 2,000 collection actions and more than 1,700 foreclosure actions. Defendant has been able to pursue claims in civil court by virtue of two exceptions within the arbitration clause, which Defendant drafted, for (1) foreclosure actions and (2) matters in which less than $15,000.00 in damages, including costs and fees, are sought. The average amount in dispute in matters in which CitiFinancial Services, Inc. pursued legal action against...