Wisconsin Auto Title Loans, Inc. v. Jones, 03-2457.

• Decision Date: 24 March 2005
• Docket Number: No. 03-2457.,03-2457.
• Citation: 2005 WI App 86,280 Wis.2d 823,696 N.W.2d 214
• Parties: WISCONSIN AUTO TITLE LOANS, INC., Plaintiff-Appellant, v. Kenneth M. JONES, Defendant-Respondent.
• Court: Wisconsin Court of Appeals

280 Wis.2d 823

2005 WI App 86

696 N.W.2d 214

WISCONSIN AUTO TITLE LOANS, INC., Plaintiff-Appellant,¹ v. Kenneth M. JONES, Defendant-Respondent.

No. 03-2457.

Court of Appeals of Wisconsin.

Oral argument May 27, 2004.

Decided March 24, 2005.

On behalf of the plaintiff-appellant, the cause was submitted on the briefs of Kenneth R. Nowakowski, Lisa M. Arent and Amy M. Salberg of Whyte Hischboeck Dudek S.C., Milwaukee. There was oral argument by Kenneth R. Nowakowski.

On behalf of the defendant-respondent, the cause was submitted on the brief of James A. Walrath, Hannah C. Dugan and Peter M. Koneazny of Legal Aid Society of Milwaukee, Inc., Milwaukee. There was oral argument by James A. Walrath.

Before Vergeront, Lundsten and Higginbotham, JJ.

¶ 1. HIGGINBOTHAM, J.

Wisconsin Auto Title Loans, Inc. appeals a circuit court order denying its motion to compel arbitration. Wisconsin Auto, pursuant to WIS. STAT. § 425.205 (2003-04)² of the Wisconsin Consumer Act (WCA), filed a replevin action against Kenneth Jones seeking recovery of Jones's automobile under a Loan Agreement, promissory note and security agreement (collectively, Loan Agreement). Jones answered and counterclaimed, raising numerous defects in the Loan Agreement. Jones also asked the court to certify this case as a class action. The dispositive issue in this case is whether the arbitration clause in the Loan Agreement is unconscionable and therefore unenforceable. We conclude it is and affirm the circuit court.

FACTS

¶ 2. In December 2001, Jones was unemployed and living from unemployment check to unemployment check. Jones borrowed $800 from Wisconsin Auto for bills and living expenses. The pre-printed standard form short-term Loan Agreement imposed certain terms on Jones, including (1) repayment of the loan within one month at 300% interest in the amount of $1,197.08; (2) relinquishment of a key to his car to Wisconsin Auto and guarantee of the car's title to Wisconsin Auto as collateral; and (3) mandatory arbitration on all claims arising out of the Loan Agreement. Wisconsin Auto also reserved the right to seek replevin of the secured collateral in court.

¶ 3. The Loan Agreement included the following paragraph:

11. Arbitration and Waiver of Jury Trial. BORROWER and LENDER agree that the transactions contemplated by, and occurring under, this Agreement, involve "commerce" under the Federal Arbitration Act ("FAA") (9 U.S.C. §§ 1 et seq.) Any and all disputes, controversies or claims (collectively "claims" or "claim"), whether preexisting, present or future, between the BORROWER and LENDER, or between BORROWER and any of LENDER's officers, directors, employees, agents, affiliates, or shareholders, arising out of or related to this Agreement (save and except the LENDER's right to enforce the BORROWER's payment obligations in the event of default, by judicial or other process, including self-help repossession) shall be decided by binding arbitration under the FAA. Any and all claims subject to arbitration hereunder, asserted by any part, will be resolved by an arbitration proceeding which shall be administered by the American Arbitration ... Rules (the "Arbitration Rules"), as presently published and existing. However, in the event that BORROWER initiates arbitration, BORROWER shall pay the first $125.00 of the filing fee required by the Arbitration Rules, and LENDER will pay the remaining amount of such fee, as well as any required deposit .... The parties agree to be bound by the decision of the arbitrator(s). Any issue as to whether this Agreement is subject to arbitration shall be determined by the arbitrator. This agreement to arbitrate will survive the termination of this Agreement. BY AGREEING

TO ARBITRATE DISPUTES, YOU WAIVE ANY RIGHT YOU MAY OTHERWISE HAVE HAD TO LITIGATE CLAIMS THROUGH A COURT OR TO HAVE A JURY TRIAL.

On the back of the Loan Agreement was the following portion of paragraph 10:

This Agreement shall be governed by the laws of the State of Wisconsin including the conflict of laws provision contained in § 421.201(5) (which provides that proceedings to recover collateral shall be governed by the law of the state where the collateral is located at the time of recovery unless the collateral is only temporarily removed for transportation or temporary employment). The unenforceability or invalidity of any portion of this Agreement shall not render unenforceable or invalid the remaining portions thereof.

¶ 4. Jones defaulted on the loan and Wisconsin Auto issued Jones a "Notice of Default." The notice informed Jones he was required to pay $1,627.32 on or before May 6, 2002 to avoid litigation and the repossession of his car. Jones did not pay the amount owed by the due date.

¶ 5. Wisconsin Auto filed a complaint for replevin against Jones seeking recovery of the property securing the Loan Agreement. Jones answered and counterclaimed against Wisconsin Auto, alleging, in part, that Wisconsin Auto's loan and collection practices violated both Jones's common law contract rights and various provisions of the WCA. Jones's counterclaims also asserted class action claims on behalf of a putative class of similarly situated Wisconsin Auto customers in Wisconsin.

¶ 6. Wisconsin Auto moved to compel arbitration of the issues raised in Jones's counterclaims pursuant to the arbitration clause, the Federal Arbitration Act and WIS. STAT. § 788.03 and to stay litigation on Jones's counterclaims but not on its replevin claim pursuant to 9 U.S.C. § 4 and WIS. STAT. § 788.02. After briefing and oral argument, the circuit court denied Wisconsin Auto's motion. Neither party requested an evidentiary hearing. The circuit court concluded, based on common law contract principles and the WCA, the arbitration provision was unconscionable because it was one-sided and the product of the parties' unequal bargaining power. Wisconsin Auto appeals.

DISCUSSION

¶ 7. Jones contends the arbitration clause at issue in this case is unconscionable and unenforceable. Wisconsin Auto first argues the Federal Arbitration Act preempts the WCA because the WCA, according to Wisconsin Auto, prohibits arbitration in secured consumer credit transactions. Wisconsin Auto also argues the circuit court erred by concluding the arbitration clause is unconscionable.

[1-4]

¶ 8. We consider both federal and state law to assess whether an arbitration clause is unconscionable or otherwise unenforceable. See Iberia Credit Bureau, Inc. v. Cingular Wireless, LLC, 379 F.3d 159, 166 (5th Cir. 2004). By enacting the Federal Arbitration Act (9 U.S.C. § 1 et seq.), Congress has declared a national policy favoring arbitration. Perry v. Thomas, 482 U.S. 483, 489 (1987). Questions of arbitrability must be addressed with a healthy regard for this policy. Moses H. Cone Mem'l Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 24 (1983),superseded by statute on other grounds, Bradford-Scott Data Corp., Inc. v. Physician Computer Network, Inc., 128 F.3d 504, 506 (7th Cir. 1997). The Federal Arbitration Act's purpose is "to reverse the longstanding judicial hostility to arbitration agreements ... and to place arbitration agreements upon the same footing as other contracts." Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20, 24 (1991). The Federal Arbitration Act established that any doubts concerning the scope of arbitrable issues should be resolved in favor of arbitration, whether the problem 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.,460 U.S. at 24-25.

¶ 9. The Supreme Court has interpreted the Federal Arbitration Act as mandating the enforcement of all arbitration agreements involving commerce, unless revocable on contractual grounds. See Doctor's Assocs., Inc. v. Casarotto, 517 U.S. 681, 686-87 (1996). 9 U.S.C. § 2 of the Federal Arbitration Act provides, in relevant part,

A written provision in any ... contract evidencing a transaction involving commerce to settle by arbitration a controversy thereafter arising out of said contract ... shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.

[5-7]

¶ 10. Consequently, according to 9 U.S.C. § 2, in determining whether the parties have made a valid arbitration agreement, state law may be applied if that state law governs issues concerning the validity, revocability and enforceability of contracts generally; the Federal Arbitration Act preempts "state laws applicable only to arbitration provisions." Doctor's Assocs., Inc.,517 U.S. at 687. Accordingly, the usual defenses to a contract such as fraud, unconscionability, duress and lack of consideration may be applied to invalidate an arbitration agreement, so long as the law under which the provision is invalidated is not applicable solely to arbitration agreements. See id. Where an arbitration agreement is found to be unconscionable pursuant to general state law principles, then it may be invalidated without offending the Federal Arbitration Act. See id. at 686. With these principles in mind, we consider whether the arbitration clause in the Loan Agreement is unconscionable. We conclude it is.

¶ 11. Wisconsin Auto argues it is required under the WCA to bring its replevin action in small claims court but that requirement does not exempt Jones's counterclaims from arbitration. Wisconsin Auto claims the parties agreed to arbitrate Jones's counterclaims pursuant to the arbitration clause and that parties to an arbitration agreement may agree to limit the scope of arbitration by excepting certain actions from arbitration. Finally, Wisconsin Auto argues the circuit court erred in concluding the arbitration clause was unconscionable; specifically, Wisconsin Auto maintains the arbitration agreement is not "one-sided" and the circuit court's finding that the contract is unconscionable due to "unequal bargaining power" is...