Wisconsin Auto Title Loans, Inc. v. Jones, 2006 WI 53 (Wis. 5/25/2006)

• Decision Date: 25 May 2006
• Docket Number: No. 2003AP2457.,2003AP2457.
• Parties: Wisconsin Auto Title Loans, Inc., Plaintiff-Appellant-Petitioner, v. Kenneth M. Jones, Defendant-Respondent.
• Court: Wisconsin Supreme Court

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2006 WI 53

Wisconsin Auto Title Loans, Inc., Plaintiff-Appellant-Petitioner, v. Kenneth M. Jones, Defendant-Respondent.

No. 2003AP2457.

Supreme Court of Wisconsin.

Opinion Filed: May 25, 2006.

Appeal from the Circuit Court, Milwaukee County, Michael Guolee Judge.

REVIEW of a decision of the Court of Appeals. Affirmed. 2005 WI App 86 Reported at: 280 Wis. 2d 823, 696 N.W.2d 214 (Ct. App. 2005-Published)

For the plaintiff-appellant-petitioner there were briefs by Kenneth R. Nowakowski, Lisa M. Arent, and Whyte Hirschboeck Dudek S.C., Milwaukee, and oral argument by Kenneth R. Nowakowski.

For the defendant-respondent there was a brief by Peter M. Koneazny and Legal Aid Society of Milwaukee, Inc., and oral argument by Peter M. Koneazny.

An amicus curiae brief was filed by Deborah M. Zuckerman, Michael Schuster, and American Association of Retired Persons, Washington, D.C.; Mary Catherine Fons and Fons Law Firm, Stoughton, on behalf of AARP, Consumer Federation of America, National Association of Consumer Advocates, and National Consumer Law Center.

An amicus curiae brief was filed by Stephen E. Meili, Sarah N. Mervine, and University of Wisconsin Law School, Madison, on behalf of University of Wisconsin Law School Consumer Law Litigation Clinic.

An amicus curiae brief was filed by Frank Tuerkheimer and University of Wisconsin Law School, Madison, on behalf of University of Wisconsin Law Professors.

SHIRLEY S. ABRAHAMSON, C.J.

¶ 1 This is a review of a published decision of the court of appeals affirming an order by the circuit court for Milwaukee County, Michael D. Guolee, Judge.¹ The circuit court denied the motion of Wisconsin Auto Title Loans, Inc. to stay judicial proceedings on Kenneth Jones's counterclaims and to compel Kenneth Jones, the borrower, to arbitrate his counterclaims. The court of appeals affirmed the circuit court's order and we affirm the decision of the court of appeals.

¶ 2 The dispositive issue in this case is whether the arbitration provision in the loan agreement between Wisconsin Auto Title Loans and the borrower is unconscionable and, therefore, unenforceable. If the arbitration provision is unconscionable, the circuit court was correct in not staying judicial proceedings or compelling arbitration on the borrower's counterclaims.

¶ 3 The circuit court concluded that the "arbitration provision is unconscionable under general common law contract standards . . . and the unconscionability provision of the Wisconsin Consumer Act" and that the provision "is both procedurally and substantively unconscionable according to those standards."² Accordingly, the circuit court denied the motion of Wisconsin Auto Title Loans to compel arbitration on the borrower's counterclaims and to stay the court proceedings. The court of appeals also held the arbitration provision unconscionable on procedural and substantive grounds.

¶ 4 We hold that the arbitration provision of the loan agreement between Wisconsin Auto Title Loans and the borrower is unconscionable.

¶ 5 The challenge to the validity of the arbitration provision is to be decided by the courts, even though the arbitration provision in the instant contract provides that the validity of the arbitration provision is to be decided in arbitration. Indeed, Wisconsin Auto Title Loans does not argue that the validity of the arbitration provision must be decided in arbitration.

¶ 6 The United States Supreme Court has made it clear that although challenges to the validity of a contract as a whole must be made in arbitration if the contract so provides, challenges to an arbitration provision in a contract may be raised in a court proceeding.³ Like the arbitration agreement in the instant case, the arbitration agreement in Buckeye Check Cashing, Inc. v. Cardegna, No. 04-1264, slip op. at 2 (U.S. Feb. 21, 2006), expressly provided that the arbitrator was to decide challenges to the validity of the arbitration provision. Therefore, because this appeal addresses only the unconscionability of the arbitration clause, not the validity of the contract as a whole, the issue is properly before a court and not an arbitrator.

¶ 7 The following factors render the arbitration provision procedurally unconscionable: Wisconsin Auto Title Loans was in the business of providing loans with automobile titles as collateral and was experienced in drafting such loan agreements; Wisconsin Auto Title Loans was in a position of substantially greater bargaining power than the borrower; the borrower was indigent and in need of cash; and the loan agreement was an adhesion contract presented to the borrower on a take-it-or-leave-it basis.

¶ 8 The broad, one-sided, unfair "save and except" parenthetical in the arbitration provision of the loan agreement allowing Wisconsin Auto Title Loans full access to the courts, free of arbitration, while limiting the borrower to arbitration renders the arbitration provision substantively unconscionable. Other factors support this conclusion of law.

¶ 9 Thus a sufficient quantum of both procedural and substantive unconscionability exists to render the arbitration provision invalid. We therefore affirm the decision of the court of appeals and remand the matter to the circuit court for further proceedings on Wisconsin Auto Title Loans' replevin action and the borrower's answer and counterclaims.

I

¶ 10 No evidentiary proceedings were held in the circuit court. The following facts are in the record and are not disputed.

¶ 11 Wisconsin Auto Title Loans is a Wisconsin corporation that provides short-term loans to consumers.

¶ 12 On December 6, 2001, Jones, the borrower, obtained an $800 loan from Wisconsin Auto Title Loans. The borrower and Wisconsin Auto Title Loans entered into a loan agreement, promissory note, and security agreement providing the borrower an $800 loan. We refer to these documents collectively as the "loan agreement."

¶ 13 The loan agreement executed by Wisconsin Auto Title Loans and the borrower is a pre-printed standard form short-term loan agreement provided by Wisconsin Auto Title Loans. To receive the loan, the borrower had to deliver a security interest in his motor vehicle, a 1992 Infiniti, in the form of a title to Wisconsin Auto Title Loans; purchase a $150, one-year membership in Wisconsin Auto Title Loans' "Continental Car Club"; and pay a $4 filing fee on the motor vehicle title.⁴

¶ 14 The loan agreement calls for a single payment of $1,197.08, due on January 3, 2002, which includes the original $800 loan amount, $243.08 of finance charges, and the $154 the borrower borrowed from Wisconsin Auto Title Loans to pay Wisconsin Auto Title Loans' fees. Wisconsin Auto Title Loans represents in its loan agreement that the annual percentage rate for the finance charge is 300%.

¶ 15 The loan agreement also includes the arbitration provision at issue in the instant case. The arbitration provision broadly states that all disputes, controversies, or claims between the borrower and Wisconsin Auto Title Loans relating to the loan agreement shall be decided by binding arbitration. Nevertheless, the arbitration provision carves out for Wisconsin Auto Title Loans the right to enforce the borrower's payment obligations in the event of default by judicial or other process, including self-help repossession. The arbitration provision provides as follows:

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 party, will be resolved by an arbitration proceeding which shall be administered by the American Arbitration Association under its Commercial 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. In the event LENDER initiates arbitration, LENDER shall pay the entire amount of such filing fee and 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.⁵

¶ 16 The loan agreement also includes a single printed page entitled REMINDER TO BORROWER, including seven reminders. The seventh reminder states as follows: "Please note, this is a higher interest loan. You should go to another source if you have the ability to borrow at a rate of interest below 25 percent per month or 300 percent APR. "⁶

¶ 17 At the bottom of this REMINDER is a place for a borrower to sign, indicating that he had read the reminder, understood its contents, and understood that unless he paid the amount due he was placing continued ownership of his automobile at risk. The borrower signed the reminder.

¶ 18 Beginning in January 2002, the borrower made several partial cash payments on the loan, which Wisconsin Auto Title Loans accepted. On April 22, 2002, Wisconsin Auto Title Loans served on the borrower a notice...