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Muhammad v. County Bank of Rehoboth Beach

August 9, 2006

JALIYAH MUHAMMAD, ON HER OWN BEHALF AND ALL OTHERS SIMILARLY SITUATED, PLAINTIFF-APPELLANT,
v.
COUNTY BANK OF REHOBOTH BEACH, DELAWARE AND MAIN STREET SERVICE CORPORATION, DEFENDANTS-RESPONDENTS, AND EASYCASH, TELECASH, JOHN DOE AND JOHN ROE, DEFENDANTS.



On appeal from Superior Court, Appellate Division, whose opinion is reported at 379 N.J. Super. 222 (2005).

SYLLABUS BY THE COURT

(This syllabus is not part of the opinion of the Court. It has been prepared by the Office of the Clerk for the convenience of the reader. It has been neither reviewed nor approved by the Supreme Court. Please note that, in the interests of brevity, portions of any opinion may not have been summarized).

On May 23, 2003, plaintiff Jaliyah Muhammad received a short-term, single advance, unsecured loan of $200 from defendant, County Bank of Rehoboth Beach, Delaware. The principal plus a $60 finance charge was due on June 13, 2003. The annual percentage rate (APR) listed on the note was 608.33%. Muhammad extended the loan twice (with a $60 finance charge each time), resulting in a total of $180 in finance charges. She also obtained two similar loans from County Bank in April and June 2003.

To receive a loan, Muhammad had to complete and sign three pages of standard form contracts. The 2-page LOAN APPLICATION form contained the arbitration agreement, which included a provision that stated that all disputes "shall be resolved by binding individual (and not class) arbitration" under the procedures of the National Arbitration Forum (NAF). Above the signature line, the LOAN APPLICATION also stated, "By signing below you also agree to the Agreement to Arbitrate All Disputes and the Agreement Not To Bring, Join or Participate In Class Actions."

Muhammad also signed a LOAN NOTE AND DISCLOSURE form, which contained sections titled "Agreement to Arbitrate All Disputes" and "Agreement Not To Bring, Join or Participate In Class Actions." The first of those sections provided that all disputes "shall be resolved by binding individual (and not joint) arbitration" under the procedures of the NAF. Directly above the signature line, the LOAN NOTE AND DISCLOSURE stated, "BY SIGNING BELOW, YOU AGREE TO ALL OF THE TERMS OF THIS NOTE, INCLUDING THE AGREEMENT TO ARBITRATE ALL DISPUTES AND THE AGREEMENT NOT TO BRING, JOIN OR PARTICIPATE IN CLASS ACTIONS."

In February 2004, Muhammad filed a putative class-action suit against County Bank, Main Street Service Corp.(a loan servicer forCounty Bank), and Easy Cash and Telecash (both registered trade names of County Bank). She alleged that Easy Cash, Telecash, and Main Street violated the Consumer Fraud Act, the civil usury statute, and the New Jersey RICO statute by charging and conspiring to charge illegal rates of interest. She also alleged that County Bank aided and abetted the other defendants' unlawful conduct by renting out its name without actually funding the loans.

Muhammad argued that the arbitration agreement was unconscionable based on the class-action waiver and other provisions. The trial court disagreed and granted defendants' motion to compel arbitration pursuant to the Federal Arbitration Act (FAA). The Appellate Division affirmed in a published opinion.

The Supreme Court granted Muhammad leave to appeal. Amici curiae briefs were filed in support of plaintiff by Legal Services of New Jersey; AARP, the Consumers League of New Jersey, and the National Association of Consumer Advocates; and the Attorney General on behalf of the New Jersey Division of Consumer Affairs. Amici briefs were filed in support of defendants by the Chamber of Commerce of the United States of America and the New Jersey Business and Industry Association.

HELD: The provision in this consumer loan contract that forbids class-wide arbitration is unconscionable and thus unenforceable. The appropriate remedy is to sever the unconscionable provision and enforce the remaining valid portions of the arbitration agreement.

1. Pursuant to the Federal Arbitration Act, 9 U.S.C. §§ 1-16, arbitration agreements are on the same footing as other contracts; states cannot require a judicial forum to resolve claims that parties have agreed to resolve by arbitration. However, state law contract defenses, such as fraud and unconscionability, may be applied to invalidate arbitration agreements without violating the FAA. Although questions of interpretation of an arbitration agreement are matters for the arbitrator to decide, the issue of whether an arbitration agreement is valid is a question for the courts. In this case, the loan application and note contain language that unmistakably bars class-wide arbitration; thus, an arbitrator need not interpret the arbitration agreement to determine whether it allows class-wide arbitration. The Court thus has the power to examine whether the class-arbitration waiver is unconscionable, and thus invalid, under New Jersey law. (pp. 11-15)

2. The essential nature of a contract of adhesion is that it is presented on a take-it-or-leave-it basis, commonly in a standard printed form, with little or no opportunity for the "adhering" party to negotiate. The fact that a contract is one of adhesion, however, is only the beginning of the inquiry into whether the contract, or a specific provision in the contract, should be deemed unenforceable based on policy considerations. Rudbart v. North Jersey District Water Supply Commission, 127 N.J. 344 (1992) requires a case-by-case, fact-sensitive examination into (1) the subject matter of the contract, (2) the parties' relative bargaining positions, (3) the degree of economic compulsion motivating the "adhering" party, and (4) the public interests affected by the contract. (pp. 15-17)

3. The class-action mechanism is valuable to litigants, the courts, and the public interest. By allowing the aggregation of claims, the class-action vehicle remedies problems facing individual litigants who seek small recoveries, by overcoming the inability to obtain legal representation and the disincentive to investigate and file claims. A class-action proceeding also can aid in the efficient administration of justice by avoiding the expense of relitigating similar claims. (pp. 18-20)

4. Applying Rudbart's four factors, the Court determines that the presence of the class-arbitration waiver in Muhammad's consumer arbitration agreement, which is a contract of adhesion, renders that agreement unconscionable as a matter of New Jersey contract law. Rudbart's fourth factor is the most important in the present case. Muhammad's individual consumer-fraud case involves a small amount of damages, rendering individual enforcement of her rights (and the rights of her fellow consumers) difficult if not impossible. The effect of the class-arbitration bar is to preclude any realistic challenge to the substance of the loan-contract's terms in pursuit of statutory rights. Because class-action waivers reduce the possibility of finding competent counsel to advance a cause of action, as a practical matter they can result in shielding defendants from liability for failing to comply with the laws of this State. Those public interest concerns override the defendants' right to seek to enforce the class-arbitration bar in their agreement. (pp. 20-26).

5. New Jersey's public policy favoring arbitration is not determinative of whether a specific class-arbitration waiver is enforceable. The arbitration process does not require that claims be brought only by individuals, and class-arbitration waivers do not make arbitration a more streamlined and efficient forum for resolving disputes. The drafters of arbitration agreements and arbitration forum rules may allow for the development of new procedures to address the perceived problems with the current arbitration system as it applies to class arbitration. (pp. 27-29)

6. The Court's decision is not based on a determination that the arbitral forum, per se, prevents consumer-fraud litigants from pursuing their rights. The Court's consideration of the public interests affected by the contract compels a broad inquiry into how class-action waivers affect the various interests protected under the Consumer Fraud Act. (pp. 30-31)

7. The unconscionable class-arbitration waivers in the arbitration agreement are severable. Once they are removed, the rest of the arbitration agreement is enforceable. (pp. 32-33)

The judgment of the Appellate Division is REVERSED and the matter is REMANDED to the trial court for further proceedings consistent with this opinion.

JUSTICE RIVERA-SOTO, CONCURRING IN PART and DISSENTING IN PART, expresses the view that the arbitration agreements, including the class-arbitration waiver provisions, are enforceable. For the reasons expressed by the Appellate Division and the trial court, he finds that the class-arbitration waivers are not unconscionable.

CHIEF JUSITCE PORITZ and JUSTICES LONG, ZAZZALI and WALLACE join in JUSTICE LaVECCHIA's opinion. JUSTICE RIVERA-SOTO filed a separate opinion concurring in part and dissenting in part. JUSTICE ALBIN did not participate.

The opinion of the court was delivered by: Justice LaVECCHIA

Argued February 14, 2006

In this appeal we must determine whether a provision in an arbitration agreement that is part of a consumer contract of adhesion is unconscionable and therefore unenforceable because it forbids class-wide arbitration. Plaintiff entered into a short-term loan agreement, the terms of which she claims violate the State's consumer-fraud statutes. Her complaint includes allegations that the State's civil usury limits are being evaded in loan transactions such as hers by means of a conspiracy involving complex financial dealings among out-of-state financial entities. The damages allegedly caused by such transactions are small on an individual-by-individual basis, but are substantial when aggregated into a class claim. Plaintiff seeks, therefore, to pursue a class action and is willing to pursue her class-wide claim in the arbitral forum but for the arbitration agreement's class-arbitration bar. Both the trial court and the Appellate Division found the class-arbitration bar enforceable.

Applying the controlling test for determining unconscionability for contracts of adhesion set forth in Rudbart v. North Jersey District Water Supply Commission, 127 N.J. 344, cert. denied, 506 U.S. 871, 113 S.Ct. 203, 121 L.Ed. 2d 145 (1992), we hold that the class-arbitration waiver in this consumer contract is unenforceable. Such a waiver would be unconscionable whether applied in a lawsuit or in arbitration. We further conclude that the appropriate remedy in these circumstances is to sever the unconscionable provision and enforce the otherwise valid arbitration agreement.

I.

Defendant County Bank of Rehoboth Beach, Delaware (County Bank) is a federally-insured depository institution chartered under Delaware law. Defendant Main Street Service Corp. (Main Street) is a loan servicer for County Bank. Main Street operates a telephone service center in Pennsylvania. Defendants Easy Cash and Telecash are registered trade names of County Bank.

On May 23, 2003, plaintiff Jaliyah Muhammad, a part-time student at Berkeley College in Paramus, received a short-term, single advance, unsecured loan of $200 from County Bank. According to the terms of the LOAN NOTE AND DISCLOSURE form that Muhammad signed, the principal, along with a finance charge of sixty dollars, was due on June 13, 2003. The annual percentage rate listed on the loan note was 608.33%. According to Muhammad, she twice extended the loan (with a sixty dollar finance charge each time) because she could not repay it, resulting in a total of $180 in finance charges. Those facts are unchallenged by defendants. Muhammad also obtained two similar loans from County Bank, dated April 28, 2003 and June 6, 2003.

Muhammad had to complete and return three pages of standard form contracts in order to receive a loan. The first two pages, entitled "LOAN APPLICATION," were signed by Muhammad on April 28, 2003. Muhammad did not have to complete that form again in connection with the loans made on May 23, 2003 and June 6, 2003. The first page of the LOAN APPLICATION requested general ...


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