On certification of a Question of Law to United States Circuit Court of Appeals for the Third Circuit.
(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).
This matter requires the Supreme Court to consider a question of law certified by the United States Court of Appeals for the Third Circuit: whether an arbitration agreement found in a consumer loan contract is unconscionable, in whole or in part, under New Jersey contract law. To answer that question, the Court begins with the facts as presented by the federal court. The Court does not resolve the factual differences that exist between the parties in this dispute.
Delta Funding Corp. entered into a mortgage loan contract with Alberta Harris, a 78-year-old woman with a sixth grade education and little financial sophistication, whose sole source of income was social security payments. Delta later assigned the loan to Wells Fargo. The $37,700 loan had an annual percentage rate of 14% and was secured by a mortgage on Harris's home. At the time of the loan, Harris owned her home outright and had lived in it for more than 30 years.
An arbitration agreement contained in the loan contract allows either party to elect binding arbitration as the forum to resolve certain claims; actions for foreclosure and similar actions were excluded from arbitration. The arbitration agreement provides that no claims shall be arbitrated "on a class action or class-wide basis." In respect of costs, the agreement provides that that "the arbitrator will decide who will ultimately be responsible for paying the filing, administrative and/or hearing fees in connection with the arbitration"; that "unless inconsistent with applicable law," each party shall be responsible for it own fees for attorneys, experts and witnesses regardless of which party prevails; and that the costs of any appeal will be the responsibility of the appealing party regardless of the outcome of the appeal. The agreement also states that if any portion of the agreement is deemed invalid or unenforceable, the remaining portions of the agreement shall remain enforceable.
When Harris was unable to make the loan payments, Wells Fargo instituted a foreclosure action in New Jersey Superior Court. Harris filed an answer and counterclaim, as well as a third-party complaint against Delta that alleged violations of the Truth in Lending Act (TILA), the Real Estate Settlement Procedures Act (RESPA), and the New Jersey Consumer Fraud Act (CFA). Delta filed a petition in federal district court seeking to compel arbitration of Harris's claims against Delta. Harris responded by filing a motion for summary judgment contending that the arbitration agreement was unconscionable and unenforceable. The federal district court denied Harris's motion for summary judgment and granted Delta's motion to compel arbitration. The state court then dismissed Harris's third-party complaint against Delta.
Harris appealed to the United States Court of Appeals for the Third Circuit. The Third Circuit issued a certification order to this Court pursuant to Rule 2:12A-3. The Supreme Court granted certification of the following question: "Is the arbitration agreement at issue, or any provision thereof, unconscionable under New Jersey law, and, if so, should such provision or provisions be severed?"
In support of Harris, amici curiae briefs were received by Legal Services of New Jersey, the Attorney General on behalf of the New Jersey Division of Consumer Affairs, the American Civil Liberties Union of New Jersey, the New Jersey Institute for Social Justice, New Jersey Citizen Action, the New Jersey Public Policy Research Institute, the National Association of Consumer Advocates, AARP, the Center for Responsible Lending, and Seton Hall School of Law Center for Social Justice. In support of Delta, amici briefs were filed by the United States Chamber of Commerce, the New Jersey Business and Industry Association, and the American Financial Services Association.
HELD: The ambiguous provisions of the arbitration agreement contained in this mortgage loan contract may be unconscionable and unenforceable if they are interpreted and applied by an arbitrator in a manner that is unfavorable to the consumer, as described in the Court's opinion.
1. In answering the question of state law presented, the Court's inquiry is limited. It is the role of an arbitrator -- not the courts -- to interpret ambiguous provisions of an arbitration agreement. Thus, to the extent that the unconscionability of an ambiguous provision depends on how the arbitrator interprets the provision, the Court cannot determine whether the provision is actually unconscionable.For purposes ofanswering the certified question, the Court addresses how the ambiguous provisions, if interpreted and applied in a mannerdetrimental to Harris,could be unconscionable. (pp. 7-8)
2. Based on state law principles that apply to contracts generally, a court can refuse to enforce an arbitration agreement if it is found to be unconscionable. Pursuant to Rudbart v. North Jersey District Water Supply Commission, 127 N.J. 344 (1992), that determination 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. The procedural unconscionability of a consumer contract of adhesion is taken into account when the court considers the public interests affected by the contract. (pp. 9-11)
3. A term in a contract of adhesion that could be interpreted by an arbitrator to force a consumer to pay all the costs of mandatory arbitration is unconscionable, if interpreted and applied in that manner, because it would effectively deter the vindication of the statutory rights of the consumer and others who are similarly situated. (pp. 12-16)
4. The CFA and TILA mandate an award of attorneys' fees and costs to prevailing parties; such fees and costs plainly are recoverable by Harris under the arbitration agreement. The clause that requires the parties to bear their own fees and costs, no matter who prevails, "[u]nless inconsistent with applicable law," suggests that the arbitrator may not have the power to award fees when that statutory remedy is merely discretionary. To the extent that this provision is interpreted to prevent Harris from recovering the discretionary fees and costs available under RESPA, it is unconscionable. (pp. 16-17)
5. The clause in the arbitration agreement that provides that the appealing party will bear the costs of the appeal, "regardless of the outcome of the appeal," also is unconscionable to the extent that it would bar Harris from being awarded costs if she prevailed on her appeal. Even if Harris did not prevail on an appeal, this provision would be unconscionable if she were required to incur the entire appeals cost. The Court reaches this conclusion for the same reasons it finds that a provision forcing a consumer to pay all the hearing-level costs of arbitration would be unconscionable. (pp. 17-18)
6. If an arbitrator were to interpret the disputed provisions in a manner that would render them unconscionable, the remainder of the arbitration agreement can be enforced after severing the unconscionable provisions. (pp. 18-19)
7. Class arbitration waivers are not unconscionable per se. Harris is not even seeking to bring a class claim. Because of the substantial damages involved, including statutory attorneys' fees and costs if she prevails, Harris has adequate incentive to bring her claim as an individual action. The class-arbitration waiver in this case is enforceable. (pp. 20-21)
8. Harris must arbitrate her third-party claims against Delta even though they are similar to defenses she has raised against Wells Fargo in the state court foreclosure proceeding. Although arguing similar claims in two forums may be burdensome, it is not unconscionable. The burden is alleviated by the fact that attorneys' fees and costs are available to Harris under the CFA if she successfully asserts a CFA-based defense in the foreclosure action. (pp. 21-24)
9. Harris's argument that other clauses of the arbitration agreement are unconscionable, such as the provisions related to discovery and confidentiality, are a challenge to arbitration generally and as such are not persuasive. (pp.24-25)
JUSTICE ZAZZALI, CONCURRING IN PART and DISSENTING IN PART, agrees that certain provisions in the arbitration agreement are unconscionable. However, he would additionally hold that the provisions creating a bifurcated claims structure (requiring certain claims to be brought in arbitration while others must be brought in court) and the class-action waiver are unconscionable. Even if he were to accept the majority's view, he would find that the objectionable provisions cannot be severed and, as a whole, the arbitration agreement is unconscionable.
JUSTICE RIVERA-SOTO, DISSENTING, would dismiss the certification of the question of law presented as improvidently granted, as the issue of unconscionability is one that depends on the specific facts of the case.
CHIEF JUSITCE PORITZ and JUSTICES LONG and WALLACE join in JUSTICE LaVECCHIA's opinion. JUSTICE ZAZZALI filed a separate opinion concurring in part and dissenting in part. JUSTICE RIVERA-SOTO filed a separate, dissenting opinion. JUSTICE ALBIN did not participate.
The opinion of the court was delivered by: Justice LaVECCHIA
This matter presents a question of law certified and submitted by the United States Court of Appeals for the Third Circuit pursuant to the procedures set forth in Rule 2:12A. We have been asked whether an arbitration agreement found in a consumer loan contract is unconscionable, in whole or in part, under New Jersey contract law. Because many of the agreement's provisions are ambiguous, interpretation of the contract by an arbitrator is necessary before there can be a final resolution of this dispute. However, to the extent that the procedural posture of this matter permits, we hold that several parts of the arbitration agreement may be unenforceable based on unconscionability doctrine if interpreted by an arbitrator unfavorably to the consumer as described herein.
We begin with the facts as presented by the federal court, although we acknowledge the presence of factual disputes between the parties. R. 2:12A-4. The purpose of the certification process is to answer the question of law submitted pursuant to Rule 2:12A, not to resolve those factual differences. See R. 2:12A-1.
Plaintiff Delta Funding Corp. (Delta) is a New York mortgage lender that extends loans primarily to borrowers in the sub-prime lending market. In December 1999, Delta entered into a mortgage loan contract with defendant Alberta Harris, a seventy-eight-year-old woman with only a sixth-grade education and little financial sophistication. The $37,700 loan was secured by a mortgage on Harris's home in Newark.*fn1 The loan had an annual percentage rate of fourteen percent. At the time, Harris owned her home outright and had lived in it for more than thirty years. Delta subsequently assigned the loan to Wells Fargo as trustee.
The loan contains an arbitration agreement that allows either party to elect binding arbitration as the forum to resolve covered claims. The agreement excludes from arbitration "any action to effect a judicial or non-judicial foreclosure or to establish a deficiency judgment," as well as a number of similar actions. The agreement provides that "[t]here shall be no right or authority for any Claims to be arbitrated on a class action or class-wide basis." In respect of costs, the agreement further provides that
[a]t your written request, we will consider in good faith making a temporary advance of all or part of the filing, administrative and/or hearing fees in connection with any Claim you initiate as to which you or we seek arbitration. At the conclusion of the arbitration, the arbitrator will decide who will ultimately be responsible for paying the filing, administrative and/or hearing fees in connection with the arbitration. Unless inconsistent with applicable law, each party shall bear the expense of that party's attorneys', experts' and witness fees, regardless of which party prevails in the arbitration.
The agreement also provides for an appeal procedure within arbitration and states that "[t]he costs of . . . [any such] appeal will be borne by the appealing party regardless of the outcome of the appeal."
Under the agreement, Harris is permitted to select the American Arbitration Association (AAA), J.A.M.S./Endispute (JAMS), or the National Arbitration Forum (NAF) as the forum for any claim. The agreement also contains a severability clause, which states that "[i]f any portion of this Agreement is deemed invalid or unenforceable under any law or statute consistent with the [Federal Arbitration Act], it shall not invalidate the remaining portions of this Agreement or the Credit Transaction, each of which shall be enforceable regardless of such invalidity."
When Harris, whose only source of income was Social Security payments, was unable to make the required loan payments, Wells Fargo instituted a mortgage foreclosure action in New Jersey Superior Court. Harris responded with an answer and counterclaim, as well as a third-party complaint against Delta, alleging violations of the Truth in Lending Act (TILA), 15 U.S.C. §§ 1601 to -67, the Real Estate Settlement Procedures Act (RESPA), 12 U.S.C. §§ 2601 to -17, and the New Jersey Consumer Fraud Act (CFA), N.J.S.A. 56:8-1 to -135. Thereafter, Delta filed a petition in federal district court seeking to compel arbitration of Harris's affirmative claims against Delta. Harris filed a motion for summary judgment contending that the arbitration agreement was unconscionable and unenforceable. In March 2004, the district court denied that motion for summary judgment and granted Delta's motion to compel arbitration. Delta Funding Corp. v. Harris, 396 F. Supp. 2d 512 (D.N.J. 2004). The state court presiding over the foreclosure action then dismissed Harris's third-party complaint against Delta, which had been held in abeyance.
Harris appealed to the United States Court of Appeals for the Third Circuit. A three-judge panel of the Third Circuit issued a petition order to this Court pursuant to Rule 2:12A-3, in which the panel certified the question: "Is the arbitration clause at issue in this case, or any provision thereof, unconscionable under New Jersey law, N.J. Stat. Ann. § 12A:2-302, and if so, should such provision or provisions be severed." Delta Funding Corp. v. Harris, No. 04-1951, 2005 U.S. App. LEXIS 24531 (3d Cir. July 27, 2005). Harris submitted a brief urging that we grant certification, but asking that we remove the reference to N.J.S.A. 12A:2-302 because her unconscionability claim is based on the common law. See R. 2:12A-2.
We granted certification, reformulating the question as follows: "Is the arbitration agreement at issue, or any provision thereof, unconscionable under New Jersey law, and, if so, should such provision or provisions be severed?" 185 N.J. 255 (2005). Briefs were received from the parties; in addition, numerous groups filed submissions as friends of the court. In support of Harris, amici briefs were received from Legal Services of New Jersey, the Attorney General on behalf of the New Jersey Division of Consumer Affairs, the American Civil Liberties Union of New Jersey, the New Jersey Institute for Social Justice, New Jersey Citizen Action, the New Jersey Public Policy Research Institute, the National Association of Consumer Advocates, AARP, the Center For Responsible Lending, and Seton Hall School of Law Center for Social Justice. The United States Chamber of Commerce, the New Jersey Business and Industry Association, and the American Financial Services Association filed amicus briefs in support of Delta.
We address first the procedural posture of this matter. Because we have been asked by the Third Circuit to answer a discrete question of state law, our inquiry is limited. Under federal arbitration law, it is ordinarily the role of an arbitrator and not the courts to interpret ambiguous provisions of an arbitration agreement. Green Tree Fin. Corp. v. Bazzle, 539 U.S. 444, 451-53, 123 S.Ct. 2402, 2407, 156 L.Ed. 2d 414, 422-23 (2003) (plurality opinion); PacifiCare Health Sys., Inc. v. Book, 538 U.S. 401, 406-07, 123 S.Ct. 1531, 1535-36, 155 L.Ed. 2d 578, 584 (2003). That general rule is especially applicable where the arbitration agreement contains "sweeping language concerning the scope of the questions committed to arbitration." Bazzle, supra, 539 U.S. at 453, 123 S.Ct. at 2407, 156 L.Ed. 2d at 4223. Most of the disputed provisions in the instant arbitration agreement are, to some degree, ambiguous. To the extent that the unconscionability of those provisions ultimately turns on how the arbitrator resolves the ambiguities, we are unable to determine whether the provisions are, in fact, unconscionable.*fn2 For purposes of answering the question of state law posed by the Third Circuit, we address how the ambiguous provisions, if interpreted and applied in a manner detrimental to Harris, could be unconscionable. In doing so, we identify general principles of New Jersey contract law that the Third Circuit and the arbitrator can then apply to the agreement.
In today's companion decision, Muhammad v. County Bank of Rehoboth Beach, ___ N.J. ___ (2006) (slip op. at ___), we recognized the basic premise that when a party to an arbitration agreement argues that the agreement is unconscionable and unenforceable, that claim is decided based on the same state law principles that apply to contracts generally. The Federal Arbitration Act (FAA), 9 U.S.C. §§ 1 to -16, expresses a "liberal federal policy favoring arbitration agreements."
Moses H. Cone Mem'l Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 24, 103 S.Ct. 927, 941, 74 L.Ed. 2d 765, 785 (1983). New Jersey's public policy similarly favors enforcement of valid agreements to arbitrate. See Martindale v. Sandvik, Inc., 173 N.J. 76, 83-86 (2002) (citing New Jersey's Arbitration Act, N.J.S.A. 2A:24-1 to -11). The FAA, however, permits courts to refuse enforcement of an arbitration agreement to the extent "such grounds . . . exist at law or in equity for the revocation of any contract."
9 U.S.C. § 2. Generally recognized contract defenses, such as duress, fraud, and unconscionability, can justify judicial refusal to enforce an arbitration agreement. Doctor's Assocs., Inc. v. Casarotto, 517 U.S. 681, 686-87, 116 S.Ct. 1652, 1656, 134 L.Ed. 2d 902, 908-09 (1996); Muhammad, ...