Dalton v. Santander Consumer USA, Inc.

Citations: 7 N.M. 476; 2015 NMCA 030Docket: No. 35,101; Docket No. 33,136

Court: New Mexico Court of Appeals; March 23, 2015; New Mexico; State Appellate Court

SummaryOriginalCytator Case TreatmentBackward CitatorAnalysis

EnglishEspañolSimplified EnglishEspañol Fácil

An arbitration scheme in a vehicle financing contract is analyzed for substantive unconscionability, particularly regarding its exceptions for self-help and small claims remedies. The case centers on Eileen Dalton’s lawsuit against Santander Consumer USA, Inc. for fraud and other claims after her vehicle was repossessed despite timely payments. Santander sought to compel arbitration, but the district court found the carve-out provisions of the arbitration clause to be unreasonably one-sided, thus rendering the clause unenforceable, referencing Rivera v. American General Financial Services, Inc. The court affirmed that the arbitration clause was substantively unconscionable, as it mandated arbitration for Dalton's significant claims while exempting Santander’s key remedies. The court also concluded that there was no improper burden of proof shift and that the Federal Arbitration Act (FAA) does not preempt the application of the unconscionability doctrine in this context.

Dalton's allegations stem from two finance contracts related to a Cadillac and a Pontiac, both potentially sold to Santander by Performance Automotive Group. Following the repossession of the Cadillac due to a prior lien not being settled by the dealer, Performance agreed to credit Dalton’s payment towards a new vehicle. However, after selecting a Pontiac, that vehicle was also repossessed, leaving Dalton without a vehicle and without her initial payment being refunded.

Plaintiff initiated a lawsuit against several corporate entities and individuals, including Defendant, for allegations of fraud, conversion, breach of contract, breach of warranty of title, and violations of the UCC and Unfair Practices Act. Defendant sought to compel arbitration based on clauses in the Cadillac and Pontiac contracts, but the district court denied this motion, citing that the carve-out provisions were similar to those deemed unconscionable in Rivera. The court found that self-help remedies offered no real benefit to consumers and that small claims remedies were imbalanced, rendering the arbitration clause substantively unconscionable. Defendant appealed the decision.

The appellate court reviews the denial of the motion to compel arbitration and the unconscionability of the contract de novo. Unconscionability can be classified as procedural or substantive, with this case focusing on substantive unconscionability, which examines the fairness and legality of the contract terms. Provisions that unduly favor one party over another can be deemed unconscionable. The Supreme Court case Cordova held that a one-sided arbitration provision in a consumer loan agreement was unenforceable due to its self-serving nature. Similarly, in Rivera, an arbitration clause exempting the lender's self-help and judicial remedies from mandatory arbitration was deemed unconscionable, as it distorted the balance of rights between lenders and borrowers. The appellate court's previous attempts to justify a narrower application of unconscionability were rejected by the Supreme Court, reinforcing the principle that unfairly one-sided arbitration clauses cannot be upheld.

The Court found that the lender, despite being a secured creditor, had an unreasonably one-sided advantage by being able to pursue claims in court while compelling the plaintiff to arbitrate her claims. The Supreme Court affirmed that arbitrators possess broad authority to grant any necessary remedy, allowing for a full range of statutory and common law remedies in arbitration. Consequently, the one-sided arbitration exemptions were deemed unreasonable and void under state law. 

In subsequent cases involving nursing homes, the unconscionability doctrine was applied to invalidate seemingly bilateral arbitration clauses that exempted certain claims, such as those related to guardianship and collections, which were unlikely to be brought by residents. The practical effect of these clauses was found to favor the nursing homes unreasonably, similar to previous cases where clear one-sidedness was present. The Court refused to uphold the arbitration agreements in these instances, concluding that the carve-outs, while appearing bilateral, were substantively unconscionable and disproportionately favored the nursing homes. 

The excerpt also notes distinctions between the current case and the Rivera case, particularly regarding the specifics of the carve-out provisions in a car title loan contract that allowed the lender to enforce rights without arbitration, highlighting the nuanced differences in how these cases are interpreted.

The clause under examination differs from the Rivera case by being facially neutral regarding arbitration, though it effectively limits the borrower's access to judicial remedies. Unlike Rivera, which specifically exempted the lender’s self-help or judicial remedies, the current clause carves out all remedies in small claims court, which disproportionately benefits the lender. This small claims exemption allows the lender to maintain access to courts for significant claims as a secured creditor while restricting the borrower's judicial recourse. 

The arbitration scheme is deemed substantively unconscionable for two main reasons: it preserves the lender's court access for essential claims and allows for a scenario where, following a default, the lender can repossess the vehicle without judicial intervention and pursue deficiency judgments in small claims court—effectively circumventing arbitration. The lender can avoid arbitration throughout the entire process from repossession to potential garnishment, as claims typically fall below the small claims court threshold. Even in cases where the vehicle is secured in a manner that prevents repossession, the clause still enables the lender to seek judicial relief. The overall structure of the arbitration clause thus creates a significant imbalance, favoring the lender while limiting the borrower's legal options.

The availability of claims related to the Cadillac or Pontiac loans at the time of default may fluctuate, but they are generally accessible throughout much of the loan's duration, influencing the assessment of substantive unconscionability. Judicial repossession carve-outs for creditors have been deemed unfairly one-sided, as established in Rivera (2011-NMSC-033) and Ruppelt (2013-NMCA-014), which emphasize fairness in creditor-borrower relationships. The New Mexico Supreme Court recognizes borrower claims against lenders—including fraud, misrepresentation, and violations of consumer protection laws—as typical in disputes. These claims, which often entail punitive damages and attorney fees, are unlikely to fit within small claims jurisdiction, as specified in NMSA 1978 statutes. 

Defendant's arbitration clause applies to these common borrower claims, which lenders typically prefer to avoid litigating. The one-sided nature of the arbitration clause is particularly troubling in regards to claims for injunctive relief, as secured creditors can repossess collateral without needing an injunction, shifting the judicial action burden to borrowers. Consequently, borrowers must initiate legal action to prevent unlawful sales, but such remedies are constrained by the arbitration clause since small claims courts cannot issue injunctions. A federal case, Trompeter v. Ally Fin. Inc., supports this analysis, highlighting the disparity between a creditor's self-help repossession rights and a borrower's remedies, which are subject to arbitration, thereby contributing to a finding of unconscionability. Defendant's argument seeks to downplay the significance of the self-help carve-out, claiming it does not exempt self-help repossession from arbitration but merely acknowledges its existence.

Defendant argues that language in the contract exempting self-help repossession from arbitration is unnecessary and cannot be deemed unconscionable. The court notes that arbitrators possess broad authority to resolve cases and can grant remedies, including the ability to enjoin self-help actions related to disputes subject to arbitration. Although the Defendant, as a secured creditor, generally has the right to act outside the judicial process, the inclusion of an arbitration clause in financing contracts can potentially subject critical remedies, like deficiency judgments, to arbitration. However, the Defendant has created a small claims exception that affects these remedies, leading to an imbalance where the Defendant can choose its preferred forum while the borrower’s claims are confined to arbitration. This imbalance renders the arbitration clauses in the financing agreements substantively unconscionable.

Regarding the burden of proof on unconscionability, Defendant claims the district court improperly placed this burden on it, arguing the court raised the small claims exemption issue without evidence from Plaintiff. The court disagrees, stating that the proponent of unconscionability must prove it. At the hearing, Plaintiff’s attorney referenced a relevant case, asserting her burden of proof. The district court did not conduct an evidentiary hearing but concluded the arbitration clause was unconscionable based on its similarity to prior cases. The court was justified in raising the small claims issue and requesting counsel's arguments without shifting the burden of proof, as this does not violate any procedural rules.

Plaintiff asserted that the arbitration clause was unconscionable, arguing that the small claims exemption did not mitigate the imbalance created by allowing the Defendant unrestricted access to courts for certain claims while forcing consumers into arbitration for claims they are most likely to pursue. The court acknowledged that it needed to consider the ramifications of the small claims carve-out on consumers, which both parties discussed during the hearing, ultimately siding with Plaintiff. The district court was not obliged to conduct an evidentiary hearing on this issue, as the determination of substantive unconscionability can be made by evaluating contract terms at face value. The court found significant parallels to previously declared unconscionable exemptions in appellate cases, concluding that the small claims exception disproportionately favors lenders and is detrimental to borrowers. 

Defendant failed to effectively counter Plaintiff's argument regarding the unfairness of the carve-out, which had been established in prior cases. The court noted that it is self-evident that the most common claims a borrower may bring against a lender include fraud and violations of consumer protection laws. Given the nature of the collateral involved and the secured creditor's ability to pursue deficiency judgments in small claims court, the court determined that the carve-out lacks fairness for borrowers. The court also emphasized that Defendant could have presented evidence to dispute existing precedents concerning unconscionability but chose not to, and thus, its failure to rebut the claims was not grounds for reversal. Furthermore, the Federal Arbitration Act (FAA) mandates enforcement of valid arbitration agreements unless they are revocable under established contract law, which was not shown in this case.

The 'savings clause' allows state courts to invalidate arbitration agreements based on general contract defenses like fraud, duress, or unconscionability, but not on defenses unique to arbitration. The Supreme Court has maintained that the unconscionability doctrine can be applied to one-sided arbitration agreements, as established in various cases, including Strausberg and Flemma. A recent Tenth Circuit ruling suggested that New Mexico courts may be applying the unconscionability doctrine based on an incorrect view of arbitration's inferiority to litigation, but this issue remains unaddressed. Appeals are governed by New Mexico Supreme Court decisions, which must be followed even if they conflict with U.S. Supreme Court rulings. The New Mexico Supreme Court has previously rejected arguments that applying the unconscionability doctrine to certain exemptions contradicts the Federal Arbitration Act (FAA). Consequently, the arbitration provisions in question are deemed unfairly one-sided and unenforceable. The arbitration clause is inseparable from the contract, necessitating its removal from the entire agreement. The district court's order is affirmed.