7 N.M. 476
N.M. Ct. App.2015Background
- Plaintiff Eileen Dalton bought two used vehicles; financing contracts (Cadillac and Pontiac) contained identical arbitration clauses with a carve-out preserving "self-help" remedies (e.g., repossession) and "remedies in small claims court."
- After the first vehicle was repossessed due to an earlier lien, Performance Automotive credited Dalton $4,500 toward a second vehicle; that vehicle was also repossessed and Dalton did not get her $4,500 back.
- Dalton sued Santander Consumer USA for fraud, conversion, breach of contract, breach of warranty of title, UCC violations, and violations of the Unfair Practices Act. Santander moved to compel arbitration under the contracts’ arbitration clauses, which stated they were governed by the FAA.
- The district court denied Santander’s motion, finding the carve-outs (self-help and small claims) made the arbitration clause unreasonably one-sided and substantively unconscionable under New Mexico precedent.
- Santander appealed, arguing (1) the clause was not unconscionable because it was facially bilateral and the self-help language is superfluous, (2) the district court impermissibly shifted the burden of proof, and (3) the Federal Arbitration Act (FAA) preempts state-law unconscionability invalidation.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether the arbitration clause is substantively unconscionable because carve-outs favor the lender | Small-claims and self-help carve-outs practically preserve Santander’s likely remedies while forcing consumer claims into arbitration, so clause is one-sided | Carve-outs are facially bilateral or merely note non-arbitrable self-help rights and thus are not unconscionable | Arbitration clause is substantively unconscionable; carve-outs give defendant forum choice for its likely claims while relegating borrower’s likely claims to arbitration |
| Whether district court improperly shifted burden of proof on unconscionability | Plaintiff showed unconscionability consistent with precedent and alerted court; no need for evidentiary hearing | Court raised and decided small-claims issue sua sponte, shifting burden to Santander without evidence | No improper burden shift; plaintiff pleaded the defense, cited controlling precedent, and court relied on facial contract analysis and parties’ argument |
| Whether FAA preempts state-law unconscionability ruling | State courts may apply generally applicable contract defenses to invalidate arbitration clauses | FAA preempts state-law applications that single out arbitration or rest on perceived inferiority of arbitration | FAA does not preempt application here; New Mexico Supreme Court precedent allows unconscionability review of such carve-outs |
| Remedy: severability or strike arbitration clause | Plaintiff: carve-outs are central and inseverable from arbitration agreement | Defendant: carve-outs could be severed or interpreted to save arbitration | Court struck the arbitration clause in its entirety because exemptions were central and incapable of separation |
Key Cases Cited
- Rivera v. American Gen. Fin. Servs., 259 P.3d 803 (N.M. 2011) (one-sided carve-outs for lender’s self-help/judicial remedies render arbitration provision unconscionable)
- Cordova v. World Fin. Corp. of N.M., 208 P.3d 901 (N.M. 2009) (facially one-sided arbitration clause in consumer loan unenforceable)
- Figueroa v. THI of N.M. at Casa Arena Blanca, LLC, 306 P.3d 480 (N.M. Ct. App. 2013) (facially bilateral carve-outs invalid where practical effect favors defendant)
- Ruppelt v. Laurel Healthcare Providers, LLC, 293 P.3d 902 (N.M. Ct. App. 2013) (similar invalidation of bilateral-seeming carve-outs that practically disadvantage residents)
- Strausberg v. Laurel Healthcare Providers, LLC, 304 P.3d 409 (N.M. 2013) (state may apply unconscionability defense consistent with FAA; special arbitration rules preempted)
- AT&T Mobility LLC v. Concepcion, 131 S. Ct. 1740 (U.S. 2011) (FAA preempts state rules that single out arbitration, but general contract defenses remain available)
- Buffalo Forge Co. v. United Steelworkers of Am., AFL-CIO, 428 U.S. 397 (1976) (arbitration may permit court-ordered relief in certain contexts)
- Trompeter v. Ally Fin., Inc., 914 F. Supp. 2d 1067 (N.D. Cal. 2012) (federal court found identical carve-outs unconscionable under California law)