Anderson v. AshbyAnderson v. Ashby
Michael J. ANDERSON et al.
v.
Mary Jean ASHBY, individually, and as personal representative of the estate of Jimmy Ashby, deceased.
Supreme Court of Alabama.
Robert H. Rutherford, F.A. Flowers III, and Richard C. Keller of Burr & Forman, LLP, Birmingham, for appellants.
*169 B. Scott Shipman of Sherrill, Batts & Shipman, LLC, Athens, for appellee.
PER CURIAM.
Michael J. Anderson, American General Finance, Inc., and Merit Life Insurance Company appeal from an order denying their motions to compel arbitration in an action filed against them in the Limestone Circuit Court by Mary Jean Ashby. We affirm.
Background
On April 15, 1999, Mary Jean Ashby and Jimmy Ashby, her now-deceased husband, visited the American General Finance office located in Athens, Alabama,[1] to obtain a $2,000 loan to be secured by their automobile. The loan was to be paid over a period of three years. Mr. Ashby indicated on the loan application that his only source of income was "disability" and "soc. sec."; Mrs. Ashby indicated on the loan application that her only source of income was "disability." According to Mrs. Ashby, Mr. Ashby wanted to obtain credit-life insurance so that she would not have to worry about the payments on the loan in the event something happened to him. It is undisputed that Mr. Ashby agreed to pay $827.10 in order to purchase $5,000 of credit-life insurance during the term of their three-year note.
While at American General Finance's office, the Ashbys met with Michael Anderson, the branch manager for American General Finance; Anderson is also an insurance agent for Merit Life Insurance Company, an affiliate of American General Finance. Mr. Anderson acknowledges that, as a result of doing business with the Ashbys, he knew that Mr. Ashby was unable to read and write and that he could not sign his own name. Anderson also admits that he knew Mrs. Ashby was limited in her reading ability.[2]
Mrs. Ashby claims that she and Mr. Ashby asked Anderson to explain the loan documents because they were unable to read and understand the documents. Additionally, the operating procedures of American General Finance applicable to customers who are blind or who cannot read require the company's representative to explain the documents to the customer before obtaining the customer's signature.
Anderson alleges that he explained the loan and credit-life insurance documents to the Ashbys. Anderson claims that, in accordance with American General Finance's operating procedures applicable to illiterate customers, he wrote at the bottom of each document involved in the loan transaction "THIS DOCUMENT EXPLAINED AND UNDERSTOOD BY THE BORROWER." According to Anderson, he then had the Ashbys sign the documents. Mrs. Ashby denies that the documents she executed bore any handwritten statements when she signed them.
The note and security agreement executed by the Ashbys on April 15, 1999, contained an arbitration agreement, which included the following provisions:
*170 "ARBITRATION OF CLAIMS AND WAIVER OF JURY TRIAL:
"Borrower(s) hereby acknowledge that the transactions evidenced by this agreement involve interstate commerce. Borrower(s) and Lender agree that, except as otherwise set forth in this provision, all claims, disputes, or controversies of every kind and nature between Borrower(s) and Lender shall be resolved by arbitration including (i) those based on contract, tort or statute, (ii) those arising out of or relating to the transaction(s) evidenced by this agreement, the disclosures relating to this agreement, the Federal Disclosure Statement, any insurance certificates or policies, any documents executed at or about the same time this agreement was executed or (iii) those arising out of, [or] relating to any other prior, proposed or actual loan or extension of credit (and the relationships which result from these transactions or any other previous transactions between Borrower(s) and Lender). Borrower(s) and Lender further agree that all issues and disputes as to the arbitrability of claims must also be resolved by the arbitrator.
"BORROWER(S) AND LENDER UNDERSTAND THAT EACH HAS THE RIGHT TO LITIGATE SUCH DISPUTES THROUGH A COURT, AND BORROWER(S) AND LENDER VOLUNTARILY AND KNOWINGLY WAIVE ANY RIGHT THEY HAVE TO A JURY TRIAL OR JUDGE TRIAL OF SUCH DISPUTES.
". . . .
"BORROWER(S) AND LENDER AGREE THAT THE ARBITRATOR MAY AWARD PUNITIVE DAMAGES ONLY UNDER CIRCUMSTANCES WHERE A COURT OF COMPETENT JURISDICTION COULD AWARD SUCH DAMAGES. HOWEVER, IN NO EVENT SHALL AN AWARD OF DAMAGES EXCEED FIVE (5) TIMES THE ECONOMIC LOSS SUFFERED BY THE PARTY. BORROWER(S) AND LENDER FURTHER AGREE THAT THE ARBITRATOR SHALL NOT CONDUCT ANY CLASS-WIDE PROCEEDINGS AND WILL BE RESTRICTED TO RESOLVING THE INDIVIDUAL DISPUTES BETWEEN THE PARTIES.
"Borrower(s) and Lender agree that, notwithstanding the foregoing, Lender retains the right to use judicial or self-help remedies (i) to repossess or foreclose on collateral or to enforce the security interests relating to this transaction, and (ii) to pursue collection actions against the Borrower(s) where the amount of the debt is $10,000 or less. The exercise of this right by Lender to pursue judicial or self-help remedies shall not constitute a waiver of Lender's right to compel the arbitration of any claim or dispute subject to this arbitration clauseincluding the filing of a counterclaim by Borrower(s) in a lawsuit filed by Lender.
"This arbitration clause shall be binding upon the assigns, directors, officers, representatives, employees, parent companies, affiliate companies, subsidiaries and successors of lender, and the administrators, assigns, executors, heirs and representatives of Borrower(s). In addition, the parties agree to submit to arbitration not only the foregoing claims or disputes against each other, but also all claims or disputes they have against (i) all other persons or entities involved with the transactions subject to this clause, (ii) all persons or entities who signed or executed any of the documentation subject to this clause, and (iii) all persons or entities who may be jointly or severally liable to any of the parties to this agreement regarding matters or *171 events relating to the transactions and documentation subject to this clause.
"Borrower(s) and Lender agree that if any provision of this arbitration clause is invalid or unenforceable under the Federal Arbitration Act, the provision which is found to be invalid or unenforceable shall be inapplicable and deemed omitted, but shall not invalidate the remaining provisions of this arbitration clause, and shall not diminish the parties' obligation to arbitrate the disputes subject to this clause."
(Capitalization in original.) Above the signature line on the note and security agreement is written "THIS DOCUMENT EXPLAINED AND UNDERSTOOD BY THE BORROWER"; on the signature line is an "X," presumably Jimmy Ashby's mark, and Mrs. Ashby's signature.
Included with the application for credit-life insurance submitted to Merit Life Insurance by Jimmy Ashby on April 15, 1999, was a separate, stand-alone document, on which was printed another arbitration agreement.[3] That arbitration agreement provided, in pertinent part:
"ARBITRATION OF CLAIMS AND WAIVER OF JURY TRIAL
"Merit Life Insurance Co. and I hereby acknowledge that the transactions covered by the Policy being applied for involve interstate commerce. We agree that all claims, disputes, or controversies of every kind and nature between us shall be resolved by arbitration including (i) those based on contract, tort, or statute, (ii) those arising out of or relating to the transaction(s) evidenced by a policy, the disclosures relating to a policy, any documents executed at or about the same time a policy was executed or (iii) the relationships which result from these transactions or any other previous transactions between us. Merit Life Insurance Co. and I further agree that all issues and disputes as to the arbitrability of claims must also be resolved by the arbitrator.
"WE UNDERSTAND THAT EACH HAS THE RIGHT TO LITIGATE SUCH DISPUTES THROUGH A COURT, AND WE VOLUNTARILY AND KNOWINGLY WAIVE ANY RIGHT WE HAVE TO A JURY TRIAL OR JUDGE TRIAL OF SUCH DISPUTES.
". . . .
"WE AGREE THAT THE ARBITRATOR MAY AWARD PUNITIVE DAMAGES ONLY UNDER CIRCUMSTANCES WHERE A COURT OF COMPETENT JURISDICTION COULD AWARD SUCH DAMAGES. HOWEVER, IN NO EVENT SHALL AN AWARD OF DAMAGES EXCEED FIVE (5) TIMES THE ECONOMIC LOSS SUFFERED BY THE PARTY. MERIT LIFE INSURANCE CO. AND I FURTHER AGREE THAT THE ARBITRATOR SHALL NOT CONDUCT ANY CLASS-WIDE PROCEEDINGS AND WILL BE RESTRICTED TO RESOLVING THE INDIVIDUAL DISPUTES BETWEEN THE PARTIES.
"This arbitration clause shall be binding upon the assigns, directors, officers, representatives, employees, agents, parent companies, affiliated companies, subsidiaries and successors of Merit Life Insurance Co. and my administrators, assigns, executors, heirs and representatives. In addition, the parties agree to submit to arbitration not only the foregoing claims or disputes against each *172 other, but also all claims or disputes they have against (i) all other persons or entities involved with the transactions subject to this clause, (ii) all persons or entities who signed or executed any of the documentation subject to this clause, and (iii) all persons or entities who may be jointly or severally liable to any of the parties to this agreement regarding matters or events relating to the transactions and documentation subject to this clause.
"Merit Life Insurance Co. and I agree that if any provision of this arbitration clause is invalid or unenforceable under the Federal Arbitration Act, the provision which is found to be invalid or unenforceable shall be inapplicable and deemed omitted, but shall not invalidate the remaining provisions of this arbitration clause, and shall not diminish the parties' obligation to arbitrate the disputes subject to this clause."
(Capitalization in original.) Above the signature line on this arbitration agreement was written "THIS DOCUMENT EXPLAINED AND UNDERSTOOD BY APPLICANT"; an "X," presumably Jimmy Ashby's mark, is shown on the signature line.
Although Anderson admits that he never received any training from American General Finance on how to explain an arbitration agreement to customers, he says that he explained the arbitration agreements to the Ashbys. Mrs. Ashby claims that Anderson never explained or mentioned to them the arbitration agreements contained in the loan and credit-life insurance documents. She also claims that she was within hearing distance of Mr. Ashby and Anderson during the entire closing and that Anderson never explained or mentioned arbitration to Mr. Ashby in connection with the credit-life insurance documents.
On December 2, 1999, Mr. Ashby died. Mrs. Ashby filed a claim for the death benefit provided under the credit-life insurance policy Mr. Ashby had obtained from Merit Life. Merit Life did not pay the claim; instead, it rescinded the policy issued to Mr. Ashby. Merit Life alleged that Mr. Ashby had answered the questions on the insurance application regarding his health inaccurately. Mrs. Ashby alleges that Anderson, who read the questions to them, never asked them any questions about Mr. Ashby's health.
On April 17, 2000, Mary Jean Ashby filed this action in the Limestone Circuit Court, as the personal representative of the estate of her deceased husband Jimmy Ashby, and in her individual capacity. Mrs. Ashby seeks compensatory and punitive damages as a result of Merit Life's refusal to pay benefits under the credit-life insurance policy issued in connection with the American General Finance loan.[4]
Anderson, American General Finance, and Merit Life each moved to stay the proceedings and to compel arbitration, relying upon the arbitration agreements contained in the note and security agreement and executed as part of the application for credit-life insurance. Mrs. Ashby opposed those motions to compel, asserting that the arbitration agreements were unconscionable and that they were obtained through fraud.
On January 22, 2002, after receiving briefs and conducting hearings, the trial court denied the motions to compel arbitration on the grounds that the arbitration agreement contained in the note and security agreement was unconscionable and that "fraud in the factum" had occurred *173 with regard to the arbitration agreement executed in connection with the application for credit-life insurance. On February 20, 2002, Anderson, American General Finance, and Merit Life moved, pursuant to Rule 59(e), Ala. R. Civ. P., to alter, amend, or vacate the trial court's order. On May 8, 2002, the trial court denied the defendants' Rule 59(e) motion.
American General Finance, Anderson, and Merit Life appeal, asserting the following claims: that the trial court erred and usurped the arbitrator's authority by deciding the threshold issues of arbitrability; that the trial court erred in concluding that the arbitration agreement included in the note and security agreement was unconscionable; and that the trial court erred in concluding that Mr. Ashby's fraud claim presented a question for the jury.
Standard of Review
In American General Finance, Inc. v. Morton,
"This Court reviews the [grant or] denial of a motion to compel arbitration de novo. Green Tree Fin. Corp. v. Vintson,753 So.2d 497 , 502 (Ala.1999); Patrick Home Ctr., Inc. v. Karr,730 So.2d 1171 , 1172 (Ala.1999). The party seeking to compel arbitration has the initial burden of proving the existence of a contract calling for arbitration and proving that the contract evidences a transaction substantially affecting interstate commerce. TranSouth Fin. Corp. v. Bell,739 So.2d 1110 , 1114 (Ala.1999); Sisters of the Visitation v. Cochran,775 So.2d 759 (Ala.2000). `[A]fter a motion to compel arbitration has been made and supported, the burden is on the nonmovant to present evidence that the supposed arbitration agreement is not valid or does not apply to the dispute in question.' Jim Burke Auto., Inc. v. Beavers,674 So.2d 1260 , 1265 n. 1 (Ala.1995)."
Analysis
I. Did the trial court err and usurp the arbitrator's authority in deciding the threshold issue of arbitrability?
The trial court determined that the arbitration agreement included in the note and security agreement was unconscionable and therefore unenforceable. American General Finance and Anderson appeal, arguing that whether the arbitration agreement was unenforceable was an issue for the arbitrator to decide rather than for the trial court. We disagree.
The Federal Arbitration Act, 9 U.S.C. § 1 et seq. (the "FAA"), "binds us to faithfully apply general principles of Alabama contract law when considering a challenge to the validity of an arbitration agreement." Green Tree Fin. Corp. v. Wampler,
"Alabama has long recognized the doctrine of unconscionability as a defense to enforcement of a contract. While Prima Paint Corp. v. Flood & Conklin Mfg. Co.,388 U.S. 395 ,87 S.Ct. 1801 ,18 L.Ed.2d 1270 (1967), relegates challenges to the validity of a contract as a whole to the arbitrator, a challenge to the arbitration clause only is properly determined by the court."
"`[A] determination that, by the terms of the arbitration clause, the arbitrator is to decide issues of arbitrability, does not end the inquiry.' `Where the attack is addressed to the arbitration clause itself, as opposed to the contract as a whole, the court, and not the arbitrator, resolves the issue.' Thus, the threshold `issue of unconscionability of an arbitration clause is a question for the court and not the arbitrator.'"
We agree with Branch and the cases cited in that opinion. Because Mrs. Ashby contends that the arbitration agreement included in the note and security agreement was itself unconscionable, the trial court did not err in holding that it had the authority to resolve that issue.
II. Did the trial court err in ruling that the arbitration agreement included in the note and security agreement was unconscionable as a matter of law?
American General Finance and Anderson argue that the trial court erred in concluding that the arbitration agreement included in the note and security agreement was unconscionable as a matter of law. In reaching that conclusion, the trial court relied heavily upon Branch, which it summarized in its order. In pertinent part, the trial court's order provided:
"The defense of unconscionability must be addressed by the trial court. Green Tree Financial Corp. v. Vintson,753 So.2d 497 (Ala.1999). The party asserting the affirmative defense of unconscionability has the burden of proof. Green Tree Fin. Corp. v. Wampler,749 So.2d 409 (Ala.1999). The doctrine of unconscionability is codified at [Ala.Code 1975, § 5-19-16], which provides:
"`With respect to a consumer credit transaction, if the court as a matter of law finds the contract or any provision of the contract to have been unconscionable at the time it was made, the court may refuse to enforce the contract, or it may enforce the remainder of the contract without the unconscionable provision, or it may so limit the application of any unconscionable provision so as to avoid any unconscionable result.'
"The Alabama Supreme Court set forth a two-part test to be applied by this court in determining unconscionability: (1) Terms that are grossly favorable to a party that has (2) overwhelming bargaining power. American General Finance, Inc. v. Branch,793 So.2d 738 , 748 (Ala.2000). The court notes that the arbitration clause in the note and security agreement supplied by [American General Finance] in this case is identical to that supplied by [American General Finance] in Branch. The Alabama Supreme Court affirmed the trial court's denial of [American General Finance's] Motion to Compel Arbitration in Branch because it found the arbitration clause unconscionable.
"The same grossly favorable terms favoring [American General Finance] that *175 existed in Branch are present here. The first indicium of unconscionability is the breadth of the clause. The Branch court stated that the clause applied `to every cause of action that could conceivably arise in favor of Branch, and to every individual against whom a claim could conceivably be brought.' Id.
"A second indicium of unconscionability is the provision purporting to invest the arbitrator with the threshold issues of arbitrability. The Branch court stated that `"[s]uch authority of the arbitrator to determine its own authority may itself be an indicium of unconscionability." `Id. at 749, quoting Brilliant Homes, Ltd. v. Lind,722 So.2d 753 , 755 (Ala.1998).
"A third indicium of unconscionability is the provision exempting the defendants from the duty to arbitrate and expressly reserving the right to try to a jury their claims against the Ashbys up to $10,000. In Branch, the Alabama Supreme Court stated:
"`Practically speaking, this provision benefits only the [l]enders. In other words, American General [Finance] reserved for itself the right to collect by judicial action the loan paymentsthe only species of claim it would ever realistically be expected to assert against Branchwhile requiring Branch to settle by arbitration claims such as breach of contract and fraudthe species of claims she would most likely assert against the [l]enders.' (emphasis in original).
[
"The [American General Finance] arbitration provision limits the right of the arbitrator to award an amount in excess of five times the amount of economic loss. The Branch court stated `this limitation includes not only punitive damages, but all species of noneconomic loss, such as mental anguish.' [793 So.2d at 749 .] The Branch court found it significant that the arbitration clause prevented the borrower from obtaining the full range of relief available under Alabama law, but allowed the lenders to seek full redress for their claims in court. Id.
"The Branch court found that the [American General Finance] arbitration provisions were so grossly favorable to the defendants as to pass the first prong of the unconscionability test. Id. at 750. Along with each grossly favorable term constituting an indicium of unconscionability found in the Branch case, this court finds an additional indicium of unconscionability. The Ashbys requested that the defendants explain the terms of the contract to them. The defendant's agent chose not to explain, or even mention, the arbitration clause. Such a refusal of assistance is an indicium of unconscionability. Ex parte Napier,723 So.2d 49 , 52 (Ala.1998).
"The second prong of the unconscionability test set forth in Branch is overwhelming bargaining power. American General Finance, Inc. v. Branch,
"In Branch, the record contained stipulations and affidavit testimony of eight of the sixteen companies (the eight including [American General Finance]) that were listed in the advertising pages of the Southern Directory Company telephone directory for the City of Tuscaloosa under the heading of `financing.' *176 Of those eight companies only one did not routinely enter into arbitration agreements in connection with its loans during the applicable time period. [793 So.2d] at 751. The Branch court noted that `"[e]ntire segments of the market for certain goods and services ... are being closed to consumers who are unwilling to forfeit their rights guaranteed them by the federal and state Constitutions." `Id., quoting Allstar Homes, Inc. v. Waters,
"In the case at hand, the record reveals that ten companies advertised under the heading `financing' in the Athens BellSouth Yellow Pages at the time that the Ashbys applied for their loan. The parties presented evidence from nine of those ten companies. Of those nine companies, three (Badcock Home Furnishing Center, First South Production Credit Association and First Trust Mortgage of Athens) did not routinely make loans to consumers using personal property as collateralthe type of loan at issue. All of the six remaining companies, including [American General Finance], required arbitration agreements of their customers. The record further reveals that the defendants presented affidavits from four banks and financial institutions that did not require arbitration agreements that maintained an office in Athens, Alabama, but [that] were not listed under `financing' in the Yellow Pages. The evidence also reveals that the Ashbys presented evidence of four such additional institutions that did require arbitration agreements. The defendants presented affidavits from companies that did not require arbitration agreements in cities other than Athens.
"In order to meet their burden of proof on this issue, the Ashbys `need not show that the market was completely closed, only that [they were] unable to acquire goods or services without considerable expenditure of time and resources.' [793 So.2d] at 751 (emphasis in original). The court concludes that the Ashbys have met this burden. The evidence reveals that the Ashbys had no input into the drafting of the note and security agreement provided by [American General Finance]. The court concludes that the evidence demonstrates that the Ashbys had no meaningful choice and that [American General Finance] had overwhelming bargaining power. As a result of the two-part analysis as set forth in Branch, this court holds that the arbitration provisions in the American General Finance contract [are] unconscionable and unenforceable."
The First Prong of BranchGrossly Favorable Terms
As the trial court noted, the arbitration agreement included in the note and security agreement is identical to the arbitration agreement this Court found unconscionable in Branch. Thus, each of the provisions of the Branch arbitration agreement found to be grossly favorable to the lenders is also present in the Ashbys' arbitration agreement with American General Finance. Those provisions grossly favorable to American General Finance are: (1) the breadth of the arbitration agreement, which extends to every cause of action that might conceivably arise in favor of the Ashbys and that applies to every individual or entity against whom the Ashbys might bring a claim; (2) the provision purporting to invest the arbitrator with the threshold *177 issue of arbitrability; (3) the provision reserving to American General Finance the right to a trial by jury while mandating that the Ashbys arbitrate any and every claim that might arise; and (4) the provision limiting the Ashbys' right of recovery for all species of damages to no more than five times the economic loss while preserving American General Finance's right to seek full redress for its claims.
We agree with the trial court that the arbitration agreement contained in the note and security agreement is grossly favorable to American General Finance. Accordingly, Mrs. Ashby has met the first prong of the Branch unconscionability test.
The Second Prong of Branch Overwhelming Bargaining Power
American General Finance and Anderson argue that the trial court erred in finding the arbitration agreement unconscionable because, they argue, Mrs. Ashby failed to meet the second prong of the Branch unconscionability test. American General Finance and Anderson argue that the trial court ignored evidence presented indicating that there were lenders in the financial market available to the Ashbys that would make loans without requiring an arbitration agreement and that ignoring that evidence caused the trial court to err in concluding that the Ashbys had no meaningful choice and could not obtain an arbitration-free loan. Further, American General Finance and Anderson argue that Mrs. Ashby cannot meet the second prong of the Branch test because, they say, she failed to present any evidence indicating that she and Mr. Ashby actually shopped around for an arbitration-free loan. We reject these arguments.
First, we note that the trial court limited the financial market it considered to be available to the Ashbys to those lenders advertising in the yellow pages of the Athens BellSouth telephone directory under "financing" at the time the Ashbys applied with American General Finance for their loan in April 1999.[5] This is exactly the type of comparison this Court made in Branch, and we find no error in this method of determining the applicable market available to the Ashbys. See Branch,
Moreover, the trial court did not err in concluding that the arbitration agreement in the note and security agreement was unconscionable in the absence of evidence indicating that the Ashbys sought other alternatives to the American General Finance loan. Our decision in Branch regarding meaningful choice was based upon affidavits and stipulations regarding the practices of nearby lenders that were in the business of making loans comparable to the one Branch sought to obtain. In Branch, we stated:
"From the sample responses of the companies providing the kind of financing for which Branch was shopping in her geographical area, it follows that only 1 or 2 companies out of 16 might have allowed her to borrow money in November 1997 without agreeing to arbitrate. Branch would have had to expend considerable time and effort even to find these companies."
In this case, Mrs. Ashby presented the same type of evidence we considered in Branch. Mrs. Ashby presented the trial court with evidence indicating that, at the time she and Mr. Ashby obtained their loan with American General Finance in 1999, 10 companies, including American General Finance, advertised in the yellow pages of the Athens BellSouth telephone directory under the category "financing." Mrs. Ashby presented evidence indicating that 2 of those 10 companies did not make loans of the type sought by the Ashbys,[6] while 6 companies, including American General Finance, did make loans comparable to the one sought by the Ashbys.[7] Mrs. Ashby presented evidence indicating that all six of those companies required their customers to sign arbitration agreements. Thus, we conclude, as we did in Branch, that the Ashbys would have had to expend considerable time and effort to locate the remaining two companies, and it is unknown whether those companies would have insisted that the Ashbys sign an arbitration agreement.
Justice Stuart, in her special writing, states that she would require evidence showing that the plaintiff actually shopped around for an arbitration-free loan. She relies upon the recent cases of Mason v. Acceptance Loan Co.,
Anderson, the corporate defendants' agent and himself a defendant, admits that he knew that the Ashbys could not read the documents he presented to them. The "operating procedures" of American General Finance itself therefore required Anderson to explain those documents to the Ashbys, and Anderson did in fact undertake and purport to explain the documents to the Ashbys. These facts are undisputed. Mrs. Ashby, further, has submitted evidence indicating that she and Mr. Ashby requested an explanation of the documents and that Anderson withheld from the explanation he gave any mention of the presence or the effect of any "arbitration agreement."
Mason, on which Justice Stuart relies in her special writing, cites Mitchell Nissan, Inc. v. Foster,
Neither Vann nor Lewis constitutes a retreat from Branch. Each turns on the utter failure of the plaintiffs to submit evidence of the scarcity of lenders that did not require arbitration agreements in the particular market in which the plaintiffs were seeking loans. Vann,
Finally, the facts of this case do not logically present an issue whether the Ashbys should have "actually shopped around" for a lender that would not require that they execute an arbitration agreement. The Ashbys' inability to read the documents and agent Anderson's alleged failure to mention the "arbitration agreement" when he undertook and purported to explain the documents to them deprived the Ashbys of any reason to "shop around" for such a lender.
The trial court also determined, and we agree, that the Ashbys had no input into negotiating the terms of or drafting the arbitration agreement. This evidence establishes that the Ashbys had no meaningful choice in accepting the arbitration agreement and that American General Finance had overwhelming bargaining power in obtaining the arbitration agreement.[8] For these reasons, we find that the evidence is sufficient to meet the second prong of the Branch unconscionability test.
Severability Provision
American General Finance and Anderson next argue that, even assuming that the trial court properly concluded that the arbitration agreement included in the note and security agreement contains some unconscionable provisions, the trial court erred by not striking only those provisions it found to be unconscionable while enforcing the remainder of the arbitration agreement, pursuant to the severability clause included in that arbitration agreement. American General Finance and Anderson rely upon Cavalier Mfg., Inc. v. Jackson,
In Cavalier Manufacturing and Ex parte Thicklin this Court struck only the offensive provisions of the arbitration agreements under consideration in those cases and upheld the remainder of those agreements. However, the arbitration agreements considered in those cases contained only one unconscionable provision; the arbitration agreement in this case is *180 unconscionable in numerous aspects. For this reason alone, Cavalier Manufacturing and Ex parte Thicklin are distinguishable.
Additionally, in Ex parte Thicklin, this Court expressly recognized:
"This Court has limited authority to deal with the enforceability of contract terms. It can nullify or reform a contract on the basis of fraud; it can also nullify or reform a contract to eliminate any unconscionable provisions or terms that violate public policy."
"With respect to a consumer credit transaction, if the court as a matter of law finds the contract or any provision of the contract to have been unconscionable at the time it was made, the court may refuse to enforce the contract, or it may enforce the remainder of the contract without the unconscionable provision, or it may so limit the application of any unconscionable provision so as to avoid any unconscionable result."
We conclude that the arbitration agreement included in American General Finance's note and security agreement meets the two-part test for unconscionability set forth in Branch. The entire arbitration agreement is unconscionable and therefore unenforceable. We affirm the trial court's order denying the motion to compel the Ashbys' claims against American General Finance and Anderson to arbitrate under that agreement.
III. Did the trial court err in concluding that Mr. Ashby's fraud claim presented a question for the jury?
Mrs. Ashby alleges that the arbitration agreement executed in connection with the Merit Life application for credit-life insurance was obtained by fraud.[9] The trial court concluded that Mrs. Ashby presented substantial evidence of fraud in the factum and, therefore, that her claims must be resolved by a jury. Merit Life appeals. We affirm.
Whether we view Mrs. Ashby's fraud claim as one of fraudulent inducement or as one of fraud in the factum, we conclude that the claim presents a jury question.
If we construe the claim as alleging that Mr. Ashby was fraudulently induced into signing the arbitration agreement presented in conjunction with Merit Life's credit-life insurance application, that claim is not subject to arbitration because it is directed at the arbitration agreement itself.[10] In Investment Management & Research, Inc. v. Hamilton,
"[W]hen a claim of fraud in the inducement is directed toward the arbitration clause itself, the issue is adjudicated by the court. On the other hand, when a claim of fraud in the inducement is directed toward the entire contract ... the issue is subject to arbitration." *181727 So.2d at 78 (relying on Prima Paint Corp. v. Flood & Conklin Mfg. Co.,388 U.S. 395 ,87 S.Ct. 1801 ,18 L.Ed.2d 1270 (1967)).
Conversely, if we construe the claim as alleging that Mr. Ashby was deceived as to the character or basic nature of the document (i.e., the arbitration agreement) he signed, the claim is one of fraud in the factum. Claims of fraud in the factum are likewise not subject to arbitration. As this Court recognized in Harold Allen's Mobile Home Factory Outlet, Inc. v. Early,
"We do not interpret the Earlys' allegations as falling within the class of fraud termed fraud in the factum, or execution, as distinguished from fraud in the inducement, or treaty, and, thus, as permitting the Earlys to avoid the obligation to arbitrate. See Drinkard v. Embalmers Supply Co.,244 Ala. 619 ,14 So.2d 585 (1943) (explaining distinction between fraud in the factum and fraud in the inducement). As Professor Farnsworth explains in his treatise, fraud in the factum applies only `[i]n rare cases [where] the misrepresentation is regarded as going to the very character of the proposed contract itself....' E. Allen Farnsworth, Contracts, § 4.10 (1982); see also Restatement (Second) of Contracts § 163 & cmt. a (1981) (`If a misrepresentation as to the character or essential terms of a proposed contract induces conduct that appears to be a manifestation of assent by one who neither knows nor has reasonable opportunity to know of the character or essential terms of the proposed contract, his conduct is not effective as a manifestation of assent.'). These rare cases `"include situations involving blind persons, illiterate persons, [and] foreign speaking persons."' Alfa Mutual Ins. Co. v. Northington,561 So.2d 1041 , 1049 (on application for rehearing) (Houston, J., concurring specially) (citations omitted); see, e.g., Cancanon v. Smith Barney, Harris, Upham & Co.,805 F.2d 998 (11th Cir.1986) (case involving persons who `[had] no knowledge of the English language'805 F.2d at 999 ). Alabama law has a long line of cases recognizing the following rule regarding fraud in the factum:
"`"`When the execution of an instrument, which the party signing did not intend to sign, and did not know he was signing, is procured by a misrepresentation of its contents, and the party signing it does so without reading it or having it read, relying upon such misrepresentations and fraud, and believing he is signing a different instrument, he can avoid the effect of his signature notwithstanding he was able to read and had an opportunity to read the instrument.'"'
"Willcutt v. Union Oil Co. of California,432 So.2d 1217 , 1220 (Ala.1983) (quoting earlier cases and collecting cases). See also W.T. Rawleigh Medical Co. v. Wilson,7 Ala.App. 242 , 252,60 So. 1001 , 1005 (1912), and cases cited therein. Alabama caselaw, like the Restatement, recognizes that to constitute fraud in the factum, and thereby to prevent the formation of a contract, the misrepresentation must go to the essential nature or existence of the contract itself, for example, a misrepresentation that an instrument is a promissory note when in fact it is a mortgage, see Edwards v. Tabb,242 Ala. 209 , 210,5 So.2d 770 , 771 (1942). A misrepresentation that concerns a misapprehension of the legal meaning of a term or provision in a contract does not constitute fraud in the factum. See Rutter & Hendrix v. Hanover Fire Ins. Co.,138 Ala. 202 , 215,35 So. 33 , 37 (1903) (`"[A]ll our decisions hold, that in the absence of a relation of *182 trust and confidence, or of some other peculiar fact or circumstance, a misrepresentation of [a] matter of law, or of [a] matter of judgment equally open to the observation or inquiries of both parties, or of mere opinion, will not vitiate a contract." ... "[A] misrepresentation of the legal effect of a written instrument was, from its very nature, but the expression of an opinion upon a question of law, equally open to the observation and inquiries of both parties, and as to which, the law presumes that the party to whom it was made had knowledge."') (citations omitted); see also Restatement (Second) of Contract § 164 & cmt. b, illus. 2 & 3 (1981).
"The Earlys do not allege that they did not know they were signing an arbitration agreement (indeed, their question to Harold Allen's salesman makes it clear they were aware of the arbitration agreement) or that the salesman represented that the document they were signing was not an arbitration agreement or that it had no legal effect. Instead, they allege that Harold Allen's salesman misrepresented the legal meaning of the arbitration agreement and that they relied on that misrepresentation. However, under the rule of Rutter & Hendrix, absent a confidential relationship or other special circumstances between the Earlys and Harold Allen, the salesman's misrepresentation of the legal meaning of the arbitration agreement cannot form the basis for a claim of fraud in the factum. Accordingly, we would interpret the Earlys' allegations as going to inducement."
Although Mrs. Ashby's allegations could fit under either type of case, her allegations appear to be virtually identical to those presented in Oakwood Mobile Homes, Inc. v. Barger,
"Fraud in the inducement consists of one party's misrepresenting a material fact concerning the subject matter of the underlying transaction and the other party's relying on the misrepresentation to his, her, or its detriment in executing a document or taking a course of action. See Reynolds v. Mitchell,529 So.2d 227 (Ala.1988).
"Larry Barger's assertionthat he signed the arbitration agreement in reliance upon Clary's [Oakwood's manager's] statement that Larry was signing papers for insurance purposes so that the mobile home could be movedis better characterized as a claim of fraud in the factum. Fraud in the factum occurs when a party `procures a[nother] party's signature to an instrument without knowledge of its true nature or contents.' Langley v. Federal Deposit Ins. Corp.,484 U.S. 86 , 93,108 S.Ct. 396 ,98 L.Ed.2d 340 (1987). See also Drinkard v. Embalmers Supply Co.,244 Ala. 619 ,14 So.2d 585 (1943), and Burroughs v. Pacific Guano Co.,81 Ala. 255 ,1 So. 212 (1887). Fraud in the factum constitutes ineffective assent to the contract. Cancanon v. Smith Barney, Harris, Upham & Co.,805 F.2d 998 (11th Cir.1986).
". . . .
"In Shearson Lehman Bros. [, Inc. v. Crisp,
"The Bargers claim that Clary represented the documents as being `for insurance purposes,' when, in fact, one of the documents was an arbitration agreement, which Larry never knowingly signed as an arbitration agreement. Therefore, we treat the Bargers' claim of fraud in the inducement as a claim of fraud in the factum. The critical issue is whether the Bargers presented substantial evidence to support a claim of fraud in the factum.
"Fraud in the factum is a traditional fraud. A claim of fraud, including such fraud as fraud in the factum, requires the party making the claim to prove by substantial evidence that he or she reasonably relied on the alleged misrepresentation."
Implicit in the Court's holding in Barger was the recognition that Oakwood's agentClaryhad no duty to expressly disclose the existence of the arbitration agreement to Barger because Barger was capable of reading the documents himself. This is consistent with Alabama contract law. See, e.g., Rutter & Hendrix v. Hanover Fire Ins. Co.,
This case shares some similarities with Barger. Mrs. Ashby, as Mr. Ashby's personal representative, acknowledges that Mr. Ashby intended to sign the credit-life insurance application and that Anderson told him he was signing an application for credit-life insurance. As did the plaintiff in Barger, Mrs. Ashby alleges that Mr. Ashby was not told that one of the documents he was signing was an arbitration agreement; Mrs. Ashby alleges that Mr. Ashby had no knowledge that he was entering into such an agreement. Here the similarities to Barger end.
Unlike the plaintiff in Barger, Mr. Ashby could not read. Anderson knew that Mr. Ashby could not read, and, under the facts of this case, Mr. Ashby had no way to determine for himself that he was signing, in addition to an application for credit-life insurance, an agreement to arbitrate any claim he might have against Merit Life. We cannot say, as we could and did in Barger, that Mr. Ashby must have closed his eyes to the truth to believe the document he signed was not an arbitration agreement. We conclude that whether Mr. Ashby's reliance upon Anderson's representations was reasonable must be determined by the finder of fact.
Moreover, we are presented with allegations that, if meritorious, give rise to the special circumstances absent in Barger: the Ashbys were unable to read the documents for themselves; Anderson was aware of the fact that the Ashbys could *184 not read the documents; Mrs. Ashby alleges that she and Mr. Ashby asked Anderson to explain the documents to them but, she alleges, he failed to do so; and American General Finance's own internal operating procedures required Anderson to explain the documents to any customers who indicated that they were unable to read. The parties dispute whether such an explanation was given. Further, Anderson wrote at the bottom of the arbitration agreement: "THIS DOCUMENT EXPLAINED AND UNDERSTOOD BY APPLICANT." However, Mrs. Ashby alleges that this statement is false because, she says, the arbitration agreement was never explained or mentioned to them. Again, a factual dispute exists.
These circumstances present a question of fact as to whether, under the circumstances of this case, Anderson had a duty to disclose the existence of the arbitration agreement to Mr. Ashby and, if so, whether he did in fact make such a disclosure. Because these issues address the validity of the Ashbys' agreement to arbitrate, they are to be resolved by the fact-finder.
Conclusion
We conclude that the arbitration agreement included in American General Finance's note and security agreement is unconscionable and therefore unenforceable. We also conclude that the question whether the arbitration agreement contained in the Merit Life application for credit-life insurance was obtained by fraud is a question for the jury. We affirm the trial court's denial of the motions to compel arbitration filed by American General Finance, Anderson, and Merit Life.
AFFIRMED.
HOUSTON, LYONS, JOHNSTONE, HARWOOD, and WOODALL, JJ., concur.
MOORE, C.J., concurs in the result.
BROWN and STUART, JJ., concur in part and dissent in part.
SEE, J., concurs in the result in part and dissents in part.
Appendix to Per Curiam Opinion
The following evidence regarding financial companies, banks, and credit unions doing business in the Athens, Decatur, and Huntsville areas at the time the Ashbys applied for their loan was before the trial court. The first 10 of the following lenders advertised in the yellow pages of the BellSouth telephone directory under the category "financing" for the cities of Athens and Elkmont at the time the Ashbys obtained their loan from American General Finance:
1. American General FinanceAthens; made similar consumer loans; required arbitration agreement;
2. Colonial BankAthens location; made similar consumer loans; routinely required arbitration agreement;
3. First Family Financial ServicesAthens; made similar consumer loans; required arbitration agreement;
4. 1st Community Credit Corporation Athens; made similar consumer loans; required arbitration agreement;
5. Washington Mutual Finance Company (formerly Blazer Financial Services); made similar consumer loans; required arbitration agreement;
6. Wells Fargo Financial Alabama, Inc., f/k/a Norwest FinancialAthens; made similar consumer loans; required arbitration agreement;
7. Compass BankAthens;
8. Badcock Home Furnishing Center Athens; did not make similar loans secured by personal property;
*185 9. First South Agricultural Credit Association (formerly First South Production Credit)Athens; did not make similar loans secured by personal property;
10. First Trust Mortgage of Athens;
11. First State LoansAthens; made similar consumer loans; required arbitration agreement;
12. Alabama MoneyAthens; made similar consumer loans; required arbitration agreement;
13. First Southern United Financial Servicesmaintained an office in Athens until June 1999; made similar consumer loans; did not routinely require arbitration agreement;
14. First Commercial Bank of Huntsville; made similar consumer loans; did not routinely require arbitration agreement;
15. South BankHuntsville; made similar consumer loans; did not routinely require arbitration agreement;
16. North Alabama BankHuntsville and Hazel Green locations; made similar consumer loans; did not routinely require arbitration agreement;
17. Heritage BankHuntsville and Decatur locations; made similar consumer loans; did not routinely require arbitration agreement;
18. Family Security Credit UnionDecatur, Hartselle, and Athens Locations; made similar consumer loans; did not routinely require arbitration agreement; Mrs. Ashby was not and is not a member of the credit union and would have had to join credit union to apply for a loan;
19. Regions BankAthens; made similar consumer loans; routinely required arbitration agreement;
20. First American BankAthens; made similar consumer loans; did not routinely require arbitration agreement;
21. Reliance BankAthens; made similar consumer loans; did not routinely require arbitration agreement;
22. Union Planters BankHartselle and Athens branches; made similar consumer loans; routinely required arbitration agreement.
The record reveals that Compass Bank (no. 7) and First Trust Mortgage of Athens (no. 10) were listed under the category "financing" in the 1999 Athens BellSouth telephone directory. Although the record does not contain evidence regarding the lending practices of either of those lenders, they are included on the above list for the purpose of making the list complete.
BROWN, Justice, concurring in part and dissenting in part.
I disagree with the portion of the majority opinion that holds that the arbitration agreement included in the note and security agreement between American General Finance and the Ashbys is unconscionable and therefore unenforceable.
First, I do not believe that the terms of the arbitration agreement, when considered either singly or as a whole, are unconscionable. Although this Court has held that "agreements to arbitrate are not in themselves unconscionable," Ex parte McNaughton,
Moreover, I dissented in American General Finance, Inc. v. Branch,
STUART, Justice, concurring in part and dissenting in part.
I concur with the per curiam opinion except for two aspects: I dissent from the holding that Mrs. Ashby, without presenting evidence that she and Mr. Ashby actually shopped around in an attempt to secure an arbitration-free loan, has established that they had no meaningful choice but to accept the arbitration provision offered by American General Finance. I also dissent from the holding that this Court need not apply the severability provision found in the arbitration agreement.
I conclude that the "hindsight" evidence offered by Mrs. Ashby is insufficient to establish that the Ashbys lacked a meaningful choice in whether to accept the arbitration provision contained in American General Finance's note and security agreement. Mrs. Ashby testified that she and Mr. Ashby wanted to do business with American General Finance for two reasons: American General Finance made the process easy for them and American General Finance would provide Mr. Ashby with credit-life insurance. The record does not indicate that the Ashbys consulted with any other lender before deciding to do business with American General Finance.
It appears that this Court did not require the plaintiff in Branch to offer evidence showing that, before she obtained the loan in question she had actually shopped for but was unable to find or obtain an arbitration-free loan in order to establish that she had no meaningful choice in obtaining such a loan. However, since Branch, we have released at least two opinions that stand for the proposition that a plaintiff must offer such evidence. See Vann v. First Community Credit Corp.,
These cases properly apply the "no meaningful choice" language from Branch. If these cases conflict with the evidentiary standard created in Branch, which the per curiam opinion interprets as allowing a plaintiff to present after-the-fact evidence of market conditions, I would overrule Branch to the extent they do so. I find it objectionable to invalidate a contract provision under the guise of a consumer's having "no meaningful choice" as to that provision, if the consumer never attempted to determine what choices were available at the time he or she accepted that contract provision. If a consumer is concerned as to whether a contract contains an arbitration provision, surely the customer would attempt to negotiate an arbitration-free contract or would shop around for such a contract.
The per curiam opinion allows a consumer to challenge the enforceability of an arbitration provision by offering evidence that arbitration-free loans were unavailable.[11] However, the per curiam opinion goes further, allowing a consumer to raise this challenge although the consumer learned that arbitration-free loans were unavailable only after the legal dispute had already arisen. Thus, the per curiam opinion allows a consumer to challenge the enforceability of an arbitration provision, based on a lack of the availability of other options, although this lack of other options did not influence the consumer to accept the arbitration provision in the first place. I find this practice unacceptable.
I would hold that for a consumer to establish that he or she lacked a meaningful choice in whether to accept an arbitration provision in his contract, the consumer must present evidence tending to show that, before entering into the contract at issue, he or she actually shopped for an arbitration-free contract but was unable to locate such a contract. I, therefore, dissent from the holding in the per curiam opinion that, to invalidate the arbitration agreement, the Ashbys, before entering into the loan at issue, need not have actually shopped for an arbitration-free loan.
I also dissent from the holding in the per curiam opinion that we need not attempt to apply the severability language found in the American General Finance arbitration agreement. I agree that the arbitration agreement contains terms that are grossly favorable to American General Finance; the parties, however, agreed that such terms, if found by a court to be unconscionable, would be severed from the remainder of the agreement. Rather than simply hold the entire arbitration agreement unconscionable, I would strike the unconscionable provisions and attempt to enforce the remainder of the parties' agreement to arbitrate, if possible.
I also feel compelled to address Mrs. Ashby's claim that she is unable to read and that Mr. Ashby was unable to read and, therefore, that they were forced to rely upon Anderson to "explain" the documents to them, i.e., to explain that the documents contained arbitration agreements. I find this claim problematic for two reasons.
First, the Ashbys were not so unsophisticated that were unable to shop around for a lender willing to provide the credit-life option they desired. Mrs. Ashby testified that she and Mr. Ashby did not want to do business with Regions Bank because *188 they did not believe that Regions Bank would provide Mr. Ashby with credit-life insurance. Despite their limited reading abilities, the Ashbys were clearly sophisticated enough to determine which terms and which provisions of a loan were important to them and to find a lender willing to offer those terms and provisions.
Second, the Ashbys sought to enter into a legally binding contract. However, under the law of Alabama, a person who signs a contract is deemed to know and understand the contents of that document. We applied this legal principle in Mason v. Acceptance Loan Co.,
Nor do I believe that a request from an illiterate person for a generic "explanation" of a contract should be sufficient to trigger a fiduciary relationship in a typical consumer transaction, which is essentially what the per curiam opinion holds. Without a specific inquiry from the consumer, what constitutes an adequate explanation, and who decides when that explanation has been adequately understood by the contracting person? If a party wishes to enter into a contract but is unable to read the terms of that contract for himself, does he not have some obligation to have the terms of that contract read to him so that he can decide if he understands those terms and if they are acceptable? Otherwise, we allow illiterate persons to enter into legally binding contracts, but then to disclaim any knowledge or understanding of those provisions to which, in hindsight, they no longer wish to be bound.
SEE, Justice, concurring in the result in part and dissenting in part.
I concur in part in the result reached in Part I of the "Analysis" section of the per curiam opinion; I concur in the result in Part III of that section, and I dissent from the holding in Part II that the arbitration clause in the note and security agreement is unconscionable.
Mrs. Ashby seeks to avoid performance under arbitration agreements in a note and security agreement ("loan agreement") she and Mr. Ashby entered into with American General Finance and in the credit-life insurance application Mr. Ashby submitted to Merit Life Insurance Company in connection with the Ashbys' loan from American General Finance. Mrs. Ashby alleges that the arbitration agreement in the loan agreement is unconscionable and that Merit Life fraudulently procured Mr. Ashby's agreement to the stand-alone arbitration agreement signed in conjunction with the insurance application by concealing from him the arbitration agreement that was part of the credit life-insurance application. I agree with the per curiam opinion that insofar as Mrs. Ashby alleges that the Ashbys' agreements to arbitrate their dispute with American General Finance and Merit Life are void due to fraud, it was proper for the trial court to decide the gateway questions of arbitrability; and I agree that, to the extent the determination of that question requires answers to questions of material fact, a jury *189 should decide whether Merit Life fraudulently obtained Mr. Ashby's agreement to arbitrate disputes that might arise between him and Merit Life. See Howsam v. Dean Witter Reynolds, Inc.,
The Fraud in the Factum Claim Against Merit Life
Mrs. Ashby has a fourth-grade education and can read only simple words. Mr. Ashby, who is now deceased, was illiterate. Mrs. Ashby stated that she and Mr. Ashby asked Michael Anderson, the agent for American General Finance and Merit Life, to explain to them the various documents associated with the loan before they agreed to the transaction. The trial court found that Mrs. Ashby had established a fraud in the factum defense because Anderson had described the freestanding arbitration agreement that he presented to Mr. Ashby as a contract of insurance and not as an arbitration agreement.
The issue presented is whether, as a matter of law, an illiterate person who signs an agreement to purchase credit-life insurance in which an arbitration clause is a material term can maintain an action against the insurance company for fraud in the factum (and avoid performance under the arbitration clause) when the agent who explained the material terms of the insurance agreement to the illiterate person described the portion of the insurance agreement containing an arbitration clause simply as insurance papers and not as a binding arbitration agreement.
Fraud in the factum occurs when "`a misrepresentation as to the character or essential terms of a proposed contract induces conduct that appears to be a manifestation of assent by one who neither knows nor has a reasonable opportunity to know of the character or essential terms of the proposed contract....'" Harold Allen's Mobile Home Factory Outlet, Inc. v. Early,
However, Mrs. Ashby alleges that in this case Anderson characterized the arbitration agreement as "insurance papers." If Anderson engaged in such an active mischaracterization of the arbitration agreement, that conduct is compelling evidence that Merit Life considered the arbitration agreement an essential element in the insurance contract; therefore, Merit Life may be estopped to deny that the arbitration agreement is an essential element and would have been required to disclose the agreement to the Ashbys.
There is other evidence indicating that Merit Life considered the arbitration agreement an essential element.
"In determining whether a term is an essential element of a contract, we look at whether a party's rejection of the term[ ] could have affected the negotiation of other terms ... `[A]n "essential" promise denotes one that the parties reasonably regarded, at the time of contract, as a vitally important part of the bargain....'"
Conner,
I concur with the holding of the per curiam opinion that Mrs. Ashby may maintain, as a matter of law, a fraud in the factum claim against Merit Life.
Trial Court's Consideration of Arbitrability and Unconscionability
Mrs. Ashby argues that she is not required to arbitrate her dispute with American General Finance because, she argues, the arbitration clause in the loan agreement is unconscionable. The arbitration clause in the loan agreement states, in part: "[b]orrower(s) and [American General Finance] agree that, except as otherwise *191 set forth in this provision, all claims, disputes, or controversies of every kind and nature between Borrower(s) and Lender shall be resolved by arbitration"; the agreement also states that "[b]orrower(s) and Lender further agree that all issues and disputes as to the arbitrability of claims must also be resolved by the arbitrator." American General Finance argues that not only does the loan agreement require Mrs. Ashby to arbitrate her dispute, but it also requires that any issues concerning the arbitrability of the dispute and the unconscionability of the arbitration clause be resolved by an arbitrator.
The per curiam opinion finds that the issues presented in this case are virtually identical to those presented in American General Finance, Inc. v. Branch,
In First Options of Chicago, Inc. v. Kaplan,
"[O]ne might call any potentially dispositive gateway question a `question of arbitrability'.... The Court's case law, however, makes clear that, for purposes of applying the interpretive rule [of what constitutes a threshold issue for judicial determination], the phrase `question of arbitrability' has a far more limited scope. The Court has found the phrase applicable in the kind of narrow circumstance where contracting parties would likely have expected a court to have decided the gateway matter, where they are not likely to have thought that they had agreed that an arbitrator would do so, and, consequently, where reference of the gateway dispute to the court avoids the risk of forcing parties to arbitrate a matter that they may well not have agreed to arbitrate."
Howsam,
If parties to a dispute have previously agreed to an arbitration agreement that itself contains a First Options clause and if one of the parties contests in court the arbitrability of the dispute, the only issue properly before the trial court is whether the parties unmistakably agreed to the First Options clause. See Ex parte Perry,
Generally, "[c]ontract defenses that are... applicable under state law, such as fraud, duress, or unconscionability, may be applied to invalidate arbitration agreements...." Ex parte Perry,
Moreover, a court may not find a clause that requires an arbitrator to decide issues of arbitrability unconscionable on its face, because to do so would be invalidating an arbitration provision based on state law "applicable only to arbitration provisions," in violation of the rule set out in Doctor's Associates, Inc. v. Casarotto,
In this case, the trial court properly considered the fraud in the factum issues because those issues go to whether the Ashbys agreed to arbitrate their dispute with American General Finance and Merit Life. Because the arbitration agreement in this case contains a First Options clause, the trial court erred when it considered the question whether the arbitration clause in the loan agreement was unconscionable. Once the trial court considered two threshold issueswhether the arbitration agreement contained a First Options clause and whether the First Options clause was obtained by fraud or duressall other issues of arbitrability should have been decided by an arbitrator.
The per curiam opinion accepts the language from Branch that states, "`"[w]here the attack is addressed to the arbitration clause itself, as opposed to the contract as a whole, the court, and not the arbitrator, resolves the issue."'"
The Unconscionability Claim
The per curiam opinion holds that the arbitration agreement in the loan agreement is unconscionable because its terms are grossly favorable to American General Finance and because the Ashbys had no meaningful choice in obtaining an arbitration-free loan. This Court has held that "agreements to arbitrate are not in themselves unconscionable." Ex parte McNaughton,
"`An unconscionable ... contractual provision is defined as a ... provision "such as no man in his sense and not under delusion would make on the one hand, and as no honest and fair man would accept on the other."'" Southern United Fire Ins. Co. v. Howard,
*194 The per curiam opinion states in conclusory terms that the arbitration agreement is overwhelmingly favorable to American General Finance because: (1) the agreement is too broad; (2) the agreement provides that the arbitrator shall consider questions of arbitrability;[20] (3) the agreement lacks mutuality of remedies; and (4) the agreement limits recovery of punitive damages to five times any economic damages.
None of these issues, considered individually, provide grounds to find the arbitration clause unconscionable. Courts routinely support arbitration in cases involving broad arbitration clauses. See, e.g., Pritzker v. Merrill Lynch, Pierce Fenner & Smith,
A clause that requires parties to submit a dispute about the arbitrability of their dispute to the arbitrator cannot be unconscionable.[22] To hold otherwise would impermissibly "single out the provisions of arbitration agreements for suspect status," Harris v. Green Tree Fin. Corp.,
A lack of mutuality of remedy will not render an arbitration clause unconscionable.
"[P]roperly understood, the concept of mutuality of remedy has no application to arbitration agreements....
"The doctrine of mutuality of remedy is limited to the availability of the ultimate redress for a wrong suffered by a plaintiff, not the means by which that ultimate redress is sought. A plaintiff does not seek as his ultimate redress an arbitration proceeding or a court proceeding. Instead, he seeks legal relief (e.g., damages) or equitable relief (e.g., specific performance) for his injury and he uses the proceeding as a means to obtain that result."
McNaughton,
Finally, limitations on the damages a party may recover do not make an arbitration clause unconscionable. As I stated in my dissent in Cavalier Manufacturing, Inc. v. Jackson,
The per curiam opinion in this case does not explain why these four elements, each of which considered singly is permissible, operating together somehow make the agreement unconscionable. In Branch, *197 the Court explained that these elements operating together were grossly favorable to the lender because "the Lenders have reserved for themselves the right to full redress for their claims, but denied that right to Branch. In other words, the contract limits not only the right to a specific forum, but the right to a remedy itself."
The per curiam opinion also finds that American General Finance possessed overwhelming bargaining power and that the Ashbys lacked a meaningful choice. American General Finance argues that Mrs. Ashby failed to present any evidence indicating that she and Mr. Ashby even attempted to shop for a loan from another company. The per curiam opinion concludes that "the trial court did not err in concluding that the arbitration agreement in the note and security agreement was unconscionable in the absence of evidence indicating that the Ashbys sought other alternatives to the American General Finance loan."
I dissented in Branch because Branch had "presented no evidence that she shopped around before borrowing from American General."
Even, however, had Mrs. Ashby presented evidence tending to show that the Ashbys had shopped for a loan, she still *198 could have failed to present evidence tending to show that the Ashbys lacked a meaningful choice. The per curiam opinion states: "The trial court also determined, and we agree, that the Ashbys had no input into negotiating the terms of or drafting the arbitration agreement."
In Rosenberg v. Merrill Lynch, Pierce, Fenner & Smith, Inc.,
NOTES
Notes
[1] The Ashbys lived in Elkmont, Alabama, which is located a few miles outside of Athens, Alabama. Telephone numbers for Athens and Elkmont are published in the same local telephone directory.
[2] Anderson claims that he learned Mr. Ashby could not read only after he had reviewed the federal disclosure statement with the Ashbys, and Mrs. Ashby asked if she could sign for Mr. Ashby. Mr. Ashby testified that they had earlier told Anderson he and Mrs. Ashby could not read and that they had asked him to explain the documents to them. According to the briefs filed with this Court, Mr. Ashby had attended school for only a few weeks and had never been able to read or write. Mrs. Ashby has a fourth-grade education and is able to read small and simple words.
[3] This arbitration agreement does not appear on the application for credit-life insurance; it was printed on a separate, stand-alone document.
[4] Mrs. Ashby's complaint alleges fraud, fraudulent suppression, promissory fraud, conspiracy, breach of contract, negligence, and bad-faith refusal to pay an insurance claim.
[5] See the Appendix to this opinion for a summary of the evidence before the trial court regarding financial companies, banks, and credit unions in the Athens, Decatur, and Huntsville areas at that time.
[6] Another of the 10 companies that advertised was a mortgage companyFirst Trust Mortgage Company. Although the trial court's order indicated that this company did not make loans comparable to the one obtained by the Ashbys, we are unable to locate any evidence in the record regarding the lending practices of this company.
[7] We are unable to locate in the record any evidence regarding the lending practices of Compass Bank, which was another of the 10 lenders advertising under the category "financing" in 1999 in the Athens telephone directory.
[8] American General Finance and Anderson argue that Mrs. Ashby's testimony that she and her husband had obtained a loan within the last 10 years from Regions Bank indicates that the Ashbys could have shopped at local banks for this loan. Because some local banks did not require consumers to sign arbitration agreements in 1999, American General Finance and Anderson argue that the Ashbys had a meaningful choice whether to obtain a loan without an arbitration agreement. However, Mrs. Ashby testified that she and her husband had obtained a loan from Regions Bank at some time in the past but that she had no idea how long ago. She also testified that she and Mr. Ashby did not want to return to Regions Bank for this loan because, given Mr. Ashby's age, Regions Bank would not provide him with credit-life insurance.
[9] Mrs. Ashby alleges that both arbitration agreements were obtained by fraud. Because the trial court concluded that the arbitration agreement included in the note and security agreement was unconscionable and unenforceable, the trial court addressed the issue of fraud only with respect to the arbitration agreement executed in connection with the Merit Life credit-life insurance application.
[10] As discussed below, in the absence of other special circumstances, the allegations do not necessarily state a claim that one was fraudulently induced into executing an arbitration agreement.
[11] I am not certain that Mrs. Ashby proved this. Evidence was presented that arbitration-free loans were available, although arbitration-free loans that also provided credit-life insurance may not have been available to the Ashbys.
[12] The plaintiffs in Mason alleged that they asked what they were signing and that the defendant told them only that the documents were "loan papers and insurance papers," but did not specifically mention the arbitration agreements. Mason,
[13] "`"[A] person who signs an instrument without reading it, when he can read, can not, in the absence of fraud, deceit or misrepresentation, avoid the effect of his signature, because [he is] not informed of its contents; and the same rule [applies] to one who can not read, if he neglects to have it read, or to enquire as to its contents."'"
Johnnie's Homes, Inc. v. Holt,
"`Where [however] there exists this total incapacity to read and understand a writing, then the normal duty to do so is excused and a fraud case is made out by showing that the other party misrepresented the contents of the writing.'"
Alfa Mutual Ins. Co. v. Northington,
[14] This Court has previously stated that the inclusion of an arbitration clause does not materially alter an insurance policy, "`[e]ven if the inclusion of the arbitration provision was a material alteration of the policy applied forand we would say it was not....'" American Bankers Ins. Co. of Florida v. Crawford,
[15] By implication, the arbitrator would then decide whether the agreement was unconscionable.
[16] In PacifiCare, a group of physicians sued PacifiCare and United Healthcare, Inc., alleging, among other things, claims under the Racketeer Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C. § 1961 et seq. PacifiCare moved to compel arbitration under various arbitration agreements contained in its contracts with the physicians. The arbitration agreements prohibited an arbitrator from making an award of punitive damages. The physicians argued that the arbitration agreements were unenforceable under Paladino v. Avnet Computer Technologies, Inc.,
[17] Insofar as the Supreme Court of the United States recognized in Howsam that parties may agree to arbitrate "issues of substantive arbitrability,"
[18] Mrs. Ashby argues that the inclusion of a First Options clause in an arbitration agreement may, in certain contexts, be an indicium that the entire arbitration clause is unconscionable. (Ashby's brief at 30.) Mrs. Ashby does not argue, however, that a First Options clause is per se unconscionable.
[19] In this case, the applicable doctrine of unconscionability is that codified at § 5-19-16, Ala.Code 1975. Alabama's version of the Uniform Commercial Code, § 7-2-302, Ala. Code 1975, presents the unconscionability doctrine applicable to the sales of goods. The official comment to § 7-2-302, Ala.Code 1975, states, in pertinent part:
"The basic test [of unconscionability] is whether, in the light of the general commercial background and the commercial needs of the particular trade or case, the clauses involved are so one-sided as to be unconscionable under the circumstances existing at the time of the making of the contract.... The principle is one of the prevention of oppression and unfair surprise... and not of disturbance of allocation of risks because of superior bargaining power."
See also In re State of New York v. Avco Fin. Serv. of New York,
"`[U]nconscionability as set forth in UCC § 2-302 is `not a concept, but a determination to be made in light of a variety of factors not unifiable into a formula.'" NEC Techs., Inc. v. Nelson,
"The UCC does not require that there be complete equality of bargaining power or that the agreement be equally beneficial to both parties....
"The cases seem to support the view that there must be additional factors such as deceptive bargaining conduct as well as unequal bargaining power to render the contract between the parties unconscionable. In summary, the doctrine of unconscionability is used by the court to police the excesses of certain parties who abuse their right to contract freely. It is directed against one-sided, oppressive and unfairly surprising contracts, and not against the consequences per se of uneven bargaining power or even a simple old-fashioned bad bargain."
Wille v. Southwestern Bell Tel. Co.,
[20] Branch cited only Justice Lyons's special writing concurring in the result in Brilliant Homes, Ltd. v. Lind,
[21] The United States Court of Appeals for the Eleventh Circuit also in Bess distinguished the arbitration clause at issue from that in Branch because it did not contain a limit on punitive damages and did not require the parties to submit questions about arbitrability to the arbitrator.
[22] "[A]greements to arbitrate are not in themselves unconscionable." Ex parte McNaughton,
[23] In this case, the arbitration agreement permits American General Finance to seek a judicial remedy to secure only its security interest (or what might be considered its economic damages), while Mrs. Ashby is limited to seeking a remedy in arbitration that includes all of her economic damages (in whatever amount), and an award of punitive and other damages that totals no more than five times her economic damages.
[24] The Supreme Court of the United States' reasoning in State Farm Mutual Automobile Insurance Co. v. Campbell,
"Our jurisprudence and the principles it has now established demonstrate, however, that, in practice, few awards exceeding a single-digit ratio between punitive and compensatory damages, to a significant degree, will satisfy due process. In [Pacific Mutual Life Insurance Co. v.] Haslip, [
[25] I would imagine that every lender requires that borrowers repay their loans in full, on time, and with some interest charge. The fact that borrowers do not have a "meaningful choice" but to agree to repay loans in full, on time, and with interest does not make loan agreements unconscionable. Similarly, all loan contracts contain an express or implied forum-selection clause. For this Court to hold that an arbitration clause in a loan agreement is unconscionable merely because all lenders in some geographic area incorporate the same choice of forum clause in their loan contractsin this case a forum-selection clause that prefers an arbitral forumwould run afoul of the express holding of the Supreme Court of the United States in Doctor's Associates,