EILEEN J. DALTON v. SANTANDER CONSUMER USA, INC.
NO. S-1-SC-35101
IN THE SUPREME COURT OF THE STATE OF NEW MEXICO
September 22, 2016
Sarah M. Singleton, District Judge
ORIGINAL PROCEEDING ON CERTIORARI
Ross L. Crown
Albuquerque, NM
Reed Smith LLP
Terry B. Bates
Kasey J. Curtis
Los Angeles, CA
Grignon Law Firm
Margaret A. Grignon
Long Beach, CA
for Petitioner
Rob Treinen
Albuquerque, NM
Humphreys Wallace Humphreys
Lucius James Wallace
Robert David Humphreys
Tulsa, OK
Public Justice, P.C.
Jennifer Bennett
Oakland, CA
for Respondent
CHÁVEZ, Justice.
{1} Eileen Dalton purchased two used cars under separate finance contracts which contained provisions that retained self-help remedies for both parties, and that allowed either party to compel arbitration of any claim or dispute arising out of the contracts that exceeded the jurisdiction of a small claims court, which in New Mexico is $10,000. Dalton contends that the arbitration clause is substantivеly unconscionable on its face, and therefore is unenforceable because the self-help and small claims carve-out provisions are unreasonably one-sided. We hold that the arbitration provision in this case is not substantively unconscionable because (1) lawful self-help remedies are extrajudicial remedies, and (2) the small claims carve-out is facially neutral because either party must sue in small claims court if its claim is less than $10,000, or arbitrate if its claim exceeds $10,000; as a result, the small claims carve-out is neither grossly unfair nor unreasonably one-sided on its face.
I. BACKGROUND
{2} In 2010, Dalton entered into several finance contracts to purchase a 2003 Cadillac CTS (the Cadillac) and a 2010 Pontiac G6 (the Pontiac) from a used car dealer in Santa Fe. One or more of these contracts were sold to Santander Consumer USA, Inс. (Santander). The purchase price of the Cadillac was $13,297.93, for which
{3} Each finance contract contained an identical arbitration clause. The arbitration clause provided that “[a]ny claim or dispute, whether in contract, tort, statute or otherwise” arising out of or relating to the “credit application, purchase or condition of this vehicle, this contract or any resulting transaction or relationship” would, at the election of either party, “be resolved by neutral, binding arbitration and not by a court action.” However, the arbitration clause also stated that both parties “retain any rights to self-help remedies, such as repossession,” as well as “the right to seek remedies in small claims court for disputes or claims within that court‘s jurisdiction.” In New Mexico, small claims actions are those in which the value of the claim does not exceed $10,000, exclusive of interest and costs.
{4} Dalton did not make her first payment on the Pontiac contract and the Pontiac was almоst immediately repossessed without judicial action in February 2011. Later that month, Dalton filed a complaint in district court against a number of defendants
{5} In January 2013, Santander filed a motion to compel arbitration of Dalton‘s claims based on the arbitration clause contained in the finance contracts. Dalton opposed this motion by arguing in part that the arbitration clause was unenforceable because it was substantively unconscionable under New Mexico law. After analyzing the effect of the small claims and self-help provisions, the district court agreed with Dalton, as did the Court of Appeals. Dalton v. Santander Consumer USA, Inc., 2015-NMCA-030, ¶ 2, 345 P.3d 1086, cert. granted, 2015-NMCERT-003. We reverse both the district court and the Court of Appeals.
II. DISCUSSION
A. The Equitable Defense of Unconscionability
{6} Courts may render a contract or portions of a contract unenforceable under the
{7} “[U]nconscionability is an affirmative defense to contract enforcement,” and thus the рarty claiming that defense bears the burden of proving that a contract or a portion of a contract should be voided as unconscionable. Strausberg v. Laurel Healthcare Providers, LLC, 2013-NMSC-032, ¶¶ 24, 39, 48, 304 P.3d 409. The burden of proving unconscionability refers only to “the burden of persuasion, i.e., the burden to persuade the factfinder” and not “the burden of production, i.e., the burden to produce evidence.” Id. ¶ 24. A contract can be procedurally or substantively
{8} Only the issue of substantive unconscionability is before us, which requires us to cоnsider “whether the contract terms are commercially reasonable and fair, the purpose and effect of the terms, the one-sidedness of the terms, and other similar public policy concerns” to determine “the legality and fairness of the contract terms themselves.” Id. ¶ 22. Substantive unconscionability requires courts to examine the terms on the face of the contract and to consider the practical consequences of those terms. See State ex rel. King v. B & B Inv. Grp., Inc., 2014-NMSC-024, ¶ 32, 329 P.3d 658 (“[S]ubstantive unconscionability can be found by examining the contract terms on their face.“). Thus, the party bearing the burden of proving substantive unconscionability need not make any particular evidentiary showing and can instead persuade the factfinder that the terms of a contract are substantively unconscionable by analyzing the contract on its face.
{9} As we explained in Cordova, “[c]ontract provisions that unreasonably benefit one party over another are substantively unconscionable.” 2009-NMSC-021, ¶ 25. In that case, a purportedly bilateral arbitration clause between a lender and a borrower contained a unilateral carve-out provision exempting the lender from mandatory arbitration when it sought remedies, “including[,] but not limited to, judicial
{10} Similarly, in Rivera v. American General Financial Services, Inc., 2011-NMSC-033, 150 N.M. 398, 259 P.3d 803, we analyzed an arbitration provision between a lender and a borrower that required the borrower to arbitrate any claims against the lender while exempting from mandatory arbitration the lender‘s “self-help or judicial remedies” relating to the property securing the transaction and any claims that the lender might have “[i]n the event of a default.” 2011-NMSC-033, ¶ 3 (internal quotation marks omitted). In Rivera we again concluded that it was unreasonably one-sided that the lender “retained the right to obtain through the judicial system the only remedies it was likely to need,” while “forcing [the borrower] to arbitrate any claim she may have” through an arbitration carve-out applying only to the lender. Id. ¶ 53. In the
{11} With this background in mind, we turn to the arbitration clause in this case and discuss its carve-outs exempting self-help remedies and small claims actions from mandatory arbitration.
B. The Explicit Exclusion of Self-Help Remedies from Mandatory Arbitration Is Irrelevant to Assessing Unconscionability in this Case
{12} Santander contends that the bilateral self-help carve-out in the arbitration clause merely “recognizes the existence” of self-help remedies, which “exist outside of the judicial system.” (Emphasis in original.) We agree. New Mexico has codified the right of a secured creditor to repossess collateral after default “without judicial process” if the creditor cаn proceed without a breach of the peace.
{13} As Santander concedes, judicial repossession is not a self-help remedy, and therefore it would not be exempted from arbitration by the contracts’ reservation of self-help remedies. Importantly, this distinguishes the arbitration carve-out here from those discussed in Rivera and Cordova because in those cases the lender retained the right to pursue judicial repossession in the event of a default. Rivera, 2011-NMSC-033, ¶ 3; Cordova, 2009-NMSC-021, ¶ 4. Thus, we disagree with Dalton‘s contention that this Court‘s opinion in Rivera held that self-help repossession is a remedy that must be obtained through an arbitral forum if the parties have agreed to arbitrate all disputes. Instead, Rivera clarified that the remedy of judicial repossession, although highly regulated by statute, could be granted by an arbitrator. 2011-NMSC-033, ¶¶ 51-52. In so holding, we noted that ” ‘[b]y agreeing to arbitrate a statutоry claim, a party does not forgo the substantive rights afforded by the statute; it only submits to their resolution in an arbitral, rather than a judicial, forum.’ ” Id. ¶ 51 (emphasis added) (quoting Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614, 628 (1985)). Hence, the exemption of all foreclosure and
{14} By contrast, the arbitration clause in this case does not specifically retain Santander‘s right to seek judicial repossession through the courts.1 Although parties to a contract could specifically agree to forego any self-help remedies in favоr of arbitration, in the absence of such a provision, self-help remedies are not otherwise subject to mandatory arbitration. Thus, the contract‘s recognition that the parties retained private self-help remedies in this case does not bear on whether the arbitration clause is one-sided. See Sanchez v. Valencia Holding Co., LLC, 353 P.3d 741, 756 (Cal. 2015) (“[A]rbitration is intended as an alternative to litigation, and the unconscionability of an arbitration agreement is viеwed in the context of the rights and remedies that otherwise would have been available to the parties. Self-help remedies are, by definition, sought outside of litigation . . . .” (citation omitted)).
{16} Having established that the carve-out provision‘s reservation of self-help remedies is irrelevant to the question of substantive unconscionability in this case, we next assess the small claims carve-out.
{17} At the hearing on Santander‘s motion to compel arbitration, the district court acknowledged that the bilateral carve-out provision in this case was neutral on its face. Both parties provided argument as to the practical effect of the small claims carve-out in the context of an automobile finance contract. According to Dalton, it was self-evident that consumers would be most likely to bring claims alleging “[a]uto fraud” or “financing fraud,” which were “cases that clearly have [a] value over $10,000,” apparently based on the personal experience of Dalton‘s attorney in bringing such cases in the past.
{18} The district court concluded that the small claims provision was one-sided “if common sense is employed and practical realities are considered” because consumers would most likely have to arbitrate consumer fraud claims, claims for unfair practices, or other auto fraud or financing fraud claims, while Santander‘s most likely remedies were related to repossession after a default on the loan and could be pursued through self-help or in smаll claims court rather than arbitration. On that basis, the district court determined that the bilateral language in the carve-outs was “subterfuge” and that the exemptions actually operated in an unfairly one-sided manner. We disagree.
{19} No New Mexico appellate decision has determined that a bilateral small claims
{20} In recent cases where this Court has voided an arbitration provision for substantive unconscionability, there was little ambiguity as to the one-sided operation of the examined provision or the exclusive bеnefits that inured only to the drafting party. In Cordova, the lender explicitly reserved for itself judicial remedies in all instances of default by the borrower, while leaving the borrower with no ability to go to court “for any reason whatsoever.” 2009-NMSC-021, ¶¶ 26-27 (emphasis added).
{21} Gross unfairness is a bedrock рrinciple of our unconscionability analysis. See Rivera, 2011-NMSC-033, ¶¶ 48-49. We are not persuaded that allowing both parties in this case complete access to small claims proceedings, even if one party is
{22} New Mexico public policy is also relevant to our analysis of a claim of substantive unconscionability and counsels against an unconscionability determination in this case. See Strausberg, 2013-NMSC-032, ¶ 33. New Mexico public policy favors economical and efficient judicial proceedings. For example, our procedural rules must be “construed and administered to secure the just, speedy and inexpensive determination of every action.” Rule 1-001(A) NMRA. The Uniform Arbitration Act likewise recognizes that a “disabling civil dispute clause” includes a clause requiring a consumer tо “assert a claim . . . in a forum that is less convenient, more costly or more dilatory than a judicial forum established in this state for resolution of the dispute.”
{23} As we have discussed, both the Court of Appeals and the district court erred as a matter of law by concluding that the arbitration provision in this case was substantively unconscionable on its face. However, we note that the district court‘s order in this case relied solely on substantive unconscionability without addressing Dalton‘s other affirmative defenses that the Pontiac contract is unenforceable becausе it was procured by coercion or duress and that judicial estoppel bars Santander from enforcing the arbitration provision in the Pontiac contract. We express no conclusions regarding those defenses.
III. CONCLUSION
{25} IT IS SO ORDERED.
EDWARD L. CHÁVEZ, Justice
WE CONCUR:
CHARLES W. DANIELS, Chief Justice
PETRA JIMENEZ MAES, Justice
BARBARA J. VIGIL, Justice
JUDITH K. NAKAMURA, Justice