OPINION
In this case, we determine whether an arbitration scheme in a vehicle financing contract that carves out exceptions from mandatory arbitration for self-help and small claims remedies is substantively unconscionable. We also determine whether the district court improperly shifted the burden of proof and whether, according to our Supreme Court’s interpretation of federal law, a finding of unconscionability under these circumstances is preempted by the Federal Arbitration Act (FAA).
The dispute here arose when Eileen Dalton (Plaintiff) filed suit against Santander Consumer USA, Inc. (Defendant) for fraud, conversion, breach of contract, breach of warranty of title, and various violations of the Uniform Commercial Code (UCC) and the Unfair Practices Act. Defendant moved to compel arbitration of Plaintiffs claims. The district court determined that the self-help and small claims carve-out' provisions were unreasonably one-sided, rendering the arbitration clause unenforceable pursuant to Rivera v. American General Financial Services, Inc., 201 l-NMSC-033,
BACKGROUND
Defendant is an Illinois-based subprime auto finance entity. Plaintiffs allegations involve a series of at least two finance contracts that were apparently sold to Defendant by a car dealership operated by Performance Automotive Group (Performance). The finance contracts contain identical arbitration clauses, which state, in relevant part:
Any claim or dispute, whether in contract, tort, statute or otherwise . . . between you and us or our employees, agents, successors or assigns, which arises out of or relates to your credit application, purchase or condition of this vehicle, this contract or any resulting transaction or relationship (including any such relationship with third parties who do not sign this contract) shall, at your or our election, be resolved by neutral, binding arbitration and not by a court action.
Despite this sweeping language, a separate clause then expressly exempts certain disputes from mandatory arbitration, providing that:
Y ou and we retain any rights to self-help remedies, such as repossession. You and we retain the right to seek remedies in small claims court for disputes or claims within that court’s jurisdiction, unless such action is transferred, removed or appealed to a different court. Neither you nor we waive the right to arbitrate by using self-help remedies or filing suit.
The contracts also provide that the arbitration clauses “shall be governed by the [FAA].”
Plaintiffs complaint alleged that she purchased a Cadillac from Performance, who then sold the finance contract to Defendant. Despite Plaintiffs timely payments according to the terms of her contract, the Cadillac was repossessed eight months later by another creditor because Performance had failed to pay off a prior lien on the vehicle. In response to the repossession, Performance agreed to credit Plaintiff the $4,500 she had paid on the Cadillac toward the purchase of a substitute vehicle. Plaintiff returned to Performance, selected a Pontiac G6, and signed a second purchase agreement and finance contract, now providing for a higher monthly payment. Although the facts are in dispute, the Pontiac finance contract, like the Cadillac contract before it, may have been sold to Defendant. Shortly thereafter, and for reasons that are not clear, the Pontiac was also repossessed. Plaintiff was left without a vehicle, and her $4,500 was never returned.
Plaintiff filed suit against a number of corporate entities and individuals involved in these transactions, including Defendant, alleging fraud, conversion, breach of contract, breach of warranty of title, and’violations of the UCC and the Unfair Practices Act. Defendant moved to compel .arbitration pursuant to the identical arbitration clauses in the Cadillac and Pontiac contracts. The district court denied Defendant’s motion, reasoning that the carve-out provisions were substantially similar to the exceptions from arbitration that our Supreme Court examined in Rivera. The district court concluded that self-help remedies are of absolutely no use to consumers like Plaintiff and that small claims remedies are similarly one-sided, rendering the arbitration provision substantively unconscionable. Defendant timely appealed.
DISCUSSION
Standard of Review
This Court reviews de novo both the denial of a motion to compel arbitration and the issue of unconscionability of a contract. Cordova v. World Fin. Corp. of N.M.,
Unfairly One-Sided Carve-Out Provisions Are Substantively Unconscionable
“[A] finding of unconscionability may be based on either procedural or substantive unconscionability, or a combination of both.” Rivera,
In Cordova, our Supreme Court held that a one-sided arbitration provision in a consumer loan agreement was void as unconscionable.
Two years later, the Supreme Court reaffirmed this principle in Rivera when it corrected this Court’s “overly narrow construction” of the unconscionability doctrine. 201 l-NMSC-033, ¶¶ 1, 39-54. The arbitration clause in the car title loan contract addressed in Rivera exempted from mandatory arbitration the lender’s self-help and judicial remedies, such as repossession or foreclosure, “with respect to any property that secures [the loan.]” Id. ¶ 3. This Court attempted to distinguish Cordova on the basis that the arbitration clause in Rivera was not completely one-sided because it still allowed borrowers to compel arbitration of any of the lender’s claims that arose from disputes about the loan note itself. See Rivera v. Am. Gen. Fin. Servs., Inc.,
Our Supreme Court expressly rejected our reasoning and reversed. Rivera,
Facially Bilateral Carve-Outs
After Rivera, we subsequently applied the unconscionability doctrine to invalidate a series of ostensibly bilateral arbitration clauses in admission agreements between nursing homes and their residents. See Figueroa v. THI of N.M. at Casa Arena Blanca, LLC,
While Cordova and Rivera dealt with arbitration clauses where one-sidedness was evident on the face of the agreement, the clauses in the nursing home cases were facially bilateral. The nursing home carve-outs excluded from arbitration various claims that either party could technically bring, but that were, as a practical matter, unlikely to be brought by a resident. See Figueroa,
Applying these principles, we agree with the district court that the carve-out provisions in this case, while purportedly bilateral, are unfairly and unreasonably one-sided in favor of Defendant and thus render the agreement to arbitrate substantively unconscionable. However, we first acknowledge the differences between the carve-outs at issue here and those in Rivera.
The carve-out provision in the car title loan contract in Rivera stated, in relevant part:
[The plaintiff] cannot elect to arbitrate [the Render’s self-help or judicial remedies including, without limitation, repossession or foreclosure, with respect to any property that secures any transaction .... In the event of a default . . . , [the l]ender can enforce its rights to [the plaintiffs] property in court or as otherwise provided by law, and [the plaintiff] cannot require that [the Render’s actions be arbitrated.
Second, unlike Rivera, the clause at issue here does not exempt judicial remedies. Instead, it exempts all remedies in small claims court. Under the current circumstances, we conclude that this is a distinction without a meaningful difference. While we acknowledge that a fair reading of Rivera evinces concern about one-sided access to the courts, see, e.g., 201 l-NMSC-033, ¶¶ 39, 46, 48-49, 53, it is apparent that the small claims carve-out has the practical effect of preserving Defendant’s most important claims as a secured creditor while severely limiting a borrower’s access to judicial redress. We explain.
The Practical Effect of the Small Claims Carve-Out Renders the Arbitration Scheme Substantively Unconscionable
We conclude that the small claims carve-out renders Defendant’s arbitration scheme unconscionable for two reasons. First, itpreserves Defendant’s access to the courts to assert its most important claims as a secured creditor. When a consumer-borrower defaults on her payments, the secured party to a used car financing contract — in this case D efendant — may repossess the car pursuant to Article 9 oftheUCC. See NMSA 1978, § 55-9-609 (2001). If the repossession can be effected without a breach of the peace, for instance, if the borrower keeps the car in a driveway as opposed to a garage, the secured party can simply take the vehicle without judicial process. See § 55-9-609(b). So-called “self-help” repossession does not usually end the dispute, as the creditor, seeking to recover its loss, may then sell the vehicle in a commercially reasonable manner. See NMSA 1978, § 55-9-610(a) (2001). After sale, the creditor typically sues the borrower for any remaining balance owed. If the parties have signed a mutually binding arbitration agreement, the dispute over any deficiency would then be brought before an arbitrator. But in this case, Defendant has carved out a small claims exception in a financing contract for cars valued at $13,297.93 and $15,965.32, respectively. The amounts actually financed on the vehicles were $11,074.93 and $14,305.74. Thus, Defendant could safely assume that any ordinary suit for a post-reasonable-sale deficiency judgment would claim damages of less than $ 10,000 and would therefore be exempt from arbitration by the terms of the small claims carve-out. See NMSA 1978, § 35-3-3(A) (2001) (establishing the jurisdictional limits of the magistrate courts); NMSA 1978, § 34-8A-3(A)(2) (2001) (establishing jurisdictional limits of the metropolitan court). As drafted, this scheme affords Defendant the option to forego arbitration during the entire typical default process from repossession to sale to deficiency suit to garnishment of wages in the magistrate courts. See Cordova,
In an alternative scenario, the borrower keeps the car in a garage where it cannot be repossessed without a breach of the peace or a court order. Even in these cases, however, Defendant’s arbitration scheme preserves important access to judicial redress ■for Defendant. The small claims carve-out, which by its terms applies to any “remedies in small claims court,” also reserves access to the courts for Defendant to judicially foreclose on either vehicle by replevying the collateral if the fair market value of the vehicle falls below $10,000. See NMSA 1978, § 35-11-1 (1975) (providing for the civil remedy of replevin in the magistrate courts). Depending on the values of the Cadillac or Pontiac at the time of default, these claims would not always be available to Defendant, but they would likely be available during the greater part of the life of either loan, and they thus contribute to a determination of substantive unconscionability. See Rivera,
Second, our Supreme Court has identified a borrower’s typical claims against a lender to include the exact types of claims that were brought in this case: fraud and misrepresentation, “claims based on federal or state consumer protections, such as the New Mexico Unfair Practices Act, and tortious debt-collection causes of action}.]” Cordova,
Given Defendant’s access to judicial redress for its most likely claims, the arbitration clause’s one-sided application to claims for injunctive relief is particularly concerning. This is evident in the context of a typical dispute between a secured creditor and a borrower. When a secured creditor wants to stop a borrower from using the collateral, it need not seek an injunction because it can simply repossess the collateral. Thus, Article 9 shifts the burden of initiating judicial action — or in this case, arbitration — to the borrower. See Edward L. Rubin, The Code, the Consumer, & the Institutional Structure of the Common Law, 75 Wash. U. L.Q. 11, 37 (1997). For instance, it is the aggrieved borrower who must sue to enjoin the creditor from conducting an unlawful sale. See § 55-9-625. However, this important borrower’s remedy is uniquely subject to Defendant’s arbitration clause since the small claims courts cannot issue injunctions. Section 35-3-3(C)(6).
A recent decision of a federal court applying California’s unconscionability doctrine to an arbitration scheme identical to that in this case is in accord with our analysis. See Trompeter v. Ally Fin., Inc.,
The bulk of Defendant’s argument urges us to ignore the self-help carve-out. Defendant contends that “[t]he arbitration provision does not exempt from arbitration [the] right to proceed with self-help repossession. It simply notes the existence of such remedies.” In other words, according to Defendant, the language exempting self-help applies to a non-judicial, non-arbitrable right is thus superfluous and therefore cannot be unconscionable.
Even assuming that self-help repossession is necessarily nonarbitrable — which in our view is not entirely clear, see Rivera,
While ostensibly bilateral on its face, the practical effect of Defendant’s decision to exempt small claims remedies, much like the “collections” exceptions at issue in our nursing home cases, is to create a choice of forum for its preferred claims, while relegating a borrower’s most likely claims to mandatory arbitration. See Figueroa,
The District Court Did Not Shift the Burden of Proof to Defendant
Defendant next argues that the district court improperly allocated to it the burden to prove the absence of unconscionability. Specifically, Defendant contends that the district court raised and decided the issue of the small claims exemption “sua sponte” and without any evidence from Plaintiff, thereby impermissibly shifting the burden of proof. We disagree.
The parties do not dispute that the proponent of the affirmative defense of unconscionability bears the burden of proof. Strausberg,
We note first that the district court was entitled to raise the small claims issue and request argument from counsel at the hearing on Defendant’s motion to compel arbitration. We can find no authority to the effect that a court shifts the burden of proof by asking counsel a question at a hearing sua sponte. “The theory of pleadings is to give the parties fair notice of the claims and defenses against them, and the grounds upon which they are based'' Schmitz v. Smentowski,
Second, the district court was not required to hold an evidentiary hearing on the small claims issue. See State ex rel. King v. B & B Inv. Grp., Inc.,
In further support of its claim, [the defendant asserts that [the p]laintiff failed to present evidence that the arbitration agreement exempts the most likely claims [the defendant would bring against a resident. We conclude that the inference that guardianship, collection, and eviction proceedings would be the most likely claims of the nursing home is self-evident.
Id. Given the value of the collateral in this case and the ability of a secured creditor to sue for a deficiency judgment in small claims court, we conclude that the usefulness of the small claims carve-out to Defendant is similarly self-evident. Moreover, given our Supreme Court’s determination that a borrower’s most likely claims against a lender include fraud and misrepresentation, “claims based on federal or state consumer protections, such as the New Mexico Unfair Practices Act, and tortious debt-collection causes of action}],” Cordova,
Our Conclusion Is Not Preempted by the FAA
“The FAA was enacted in 1925 in response to widespread judicial hostility to arbitration agreements.” AT&T Mobility LLC v. Concepcion,__ U.S. __, __,
In accordance with the FAA, our Supreme Court has consistently upheld the application of our generally applicable unconscionability doctrine to one-sided arbitration agreements. See Strausberg,
The parties argue the merits of a recent decision of the Tenth Circuit Court of Appeals, which determined that our state courts are applying the unconscionability doctrine based on an impermissible “perceived inferiority of arbitration to litigation as a means of vindicating one’s rights.” THI of N.M. at Hobbs Ctr., LLC v. Patton,
Accordingly, we conclude that the arbitration provisions are unfairly one-sided and unenforceable. Since “the exemptions of certain claims from arbitration are so central to the agreement that they are incapable of separation from the agreement to arbitrate,” the arbitration clause must be stricken from the contract in its entirety. Figueroa,
CONCLUSION
The order of the district court is affirmed.
IT IS SO ORDERED.
WE CONCUR:
Notes
When an injunction is granted by the arbitrator, Defendant’s arbitration clause then singles it out as an appealable award.