Donald J. FLORES et al., Plaintiffs and Respondents,
v.
TRANSAMERICA HOMEFIRST, INC., Defendant and Appellant.
Court of Appeal, First District, Division Five.
*378 Cоunsel for Defendant and Appellant: James H. Fleming, Walnut Creek, Edward Romero, San Ramon, Fleming & Phillips, Walnut Creek.
Counsel for Plaintiffs and Respondents: Richard P. Murray, San Rafael, H. Shaina Goldman, Freitas, McCarthy, MacMahon & Keating, San Rafael.
*377 STEVENS, J.
Plaintiffs Donald J. and Helen Flores, husband and wife, are senior citizens who obtained a reverse mortgage on their home from defendant Transamerica Home-First, Inc., (HomeFirst). After plaintiffs filed suit against HomeFirst for unfair business practices and other tortious conduct, HomeFirst petitioned to compel arbitration pursuant to arbitration clauses contained in the loan agreement and deed of trust signed by plaintiffs. The trial court denied the petition, finding the arbitration clauses to be unconscionable and unenforceable. HomeFirst appeals from that ruling, which we now affirm.[1]
I. BACKGROUND FACTS
In February 1997, plaintiffs, then ages 80 and 76, executed a "Loan Agreement and Note" and a deed of trust in order to obtain a reverse mortgage on their home from HomeFirst.[2] Under the reverse mortgage plan, plaintiffs received a lump sum plus monthly payments from Home-First until July 1999, when plaintiffs sold their home. In connection with the sale, plaintiffs received a final loan payoff demand from HomeFirst and were shocked to discover that they owed not only the $72,018 in principal they had borrowed plus interest on that principal but also another $75,000 in "contingent interest" which represented 50 percent of the market value appreciation over the two-year loan period. Plaintiffs paid the payoff demand under protest and then filed suit claiming unfair business practices, violations of the Consumer Legal Remedies Act (Civ.Code § 1750 et seq.), unconscionability, fraud, unlawful prepayment penalties, and bad faith. HomeFirst removed the action to federal court on the ground of federal preemption, but the federal court remanded the matter bаck to state court.
The loan agreement is 14 pages long, and an arbitration clause appears on page 11 in section 20. The first paragraph appears in bold face, enlarged type surrounded by a border:
"ARBITRATION. Any controversy or claim arising out of or relating to this *379 Loan Agreement, the Security Instrument, or any other document relating to the Loan, the breach of any of them or the default under any of them, other than an action or proceeding to foreclose on the Property pursuant to the Security Instrument, will be settled by binding arbitration under the jurisdiction of the American Arbitration Association in accordance with its Commercial Arbitration Rules. The arbitration will be conducted in the County of San Francisco or the County of Los Angeles, whichever is closer to the Property Address, unless you and I agree on a different location. Judgment upon any award rendered by the arbitrator may be entered in any appropriate court. Such аrbitration may not, however, without your consent, delay or adversely affect your ability to exercise any of the remedies available to you under this Loan Agreement or under the Security Instrument. Your pursuit of such remedies will not constitute a waiver by you of your rights to submit any controversy or claim to arbitration. No arbitration conducted hereunder shall be consolidated or combined with any other arbitration absent Lender's express written consent."
The sеcond paragraph is not in bold face type and does not appear within a border:
"Notwithstanding anything that may be contained in this Section to the contrary, this Section does not limit your right to foreclose against the Property (whether judicially or non-judicially by exercising your right of sale or otherwise), to exercise self-help remedies such as set-off, or to obtain injunctive relief for the appointment of a receiver from any apрropriate court, whether before, during or after any arbitration."
Throughout these quoted provisions, the terms "you," "your," and "Lender" refer to HomeFirst. "I" refers to the borrower.[3]
Based on these provisions, HomeFirst petitioned to compel arbitration. Plaintiffs opposed the petition on the ground that the underlying loan documents were unconscionable. The trial court ruled that the arbitration provisions within the loan documents were unconscionаble pursuant to the then-newly filed decision of the Supreme Court in Armendariz v. Foundation Health Psychcare Services, Inc. (2000)
II. DISCUSSION
A written agrеement to arbitrate is enforceable, "save upon such grounds as exist for the revocation of any contract." (Code Civ. Proc., §§ 1281, 1281.2, subd. (b).)[4] As is true for any contract, an arbitration provision may be held unenforceable if it is unconscionable.[5] (Civ. *380 Code, § 1670.5; e.g., Armendariz, supra,
A. STANDARD OF REVIEW
Unconscionability is ultimately a question of law for the court. (Civ.Code, § 1670.5; Stirlen, supra,
B. COLLATERAL ESTOPPEL
Plaintiffs argue that HomeFirst is collaterally estopped to deny the unconscionability оf the arbitration provisions by virtue of the judgment, affirmed by us on appeal, in San Mateo County Public Guardian v. Transamerica HomeFirst, Inc., et al. (Jan. 31, 2001, A090060 [nonpub. opn.]) (Reverse Mortgage Cases). We disagree. One who was not a party to a former judgment may indeed invoke the doctrine of collateral estoppel against one who was a party to the former judgment. (7 Witkin, Cal. Procedure (4th ed. 1997) Judgment, § 408, pp. 983-984.) However, the doctrine of collateral estoppel bars litigation of an issue already decided by a prior judgment only if the issue previously decided is identical to the one which is sought to be relitigated. (Amador v. Unemployment Ins. Appeals Bd. (1984)
Although the legal principles applicable to the issues in the present case are the same as those underlying the judgment in the Reverse Mortgage Cases, the facts are not. The loan agreement and deed of trust involved here were signed by different parties under different circumstances. Despite virtually identical language, the documents and the loan transactions in the Reverse Mortgage Cases are separate from those involved here. In light of the obvious similarity of the circumstances, we might have relied upon our opinion in the Reverse Mortgage Cases under the doctrine of stare decisis. Rule 977(a) of the California Rules of Court, however, precludes our reliance on an unpublished decision. Consequently, we undertake an independent examination of the legal issues raised here.
C. UNCONSCIONABILITY
In A & M Produce Co. v. FMC Corp. (1982)
Analysis of unconscionability begins with an inquiry into whether the contract was a contract of adhesioni.e., a *382 standardized contract, imposed upon the subscribing party without an opportunity to negotiate the terms. (Armendariz, supra, 24 Cal.4th at pp. 113-114,
In the present case, the arbitration clauses contained in the loan agreement and deed of trust constituted a contract of adhesion. HomeFirst unquestionably had superior bargaining strength in that it presented its preprinted documents, cast in generic language, to plaintiffs for signature. Plaintiffs were offered no opportunity to negotiate. The "IMPORTANT INFORMATION FOR ALL BORROWERS" which plaintiffs received indicated that in order to establish the reverse mortgage plaintiffs were required to sign the standardized loan documents. Plaintiffs were never informed that the documents, much less the arbitration provisions, were negotiable. Moreover, according to plaintiffs' son, HomeFirst's representative told plaintiffs that HomeFirst was the only company in California offering reverse mortgages, thereby indicating that plaintiffs had no real choice of alternate lenders.
In sum, the undisputed facts indicate that the arbitration agreement was imposed upon plaintiffs on a "take it or leave it" basis. The arbitration agreement was a contract of adhesion and thereby procedurally unconscionable.
As already noted, substantive unconscionability focuses on the one-sidedness of the contract terms. In the context of an arbitration agreement, the agreement is unconscionable unless there is a "`modicum of bilaterality'" in the arbitration remedy. (Armendariz, supra,
Here, we agree with the trial court's conclusion that the arbitration provisions do not display a modicum of bilaterality. Under the loan agreement plaintiffs' principal obligation is to repay the sums advanced with interest. Plaintiffs' indebtedness is non-recourse, secured solely by the deed of trust. In the еvent of a breach by plaintiffs, HomeFirst's remedy is mandatory prepayment, and if plaintiffs do not repay the loan, then HomeFirst is allowed to sell the property. Pursuant to section 20 of the loan agreement and the deed of trust, while plaintiffs are required to arbitrate "[a]ny controversy" arising out of the loan agreement or deed of trust, HomeFirst is allowed to proceed by judicial or non-judicial foreclosure, by self-help remedies such as set-off, and by injunctive relief to obtain appointment of a receiver.[7]
*383 Moreover, the loan documents allow HomeFirst to proceed with foreclosure despite the pendency of disputes brought to arbitration. The arbitration clauses provide that arbitration "may not ... without [HomeFirst's] consent, delay or adversely affect [HomeFirst's] ability to exercise any of the remedies available to [HomeFirst] under [the loan agreement or dеed of trust]." And finally, we note that section 19 of the deed of trust declares that "[a]ll of [HomeFirst's] remedies under this Security Agreement are cumulative to any other right or remedy under this Security Instrument or the Loan Agreement, or which is afforded by law or equity, and may be exercised concurrently, independently, or successively." (Italics added.) Realistically, then, the mandatory arbitration provisions apply to claims of the borrower against HomeFirst but not vice-versa. We conclude that this unilateral obligation to arbitrate is so one-sided as to be substantively unconscionable.
D. JUSTIFICATION
In Armendariz, supra,
HomeFirst argued below and reiterates on appeal that business realities dictate that it be allowed to foreclose against the property as a legitimate commercial means of ensuring its security for the non-recourse loan. We are not persuaded.
As a practical matter, by reserving to itself the remedy of foreclosure, Home-First has assured the availability of the only remedy it is likely to need. In any event, foreclosure is not the only remedy reserved to HomeFirst from the scope of arbitration. Rather, HomeFirst is entitled to exercise any rights or remedies "afforded by law or equity" while plaintiffs are confined to arbitration for all purposes. Moreover, by the terms of the arbitration agreement, HomeFirst is allowed to proceed with its own remedies despite the pendency of any claims in arbitration.[8] The clear implication is that HomeFirst has attempted to maximize its advantage by avoiding arbitration of its own claims.
*384 E. PREEMPTION UNDER FEDERAL ARBITRATION ACT
HomeFirst maintains that the Federal Arbitration Act (9 U.S.C. § 1 et seq.) (hereafter FAA) applies and precludes a determination under Californiа law that the arbitration agreement is unenforceable. HomeFirst relies on the principle that the FAA preempts state laws that single out and thwart arbitration provisions. (Doctor's Associates, Inc. v. Casarotto (1996)
Section 2 of the FAA contains language virtually identical to that of section 1281.2 of the Code of Civil Procedure: a written agreement to arbitrate a controversy "shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revoсation of any contract." (9 U.S.C. § 2, italics added.) The United States Supreme Court has recognized that "generally applicable contract defenses, such as fraud, duress, or unconscionability, may be applied to invalidate arbitration agreements without contravening [Section] 2 [of the FAA]." (Doctor's Associates, supra,
The Supreme Court has explained that arbitration is a favored method of resolving disputes only when it is voluntary. (Armendariz, supra,
A preemption argument identical to HomeFirst's was rejected in Stirlen, supra,
Armendariz agreed with the Stirlen court that enforcing a "modicum of bilaterality" in arbitration agreements doеs not single out arbitration for disfavor. While the form of unconscionability (e.g., one-sided choice of forums) may be peculiar to the context of arbitration, the application of ordinary principles of unconscionability does not disparage arbitration as a favored voluntary remedy. (Armendariz, supra, 24 Cal.4th at pp. 119-120,
F. SEVERANCE
Civil Code section 1670.5 permits the court, upon finding a contract to be unconscionable, to refuse to enforce the contract or to "enfоrce the remainder of *385 the contract without the unconscionable clause...." HomeFirst contends that this court should sever the provisions which reserve from arbitration the remedies of foreclosure, set-off, and appointment of a receiver. And HomeFirst argues that such a severance would have no effect on the arbitrability of plaintiffs' claims here, as those claims do not implicate such remedies. We decline to do so.
In Armendariz, supra,
In the present case, we are likewise faced with an arbitration agreement in which no single provision can be stricken to remove the unconscionable taint. As we have previously mentioned, the lack of bilaterality appears not only in the reservation of remedies specified in section 20 of the loan documents (foreclosure, set-off, appointment of receiver) but also in the provisions allowing HomeFirst to proceed with its remedies despite a claim pending in arbitration and giving HomeFirst all remedies "afforded by law and equity." HomeFirst has cited no precedent, and we are aware of none, in which a unilateral agreement to arbitrate was saved by severing the offending provisions.
Indeed, it strikes us as woefully unfair to plaintiffs tо allow HomeFirst at this late dateafter a dispute has arisen and after the reverse mortgage has terminatedto refute the unconscionable aspects of the arbitration agreement which HomeFirst itself drafted and from which HomeFirst stood to benefit over the life of the loan. "The overarching inquiry [under the doctrine of severance] is whether the interests of justice ... would be furthered." (Armendariz, supra,
III. DISPOSITION
The order denying the petition to compel arbitration is affirmed.
We concur: JONES, P.J., and SIMONS, J.
NOTES
Notes
[1] A petition to compel arbitration is a law and motion matter (rules 303(a)(2), 371, Cal. Rules of Court), but an order denying the petition is immediately appealable. (Code Civ. Proc., § 1294, subd. (a).)
[2] In a reverse mortgage the homeowner borrows against the equity in the home and makes no payment to the lender until the homeowner sells the house, moves out, or dies. The loan is then repaid out of the proceeds from the sale or through refinancing.
[3] In contrast, the "Important Information for All Borrowers" that accompanied the loan documents used "you" and "your" to refer to the borrower.
[4] The California Supreme Court has explained that the reference to grounds for "revocation" means grounds for rеscission. (Engalla v. Permanente Medical Group, Inc. (1997)
[5] The term "agreement" within section 1281.2 of the Code of Civil Procedure refers to the agreement to arbitrate, as distinguished from the overall contract in which that agreement is contained. (Ericksen, Arbuthnot, McCarthy, Kearney & Walsh, Inc. v. 100 Oak Street (1983)
[6] Earlier, in Graham, supra,
Subsequently, in Perdue v. Crocker National Bank (1985)
[7] In cоntrast, plaintiffs are expressly given no right of set-off. By statute, a party to an arbitration agreement may seek a provisional remedy from the court, including appointment of a receiver, if necessary to prevent the arbitration award from being rendered ineffectual. (Code Civ. Proc., § 1281.8.)
[8] HomeFirst points out that plaintiffs would have a statutory right to obtain a court order restraining the foreclosure if the foreclosure would render any arbitration award ineffectual. (Code Civ. Proc., § 1281.8.)