Opinion
CIVIL ACTION NO. 02-6626.
May 12, 2003.
MEMORANDUM ORDER
Plaintiff Terrace Choice brings an action against defendants Option One Mortgage Corp. ("Option One"), Accelerated Mortgage Company, D. Karpel Construction, Desmond I. Karpel, Stanley Meyers, Jack Meyers, and Russell E. Fannon asserting various federal and state law claims. Presently before the court is defendant Option One's motion to stay the action pending arbitration pursuant to 9 U.S.C. § 3. For the reasons that follow, Option One's motion to stay will be granted.
Default, for failure to appear, plead or otherwise defend, has already been entered against defendants Accelerated Mortgage Company (October 8, 2002 order), Jack Meyers (March 20, 2003 order), and Stanley Meyers (March 20, 2003 order).
In its initial motion, Option One also requested a motion to dismiss. The statute cited by Option One, 9 U.S.C. § 3, however, provides only for a stay of the trial pending resolution through arbitration. Given the statute's plain language and that Option One has advanced no other reason for dismissal, I will deny the motion to dismiss without prejudice.
9 U.S.C. § 3, in full, provides:
If any suit or proceeding be brought in any of the courts of the United States upon any issue referable to arbitration under an agreement in writing for such arbitration, the court in which such suit is pending, upon being satisfied that the issue involved in such suit or proceeding is referable to arbitration under such an agreement, shall on application of one of the parties stay the trial of the action until such arbitration has been had in accordance with the terms of the agreement, providing the applicant for the stay is not in default in proceeding with such arbitration.
FACTUAL BACKGROUND
Although styled as a motion to stay, defendant's motion is appropriately evaluated under the summary judgment standard, for reasons delineated infra. Accordingly, all of the facts are stated in the light most favorable to plaintiff as the non-moving party. Saldana v. Kmart Corp., 260 F.3d 228, 232 (3d Cir. 2001). Unlike a typical summary judgment motion, however, the motion currently at bar cannot be evaluated in light of the fruits of discovery as, to the court's knowledge, such has not yet transpired in this case. Accordingly, although my concern is with the existence of a genuine issue of material fact regarding the existence of a valid arbitration agreement, the facts set forth, infra, are gleaned primarily from plaintiff's amended complaint.
Because the only issue potentially in dispute based on the motion currently pending before the court is whether a valid arbitration agreement exists, I will tailor my recitation of the facts accordingly. This is an action brought by plaintiff Terrace Choice ("Choice") against several different individuals and entities in connection with a mortgage that, plaintiff alleges, was deceptively and fraudulently procured on her behalf.
In 1999, Choice, a 70-year old woman, decided to make some small scale repairs to her home. Amend. Compl. at ¶ 14. She contacted defendant Stanley Meyers ("Stanley"), who she believed was a general contractor, to obtain an estimate for the repairs. Id. at ¶ 15. Stanley came to Choice's home, reviewed the work desired, and advised her that the repairs would cost approximately $3,000. Id. at ¶ 17. He also told Choice that he would arrange the financing for the repair. Id. Choice was then contacted by Jack Meyers ("Jack"), who identified himself as the son of Stanley and told her that he was calling to gather information for the financing. Id. at ¶ 18. During this telephone conversation, Jack obtained Choice's social security number, employment and income information, and other personal information. Id. Choice's next contact with any of the defendants occurred when defendant Russell E. Fannon ("Fannon") came to her home to appraise her property. In that appraisal, he "grossly exaggerated" her property's worth at approximately $63,000, when in fact it was worth significantly less than that amount. Id. at ¶ 31. Shortly thereafter, Jack again contacted Choice and told her that he had found a mortgage company to finance her home repairs. Id. at 33.
Presumably, the purpose of the exaggerated appraisal was to raise the principal amount of the loan and the interest payments that would be due under the loan.
The closing occurred on or about August 6, 1999 in the Capital Assurance Group office located in Wayne, Pennsylvania. Id. at 34. In her description of the closing, Choice states that the proceeding was a rushed affair that took less than fifteen minutes. Choice Affidavit at ¶ 5, 6. She notes that Jack came to her home, picked her up and drove her to the loan closing. Amend. Compl. at ¶ 34. Choice was not provided any of the loan documents, required estimates or other required disclosures prior to the time of closing. Id. at ¶ 35. Rather, at the closing, Choice was presented with a series of papers that she was instructed to sign without reading and which, she was told, were beneficial to her. Id. at ¶ 36.
Included among the papers was a promissory note in the amount of $56,700, which was secured by a mortgage on Choice's home. Id. at ¶ 37. The terms of this mortgage provided for monthly payments of $514.42, a final balloon payment of $47,315.06 and was repayable at an annual percentage rate of 11.551 percent. Id. at ¶ 26. Additionally, numerous incidental fees and expenses were exacted against Choice, totaling several thousand dollars. Id. at ¶ 37.
Also included among the papers signed by Choice was a separate two-page document entitled "Agreement for the Arbitration of Disputes." This agreement was between Choice and Option One and its formation is central to the resolution of the pending motion. The thrust of the agreement stated that the parties to the agreement "agree that any dispute, regardless of when it arose, shall be settled . . . by arbitration in accordance with this Agreement." Def.'s Mot. to Stay Pending Arb., Exh. A at 1. "Arbitration" was defined as "a means of having an independent third party resolve a dispute." Id. A "dispute" was defined as:
[A]ny claim or controversy of any nature whatsoever arising out of or in any way related to the Loan; the arranging of the Loan; any application, inquiry or attempt to obtain the Loan; any Loan documents; the servicing of the Loan; or any other aspect of the Loan transaction. It includes, but is not limited to, federal or state contract, tort, statutory, regulatory, common law and equitable claims. A dispute does not include those items described in the paragraph labeled "Exceptions" below.Id. The paragraph labeled "Exceptions" provided:
The following are not disputes subject to this [arbitration] Agreement: (1) any judicial or non-judicial foreclosure proceeding against any real or personal property that serves as collateral for the loan, whether by the exercise of any power of sale or under any deed of trust, mortgage, other security agreement or instrument or under applicable law, (2) the exercise of any self-help remedies (including repossession and setoff rights) and (3) provisional or ancillary remedies with respect to the loan or any collateral for the loan such as injunctive relief, sequestration, attachment, replevin or garnishment, the enforcement of any assignment of rents provision in any loan documents, the obtaining of possession of any real property collateral for the loan by an action for unlawful retainer or the appointment of a receiver by a court having jurisdiction. This means that nothing in this Agreement shall limit your right or our right to take any of these actions. . . .Id. at 2.
The agreement also contained the following two advisory statements regarding its import. On the first page, the following statement advised: " If you have any questions, you should consult your own lawyer before you sign this agreement. " Id. In addition, the agreement contained an emboldened statement directly above the place where Choice placed her signature, which read: "THIS CONTRACT CONTAINS A BINDING ARBITRATION PROVISION WHICH MAY BE ENFORCED BY THE PARTIES." Id. at 2. Choice states, however, that she never had the opportunity to read these warnings. Choice Affidavit at ¶ 5, 6. Moreover, she states that she does not remember signing the arbitration agreement nor does she remember being informed of the content or effect of the agreement. Id. at ¶ 6. She further states that no one explained to her that by signing the agreement she was waiving any opportunity to have subsequent disputes settled in a court of law. Id. ¶ 8, 9.
Subsequent to the closing, when Choice inquired as to the status of her home repairs, she was informed that Jack and Stanley had filed for bankruptcy. Amend. Compl. at ¶ 44, 45. She never was able to obtain the satisfactory performance of the repairs for which she originally had attempted to contract. Id. at ¶ 46, 47. In addition, she discovered that she owed a tremendous amount of money due to the loan.
In sum, Choice contends that defendants "took advantage of [her] in order to have her enter into a grossly one-sided, overpriced loan transaction which was not advantageous to [her]." Id. at ¶ 54. Moreover, she claims, "through deliberately misleading, confusing and unfair methods, [defendants] persuaded [p]laintiff into consolidating her debt into a secured loan, then trapped [her] by making a secured loan in an amount high enough in relation to the value of [her property] so that [p]laintiff is unable to refinance the loan with Option One's competitors." Id. at ¶ 55. Choice believes that Stanley and Jack, in conjunction with Option One Mortgage Corp. ("Option One"), rather than seeking the small $3,000 loan she requested, proceeded to prepare on her behalf a mortgage application, containing false information, in the amount of $56,700. Id. at ¶ 26. She believes that the defendants engaged in this scheme to collect more money from her in the form of interest payments and broker fees, and to obtain a first position lien on her property. Id. at t 27, 29.
Based on the above, Choice asserts thirteen claims against the various defendants, alleging transgressions of both state and federal law. In particular, she asserts that defendants violated the Home Ownership and Equity Protection Act ( 15 U.S.C. § 1639(a)), the Truth in Lending Act ( 15 U.S.C. § 1601 et seq.), the Equal Credit Opportunity Act ( 15 U.S.C. § 1691 et seq.), and the Real Estate Settlement Procedures Act and Credit Services Act ( 12 U.S.C. § 2601 et seq.). Plaintiff s remaining claims concern the alleged contravention of Pennsylvania common and statutory law, and sound specifically in breach of fiduciary duty, unjust enrichment, breach of contract and violations of the Credit Services Act ( 73 P.S. § 2182), and the Unfair Trade Practices and Consumer Protection Law ("UTPCPL") ( 73 P.S. § 201-1 et seq.). Choice seeks a veritable menagerie of relief, most prominent of which are recision of the loan agreement, actual damages in the amount of $56,700, treble damages under the UTPCPL, punitive damages, fees and costs.
In response to Choice's allegations, defendant Option One filed the instant motion to stay the action pending arbitration pursuant to 9 U.S.C. § 3. Plaintiff asserts four arguments contesting the enforceability of the arbitration agreement; they will be discussed infra.
None of the other defendants has filed a motion in this action.
STANDARD OF REVIEW
When confronted with a motion to stay proceedings pursuant to 9 U.S.C. § 3, the appropriate standard of review for the district court is that employed in evaluating motions for summary judgment under Federal Rule of Civil Procedure 56(c). See Par-Knit Mills, Inc. v. Stockbridge Fabrics Co., 636 F.2d 51, 54 n. 9 (3d Cir. 1980) ("Application of [the summary judgment] standard to [arbitration determinations] is appropriate inasmuch as the district court's order to arbitrate is in effect a summary disposition of the issue of whether or not there had been a meeting of the minds on the agreement to arbitrate."); E-Time System, Inc. v. Voicestream Wireless Corp., 2002 WL 1917967 at *4 (E.D. Pa. Aug. 19, 2002) ("When confronted with a motion to stay proceedings pursuant to 9 U.S.C. § 3, the appropriate standard of review for the district court is that employed in evaluating motions for summary judgment under Fed.R.Civ.P. 56(c).") (citing Par-Knit, 636 F.2d at 54 n. 9).Either party to a lawsuit may file a motion for summary judgment, and it will be granted "if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." Fed.R.Civ.P. 56(c). "`Facts that could alter the outcome are "material", and disputes are "genuine" if evidence exists from which a rational person could conclude that the position of the person with the burden of proof on the disputed issue is correct.'" Ideal Dairy Farms, Inc. v. John Lebatt, LTD., 90 F.3d 737, 743 (3d Cir. 1996) (citation omitted).
While the moving party bears the initial burden of showing that there is no genuine issue of material fact, Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986), Rule 56(c) "mandates the entry of summary judgment . . . against a party who fails to make a showing sufficient to establish the existence of an element essential to that party's case, and on which that party will bear the burden of proof at trial." Id. at 322.
When a court evaluates a motion for summary judgment, "[t]he evidence of the non-movant is to be believed." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 255 (1986). Additionally, "all justifiable inferences are to be drawn in [the non-movant's] favor." Id. Moreover, "`[s]ummary judgment may not be granted . . . if there is a disagreement over what inferences can be reasonably drawn from the facts even if the facts are undisputed.'" Ideal Dairy, 90 F.3d at 744 (citation omitted). At the same time, "an inference based upon . . . speculation or conjecture does not create a material factual dispute sufficient to defeat entry of summary judgment." Robertson v. Allied Signal, Inc., 914 F.2d 360, 382 n. 12 (3d Cir. 1990). The nonmovant must show more than "[t]he mere existence of a scintilla of evidence" for elements on which he bears the burden of production. Anderson, 477 U.S. at 252. Thus, "[w]here the record taken as a whole could not lead a rational trier of fact to find for the nonmoving party, there is no `genuine issue for trial.'" Matsushita Elec. Indus. Co., Ltd. v. Zenith Radio Corp., 475 U.S. 574, 587 (1986) (citations omitted).
Accordingly, the court's task here is limited to determining whether there is a genuine, factual question as to the validity of the arbitration agreement.
DISCUSSION
The central dispute before the court, as articulated in the pleadings, is whether or not Choice validly agreed to arbitrate her federal and state law claims. While there is no dispute as to whether the arbitration agreement covers the claims raised by plaintiff, there is a dispute as to whether the arbitration agreement is a valid and enforceable agreement.
Courts have repeatedly agreed that it is within the jurisdiction of the federal district courts to determine whether a valid arbitration exists. ATT Technologies, Inc. v. Communications Workers of American et al., 475 U.S. 643, 649 (1986) ("[T]he question of whether the parties agreed to arbitrate is to be decided by the court, not the arbitrator.") (citing United Steel Workers of America v. Warrior and Gulf Navigation Co., 363 U.S. 574, 582, 583 (1960) among others).
Venue is proper under 28 U.S.C. § 1391(b)(2) as the transactions on which plaintiff's claims are based occurred in this district.
Neither party raises or briefs the issue of whether the claims asserted by plaintiff in her complaint fall within the scope of the arbitration agreement. As such, I will assume that they do.
Both the United States Supreme Court and the Third Circuit have repeatedly held "there is a strong presumption in favor of arbitration." Howsam v. Dean Witter Reynolds, Inc., ___ U.S. ___, 123 S.Ct. 588, 591 (2002) (quoting Moses H. Cone Memorial Hospital v. Mercury Construction Corp., 460 U.S. 1, 24-25 (1983)); EEOC v. Waffle House, Inc., 534 U.S. 279, 289 (2002); Great Western Mortgage Corp. v. Peacock, 110 F.3d 222, 228 (3d Cir. 1997), cert. denied, 522 U.S. 915. Accordingly, "in passing upon a § 3 application for a stay while the parties arbitrate, a federal court may consider only those issues relating to the making and performance of the agreement to arbitrate." Prima Paint Corp. v. Flood Conklin Mfg. Co., 388 U.S. 395, 404 (1967).
The primary inquiry, i.e., whether the parties entered into a valid arbitration agreement, is the dispositive determination in the instant case. Plaintiff raises four arguments contesting the enforceability of the arbitration agreement. She argues that the arbitration agreement is invalid, and thus, unenforceable because (1) it is unconscionable in that it allows Option One to pursue certain claims in a court of law while requiring that plaintiff submit all claims to arbitration; (2) Option One failed to show that plaintiff effectively waived her constitutional right to a judicial forum and jury trial by signing the arbitration agreement; (3) it deprives plaintiff of her statutory right to attorney fees under certain federal and state laws; and (4) it precludes plaintiff from effectively vindicating her federal statutory rights by requiring her to pay prohibitive arbitration costs. While I address each argument in turn, I conclude that no argument leads to a finding that the arbitration agreement at issue here is unenforceable.
I. Unconscionability and Lack of Mutuality
Plaintiff first argues that the arbitration agreement is unenforceable because it is unconscionable in that it allows Option One to pursue certain claims in a court of law while requiring her to submit all claims to arbitration. Plaintiff characterizes this argument in terms of lack of mutuality. Pl.'s Oppos. to Mot. to Stay Pending Arb. at 5-11. In response, Option One asserts that the Third Circuit has expressly rejected such arguments as grounds for invalidating an arbitration agreement. Def.'s Reply at 2-8.
Although most courts treat lack of mutuality as a defense separate and distinct from unconscionability, plaintiff collapses the two in her pleading. I, however, will follow the Third Circuit's approach and analyze the two separately.
As a rule, generally applicable contract defenses, i.e., fraud, duress, and unconscionability, may be applied to invalidate an arbitration agreement without violating the dictates of the Federal Arbitration Act, 9 U.S.C. § 1 et seq. Harris v. Green Tree Financial Corp., 183 F.3d 173, 179 (3d Cir. 1999) (citing Doctor's Associates, Inc. v. Casarotto, 517 U.S. 681, 687 (1996)). In assessing whether such defenses will bar enforcement of an arbitration agreement, a court must look to the relevant state law on the formation of contracts. Blair v. Scott Speciality Gases, 283 F.3d 595, 604 (3d Cir. 2002) (citing First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938, 944 (1995)); see also Battaglia v. McKendry, 233 F.3d 720, 724 (3d Cir. 2000) ("`[W]hen deciding whether the parties agreed to arbitrate a certain matter (including arbitrability), courts generally . . . should apply ordinary state-law principles that govern the formation of contracts.'") (quoting First Options, 514 U.S. at 944). Thus, the issue here is whether the lack of mutuality and unconscionability defenses posed by plaintiff are sufficient to invalidate the arbitration agreement.
According to common law, the doctrine of mutuality requires a contract to be based on an exchange of reciprocal promises. See Harris, 183 F.3d at 179-180 (citing 1A ARTHUR L. CORBIN, CORBIN ON CONTRACTS § 152, at 3 (1963)). On the other hand, "[u]nconscionability is a defensive contractual remedy which serves to relieve a party from an unfair contract or unfair provision of a contract." Wagner v. Estate of Rummel, 571 A.2d 1055, 1058 (1990), alloc. denied, 588 A.2d 510 (Pa. 1991). The Third Circuit, in reviewing these doctrines in the arbitration agreement context, has expressly rejected the arguments posed by plaintiff in her pleadings.
The test for unconscionability is two-fold: (1) whether one of the parties lacked a meaningful choice about whether to accept the provision [or contract] in question; and (2) whether the challenged provision or contract unreasonably favored the other party to the contract. Hornberger v. General Motors Corp., 929 F. Supp. 884, 891 (E.D. Pa. 1996) (citations omitted).
There appears to be no dispute that Pennsylvania law is to be applied in determining whether a valid arbitration agreement was formed. Def.'s Mot. to Stay Pending Arb. at 4 (applying Pennsylvania law); Pl.'s Oppos. to Mot. to Stay Pending Arb. at 6 (same).
In Harris v. Green Tree Financial Corp., the Third Circuit rejected the lack of mutuality argument advanced by plaintiff here. In Harris, the plaintiffs argued that the arbitration agreement was invalid and unenforceable because it lacked the requisite mutuality of agreement. 183 F.3d at 178. The arbitration agreement, which appeared in small print on the back and near the bottom of a one-page form contract, permitted the defendant lender to retain the option of using judicial or non-judicial relief to enforce a mortgage, to enforce the monetary obligation secured by the real property, or to foreclose on the real property. Id. at 177-178. Specifically, the agreement provided:
Notwithstanding anything hereunto the contrary, we retain an option to use judicial or non-judicial relief to enforce a mortgage, deed of trust, or other security agreement relating to the real property secured in a transaction underlying this arbitration agreement, or to enforce the monetary obligation secured by the real property, or to foreclose on the real property.Id. The Third Circuit in Harris found this clause valid and enforceable. In response to the assertion by the plaintiffs that the arbitration agreement was unenforceable based on a lack of mutuality, the court concluded that mutuality was not a requirement of a valid arbitration agreement. Id. at 180. Based on other federal appellate and district court cases coming to the same conclusion, the Third Circuit held that "parties to an arbitration agreement need not equally bind each other with respect to an arbitration agreement if they have provided each other with consideration beyond the promise to arbitrate." Id.
The Harris court also rejected the argument that the arbitration agreement was unenforcebale because it was unconscionable. The plaintiffs asserted that the one-sided nature of the agreement rendered it unconscionable. After reviewing the agreement, the Third Circuit held that "the mere fact that [the lender] retains the option to litigate some issues in court, while the [borrowers] must arbitrate all claims does not make the arbitration agreement unenforceable." Id. at 183. The court also noted that "inequality in bargaining power, alone, is not a valid basis upon which to invalidate an arbitration agreement." Id. at 183 (citing Great Western Mortgage Corp. v. Peacock, 110 F.3d 222, 229 (3d Cir. 1997) (citing Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20, 33 (1991))).
It is against the backdrop of these cases that I must decide whether the arbitration agreement in the instant case is unenforceable due to either lack of mutuality or unconscionability. For the reasons set forth in Harris, and subsequent district court cases, I conclude that plaintiff's lack of mutuality and unconscionability challenges to the validity of the arbitration agreement must be rejected.
With regard to the plaintiff's lack of mutuality argument, the Third Circuit has made it exceedingly clear that mutuality is not a requirement of a valid arbitration agreement. Harris, 183 F.3d at 180. Moreover, my colleague Judge Padova, deciding a similar motion, found that it was of no legal consequence that the arbitration agreement allowed the defendant lender to retain certain rights to litigate while denying them to the plaintiff borrower. Dabney v. Option One Mortgage Corp., No. CIV. A. 00-5831, 2001 WL 410543, at *5 (E.D. Pa. Apr. 19, 2001) (citing Harris, 183 F.3d at 183). Plaintiff's lack of mutuality argument is analogous to the ones raised in Harris and Dabney. Moreover, the arbitration clauses in those cases are similar to the one presently before the court. As such, I will follow the reasoning and ruling of the earlier cases to conclude that plaintiff's lack of mutuality argument provides an insufficient ground upon which to invalidate the arbitration agreement.
I likewise, conclude that plaintiff's unconscionability argument should fail. Like the plaintiffs in Harris, plaintiff here argues that the one-sided nature of the arbitration agreement renders it unconscionable. After reviewing the arbitration agreement and comparing it to the one in Harris, which was less favorable to the plaintiff borrowers than the one presently before the court, I find that the mere fact that Option One retained the ability to litigate some issues in court, while requiring plaintiff to submit most of her claims to arbitration, does not, standing alone, make the agreement unconscionable. I base my conclusion on the premise that "inequality in bargaining power, alone, is not a valid basis upon which to invalidate an arbitration agreement." Harris, 183 F.3d at 183 (citations omitted).
In further support of its contention that plaintiff's unconscionability argument is untenable, Option One directs this court's attention to Dabney v. Option One Mortgage Corp., No. CIV. A 00-5831, 2001 WL 410543 (E.D. Pa. Apr. 19, 2001), a case which involved Option One as a defendant and an arbitration agreement strikingly similar to the one at issue here. In Dabney, the plaintiff argued that the arbitration agreement was substantively unconscionable because it was an adhesion contract that unreasonably favored the defendant lender. Id. at * 4-5. Upon reviewing the agreement and the claims of unconscionability raised by plaintiffs opposing its enforcement, the judge in that case concluded that the arbitration agreement did not unreasonably favor the lender. Id. at * 5. He went on to note that "inequality of bargaining power by itself is not a valid basis upon which to invalidate an arbitration agreement." Id. (citations omitted).
While the decision in Dabney is non-binding on this court, I nevertheless find that it lends additional support to my conclusion that the plaintiff's unconscionability argument should be rejected.
Despite clear Third Circuit precedent rejecting her arguments, plaintiff directs this court's attention to a Pennsylvania Superior Court case, Lytle v. Citifinancial Services, Inc., 810 A.2d 643 (Pa.Super. 2002). The plaintiffs in Lytle argued that the arbitration agreement contained in their contract was unconscionable because the terms of the clause describing what was and was not arbitrable unfairly favored the defendant lending company. Lytle, 810 A.2d at 658-665. The arbitration agreement in that case provided that neither party could "require the other to arbitrate . . . [a]ny action to effect a foreclosure to transfer title to the property being foreclosed . . . or [a]ny matter where all parties seek monetary damages in the aggregate of $15,000.00 or less in total damages (compensatory and punitive), costs and fees." Id. at 650. The court concluded, that in practice, this meant that the plaintiff borrowers were required to arbitrate all issues involving more than $15,000 while the defendant lender remained free to enforce most of its rights ( i.e., to repayment of the debt or to commence foreclosure proceedings) in court. Id. at 660.
After reviewing the arbitration agreement and relevant authorities, the Pennsylvania appellate court declared the clause unconscionable. In reaching this conclusion, the court laid out the following rule:
[T]he reservation by [a lender] of access to the courts for itself to the exclusion of the consumer creates a presumption of unconscionability, which in the absence of "business realities" that compel inclusion of such a provision in an arbitration provision, renders the arbitration provision unconscionable and unenforceable under Pennsylvania law.Id. at 665 (citing cases from Ninth Circuit Court of Appeals, Northern District of California, Supreme Court of West Virginia, Supreme Court of Montana, Supreme Court of Ohio, and appellate court of California). Thus, according to the Lytle court, when a lender reserves access to the courts for itself for certain remedies but requires the borrower to arbitrate all or most of his or her claims, there is a presumption of unconscionability, which renders the arbitration agreement unenforceable in the absence of certain compelling business realities.
None of the cases cited by the court in Lytle provides persuasive authority for the instant decision. Even the federal cases rest on interpretations of state laws other than Pennsylvania's.
Despite plaintiff's best efforts, I find her reliance on Lytle unconvincing. First, a federal district court is bound by Third Circuit precedent on a state law issue unless the Pennsylvania Supreme Court subsequently says otherwise. Moreover, I cannot predict whether the Third Circuit would alter its holding in Harris based on Lytle or whether the Pennsylvania Supreme Court would follow Lytle rather than Harris. Nevertheless, upon review, it seems the court in Lytle relied heavily on the $15,000 cut-off provision in finding the arbitration agreement to be unconscionable. The court found the provision, in practice, to be overly favorable to the lender and unfairly harmful to the borrower. There is no such provision in the arbitration agreement between plaintiff and Option One. Rather, the instant arbitration agreement is more analogous to the one in Harris. As such, I find that case to be more instructive than Lytle, and thus, will follow its dictates.
Plaintiff's reliance on Lytle is further undermined by the fact the arbitration agreement here is not completely one-sided nor unreasonably favorable to the defendant lender; it does not completely exclude the plaintiff from access to the courts. Unlike the exceptions to arbitration listed in Lytle, which arguably benefitted only the defendant lender in practice, the exceptions to arbitration listed in the instant agreement could benefit both the plaintiff consumer and the defendant lender. For example, the self-help and set-off provisions seem to be available to both parties. Additionally, the ancillary remedies, including injunctive remedies, appear to benefit both the lender and the borrower. As such, I am unable to conclude that the arbitration agreement in the instant case precludes plaintiff's access to the courts to the same extent as the arbitration agreement in Lytle.
For the reasons set forth above, I must reject plaintiff's unconscionability and lack of mutuality arguments as a matter of law. Thus, I conclude that she has failed to establish a genuine, factual dispute as to existence of a valid arbitration agreement based on these grounds.
II. Waiver
The second reason offered by plaintiff for invalidating the arbitration agreement is her contention that she did not effect a voluntary and knowing waiver of "her basic constitutional rights to her day in court and a jury trial." Pl.'s Oppos. to Mot. to Stay Pending Arb. at 16. In response, Option One argues that courts have expressly rejected invalid waiver as a ground for avoiding an arbitration agreement. Def.'s Reply at 9-10. For the reasons set forth below, I conclude that plaintiff's waiver argument must fail.
Plaintiff appears to treat her right to a judicial forum and her right to a jury trial as distinct rights. While each derives from a different constitutional foundation, the two are intertwined. Courts have oft-noted that the right to a trial by jury is necessarily incident to and predicated upon the right to a federal judicial forum. Marsh v. First USA Bank, N.A., 103 F. Supp.2d 909, 921-22 (N.D. Tex. 2000).
The Seventh Amendment does not confer the right to a trial, but only the right to have a jury hear the case once it is determined that the litigation should proceed before a court. If the claims are properly before an arbitral forum pursuant to an arbitration agreement, the jury trial right vanishes.Cremin v. Merrill Lynch, Pierce, Fenner Smith, Inc., 957 F. Supp. 1460, 1471 (N.D. Ill. 1997). Thus, because the right to a jury trial attaches in the context of judicial proceedings only after it is determined that litigation should proceed before a court, the loss of a right to a jury trial is a necessary and obvious consequence of an agreement to arbitration. Sydnor v. Conseco Financial Servicing Corp., 252 F.3d 302, 307 (4th Cir. 2001) (citing Pierson v. Dean, Witter, Reynolds, Inc., 742 F.2d 334, 339 (7th Cir. 1984)).
As the right to a jury trial is thus subsumed in the right to a judicial forum, when I refer to the right to a judicial forum in the text above I mean both rights.
Initially, plaintiff's waiver argument fails because there is no indication that she has lost her due process rights. An arbitration agreement does not deprive an individual or his or her due process rights; it merely provides an alternative forum for the adjudication of such rights. See Dabney v. Option One Mortgage Corp., No. CIV. A. 00-5831, 2001 WL 410543, at * 2 (E.D. Pa. Apr. 19, 2001) (indicating that arbitration proceeding does not deny due process rights but rather provides for adjudication of such rights in a particular forum). It is clear that the forum in which due process is provided may be varied; it need not always be a traditional court of law setting. In addition, the principles underlying the constitutional concept of due process, namely notice and opportunity to be heard, Fuentes v. Shevin, 407 U.S. 67, 80 (1972), are preserved and protected in the arbitration setting. Dabney, 2001 WL 410543 at * 2; Mullane v. Central Hanover Tr. Co., 339 U.S. 306, 313 (1970) (noting that due process tolerates variances in form of hearing appropriate to nature of case); Boddie v. Connecticut, 401 U.S. 371, 378 (1971) (form of due process provided may depend on importance of interests involved and nature of subsequent proceedings).
Second, courts have repeatedly held that a court may refuse to enforce an arbitration "if and only if the party resisting arbitration [could] point to a generally applicable principle of contract law under which the agreement could be revoked." Seus v. John Nuveen Co., Inc., 146 F.3d 175, 183 (3d Cir. 1998) (citing Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20 (1991)). Moreover, courts have found that "[n]othing short of fraud, duress, mistake or some other ground recognized by law applicable to contracts generally" would excuse a court from enforcing an arbitration agreement. Seus, 146 F.3d at 184. A district court, considering these principles in light of a waiver argument analogous to the one presented here, concluded that inquiry into whether a party knowingly and voluntarily waived his or her right to a judicial forum by signing an arbitration agreement is inconsistent with the Federal Arbitration Act. Dabney v. Option One Mortgage Corp., No. CIV. A 00-5831, 2001 WL 410543 at * 2 (E.D. Pa. Apr. 19, 2001) (citing Gilmer and Seus). Inherent in the court's decision is the conclusion that invalid waiver is not a recognized legal ground for the revocation of contracts, and thus, is not sufficient to avoid enforcement of an arbitration agreement. Id. at * 2; see also Wright v. Universal Maritime Service Corp., 525 U.S. 70, 80-81 (1998) (stating, in dicta, that a heightened waiver standard is not applicable when an individual waives his or her own constitutional rights); Seus, 146 F.3d at 181, 182, 183-184 (finding, by implication, that the right to a judicial forum and to a jury trial are not subject to a heightened waiver standard when assessing the validity of an arbitration agreement); Sydnor v. Conseco Financial Servicing Corp., 252 F.3d 302, 307 (4th Cir. 2001) ("Nor does the fact that the appellees waived their right to a jury trial require the court to evaluate the agreement to arbitrate under a more demanding standard."); Williams v. Imhoff, 203 F.3d 758, 763 (10th Cir. 2000) (discussing Wright and noting that the Court left little doubt that a heightened waiver standard was inapplicable to agreements entered into by individual employees); Marsh v. First USA Bank, N.A., 103 F. Supp.2d 909, 921 (N.D. Tex. 2000) (stating that "individuals are free to contractually waive their rights as they see fit," and thus that no heightened waiver standard is required in the arbitration context); Bosinger v. Phillips Plastics Corp., 57 F. Supp.2d 986, 991 (S.D. Cal. 1999) (finding that no clear and unmistakable waiver of a right to a judicial forum was required to find an arbitration agreement valid).
In contrast to the general principles laid out above, plaintiff relies on Fuentes v. Shevin, 407 U.S. 67 (1972) and Erie Telecommunications, Inc. v. City of Erie, 853 F.2d 1084 (3d Cir. 1988) in support of the proposition that an arbitration agreement requires a heightened waiver standard. The cases upon which plaintiff relies, however, are unavailing and may readily be distinguished as neither involves an arbitration agreement. Fuentes involved a due process challenge to two state replevin statutes. Fuentes, 407 U.S. at 69-70. The statutes provided that a lender could summarily seize certain property of a debtor without providing notice or an opportunity for a hearing. Id. at 69-70. The Court concluded that the statutes worked a deprivation of property without procedural due process of law. Id. at 83-84. But, unlike the replevin statutes struck down in Fuentes, the arbitration agreement here does not "fly in the face of [due process] principle[s]." Id. at 83. In Fuentes, the statutes allowed lenders to take property from debtors without providing notice or an opportunity to be heard. Id. at 69-70. In the instant case, notice and an opportunity to be heard are both provided; they are merely provided in an arbitral rather than a judicial forum.
The other case cited by plaintiff, Erie Telecommunications, involved First and Fourteenth Amendment challenges to a release signed as part of a settlement agreement. Erie Telecommunications, 853 F.2d at 1086. The release provided that certain parties would not bring any related causes of action against the city, including constitutional causes of action. Id. at 1087. The Third Circuit concluded that the release constituted a valid waiver of the plaintiff's First and Fourteenth Amendment claims. Id. at 1096. In reaching a conclusion, the court examined various factors, including equality of bargaining power, whether the terms of the contract were negotiated or standard, and whether the waiving party had the opportunity to be advised by competent counsel. Id., 853 F.2d at 1096. Plaintiff appears to rely on Erie Telecommunications not for its outcome but for its reasoning. Presumably, she hopes the court will analyze the factors listed as decisive in Erie Telecommunications to conclude the waiver issue in her favor. That case, however, is inapposite to the present action; there is a clear distinction between agreeing to release a claim entirely and agreeing to submit that claim to a particular forum. Dabney, 2001 WL 410543 at * 2; Morrison v. Circuit City Stores, Inc., 70 F. Supp.2d 815, 824 (S.D. Ohio 1999). The release in Erie Telecommunications involved a full waiver of both substantive and procedural constitutional rights. In contrast, the arbitration agreement here merely provides an alternative forum for the adjudication of the parties' claims. Given this distinction, I find plaintiff's reliance on Erie Telecommunications unconvincing.
Because plaintiff's waiver argument has been soundly rejected by the Third Circuit and other courts, I find that no genuine, factual question exists and that plaintiff's wavier argument fails as a matter of law.
III. Attorney Fees
Plaintiff next argues that the arbitration agreement is unenforceable because it deprives her of statutorily-mandated attorney fees to which she may be entitled under certain federal and state laws. Pl.'s Oppos. to Mot. to Stay Pending Arb. at 16-18. In response, Option One argues that plaintiff's challenge to the attorney fees provision of the arbitration agreement is unrelated to the validity and enforceability of the agreement and thus, should be decided by the arbitrator. Def.'s Reply at 10-12. Although Option One misconstrues the plaintiff's argument, I nevertheless conclude that Option One should prevail on this count, for the reasons set forth below.
Plaintiff's attorney fees argument fails initially because the language of the arbitration agreement provides the arbitrator with the authority to grant any remedy or relief available in a court of law. Def.'s Mot. to Stay Pending Arb., Exh. A at 1. Option One has expressly endorsed this language and conceded that the arbitrator has the authority to provide attorney fees if appropriate. In its responsive pleading to plaintiff's challenge, Option One states that "the arbitrator shall the authority to award `any relief that a court in the State could order or grant.' Such authority clearly would include the power to award attorneys' fees if the law mandates it." Def.'s Reply at 10 (citing Arbitration Agreement). Option One is bound by this judicial admission both here and before the arbitrator.
More precisely, the arbitration agreement provides that the "arbitrator shall have the authority to award any remedy or relief that a court in the State could order or grant." Def.'s Mot. to Stay Pending Arb., Exh. A at 1.
In the instant case, both the Home Ownership and Equity Protection Act, 15 U.S.C. § 1639(a), ("HOEPA"), and the Truth in Lending Act, 15 U.S.C. § 1601 et seq., ("TILA"), allow a successful litigant to receive attorney fees. As such, a court in the state of Pennsylvania applying either HOEPA or TILA would have the authority to grant attorney fees to a successful litigant, and thus, an arbitrator applying either statute would likewise have that authority. Because the arbitrator has the same authority as the court with regard to the award of attorney fees, plaintiff is in the same position in the arbitral forum as if her claim had been heard in a judicial forum. I thus conclude, based on a plain text reading of the arbitration agreement, that each party will bear its own attorney fees. But if plaintiff prevails on either her HOEPA or TILA claims (or any other statutory claims where the award of attorney fees is contemplated), then the arbitrator has the ability to award attorney fees to plaintiff, pursuant to the provision in the arbitration agreement stating that the arbitrator may award any relief that a court in the state could. Option One has agreed with that interpretation and is bound by that agreement.
Plaintiff, however, bases her challenge on a constrained reading of the arbitration agreement. While noting that the arbitration agreement provides that "each party . . . shall . . . bear its own costs and expenses, including attorney's fees, that the party incurs with respect to the arbitration," she then cites to a provision which provides that the "arbitrator . . . is not authorized to change or alter the terms of this Agreement." Def.'s Mot. to Stay Pending Arb., Exh. A at 1 (emphasis added). Plaintiff reads these two statements in conjunction to mean that the arbitrator may not alter the terms of the agreement by awarding attorney fees to plaintiff under the relevant statute. Plaintiff's claim is that the arbitration clause requires each party to bear its own attorney fees, regardless of which party prevails and that this is contrary to the remedial provisions of HOEPA and TILA which provide for the award of attorney fees to the successful party. Because I find plaintiff's reading of the arbitration unnecessarily constrained, especially in light of case law to the contrary (as discussed supra), I find no need to analyze it. Rather, I conclude that plaintiff's interpretation is at odds with the agreement's plain language, and thus, should be rejected.
A further thorn in the side of plaintiff s attorney fees argument is the existence of cases supporting the proposition that the arbitrator may award attorney fees in compliance with the statute he or she is applying. In Morrison v. Circuit City Stores, Inc., 317 F.3d 646 (6th Cir. 2003), the arbitration agreement provided the arbitrator with discretionary authority to award attorney fees to the prevailing party. Id. at 655. In finding this provision valid and enforceable, the Sixth Circuit noted that if arbitration is to offer claimants the full scope of remedies available under certain state and federal statutes, then arbitrators applying those statutes, just like courts, must ordinarily grant attorney fees to prevailing claimants. Id. at 673 n. 15. Our own circuit adopted this principle by citing it favorably in Spinetti v. Service Corp. International, No. 01-4415, slip op. at 6 (3d Cir. Mar. 31, 2003). Moreover, plaintiff fails to identify any authoritative case indicating that the fees provision in the arbitration agreement supercedes the statutory provisions in the TILA and HOEPA which permit award of attorney fees to the prevailing party.
The only case directly on point cited by plaintiff, Baron v. Best Buy Co., 75 F. Supp.2d 1368 (S.D. Fla. 1999) has been reversed. Baron v. Best Buy Co., Inc., 260 F.3d 625 (11th Cir. 2001) (Table No. 99-14028).
Finally, even were I to conclude that the attorney fee provision requiring each party to pay its own attorney fees was invalid, I would sever that provision from the reminder of the agreement and still enforce the agreement with a mandate that the arbitrator has the ability to award attorney fees in compliance with the federal and state statutes. In Spinetti, the Third Circuit held that a fee/cost provision in an arbitration agreement was a non-essential provision and, thus, could be severed or altered as needed to ensure the enforceability of the arbitration agreement. Spinetti, No. 01-4415, slip op. at 3, 11, 13. The court noted that even if the fee provision of an arbitration agreement was determined to be invalid, that provision could be severed from the agreement in order to preserve the agreement. In summary, the Spinetti decision recognized the equity power of federal district courts to excise offensive language and to add language when necessary to ensure enforcement of an otherwise valid arbitration agreement. Id. at 11, 13. Other federal courts are in accord. Watkins v. Hudson Coal Co., 151 F.2d 311, 320 (3d Cir. 1945); Gannon v. Circuit City Stores, Inc., 262 F.3d 677, 682 (8th Cir. 2001); Giordano v. Pep Boys — Manny, Moe Jack, Inc., 2001 WL 484360 * 6 (E.D. Pa. Mar. 29, 2001); Zumpano v. Omnipoint Communications, Inc., 2001 WL 43781 * 12 (E.D. Pa. Jan. 18, 2001) (dicta).
Given the arbitration agreement's plain language, Option One's agreement, and recent Third Circuit precedent, i.e., Spinetti, I conclude the arbitrator has the authority to award attorney fees under the relevant statutes if the plaintiff prevails. Thus, I find that plaintiff is in the same position in front of an arbitrator as she would be in front of a court, and accordingly, that her attorney fees argument is not a sufficient ground upon which to invalidate the entire arbitration agreement. As such, I conclude that plaintiff has failed to establish that a genuine, factual question exists with regard to the validity of the arbitration agreement.
To the extent that the arbitration agreement requires a losing plaintiff to pay her own attorney fees and litigation expenses, "such burden is one borne by any litigant in federal court as well." Dabney, 2001 WL 410543 at * 4.
While plaintiff identifies several cases to the contrary, i.e., cases where courts have concluded that attempts to alter or reform arbitration agreement after the fact are ill-advised, none of these cases is authoritative in this jurisdiction. As such, I will follow the most recent Third Circuit precedent to conclude that plaintiff's attorney fees argument should be rejected.
IV. Prohibitive Arbitration Costs
Plaintiff next argues that the arbitration agreement should be found unenforceable due to the existence of prohibitively large arbitration costs which will affect plaintiff's ability, as a litigant, to pursue and vindicate her statutory causes of action. Pl.'s Oppos. to Mot. to Stay Pending Arb. at 18-25. In response, Option One asserts that plaintiff's argument is moot as it has offered to pay all costs associated with arbitration. Def.'s Reply at 12. After reviewing both parties' arguments and the relevant case law, I believe Option One should prevail for the reasons set forth below.
Even assuming plaintiff was able to establish that the costs of arbitration were prohibitively expensive, Option One's offer to pay all costs associated with arbitration moots the argument. In its motion to compel arbitration, Option One "agrees to pay the [sic] all the costs of the arbitration, including any administrative fee required by AAA [American Arbitration Association] to initiate the process and the arbitrator's fees." Def.'s Mot. to Stay Pending Arb. at 7. I interpret Option One's offer to pay "all the costs of the arbitration" to include the administrative fees, the arbitrator's fee and any other similar costs that may be charged by the arbitrator or his or her organization during the entire arbitration process. Because plaintiff will be responsible only for her own attorney fees to the extent noted previously, she will be in the same position financially as she would be if she pursued her claims in court. Thus, I must reject her prohibitive cost argument.
I will assume, although it is not in the record, that plaintiff is able to prove that the costs of arbitration would be prohibitive and that she could not afford it.
Plaintiff has not, however, demonstrated that the costs of arbitration would be prohibitively expensive. Generally, arbitration is appropriate only "so long as the prospective litigant effectively may vindicate [his or her] statutory cause of action in the arbitral forum." Green Tree Financial Corp. v. Randolph, 531 U.S. 79, 90 (2000) (citing Gilmer, 200 U.S. at 28). Courts have acknowledged that large arbitration costs are directly related to a litigant's ability to pursue a claim. Green Tree, 531 U.S. at 90; Blair v. Scott Specialty Gases, 283 F.3d 595, 605 (3d Cir. 2002); Dabney, 2001 WL 410543 at * 3. Thus, a litigant may challenge the enforceability of an arbitration agreement by asserting that costs of arbitration are prohibitively expensive and would adversely affect the litigant's ability to vindicate his or her statutory cause of action in the arbitral forum. The party seeking to avoid arbitration on this ground bears the burden of establishing the likelihood of incurring such prohibitive costs. Green Tree, 531 U.S. at 92; Dabney, 2001 WL 410543 at* 3.
Applying the above guidelines to the instant case, it becomes clear that plaintiff has failed to meet this burden. The arbitration agreement here requires that "each party . . . shall . . . bear its own costs and expenses, including attorney's fees, that the party incurs with respect to the arbitration." Def.'s Mot. to Stay Pending Arb., Exh. A at 1. Plaintiff has produced no evidence in support of her contention that the costs of arbitration are so prohibitive as to affect her ability to vindicate her statutory rights. Rather, she indirectly admits that she has no such evidence by requesting, in her pleading, leave to conduct discovery with regard to the actual costs of arbitration. Pl.'s Oppos. to Mot. to Stay Pending Arb. at 20. Given the lack of a record before me, I cannot conclude that the agreement is unenforceable because of prohibitive costs, as any analysis of the effect on plaintiff would be speculative.
Moreover, even if Option One had not offered to pay the costs of arbitration, I have the power to require that Option One pay all costs associated with arbitration and thus the ability to protect plaintiff from any prohibitively expensive costs. This court has the power to eliminate the fees/costs provision of the agreement and to insert a new provision requiring that Option One pay all costs associated with the arbitration of plaintiff's claims. See Blair v. Scott Speciality Gases, 283 F.3d 595, 610 (3d Cir. 2002) (indicating that court would enforce an arbitration agreement with a prohibitively expensive fee provision if a party offered to pay all costs associated with arbitration); Large v. Conseco Finance Servicing Corp., 292 F.3d 49, 56-57 (1st Cir. 2002) (ordering arbitration where lender agreed to pay all costs associated with arbitration); see also Section 3.c. supra (citing case law in support of the proposition that a court has the authority to require one party to pay certain costs associated with arbitration in order to enforce an arbitration agreement). Were plaintiff to establish that the costs of arbitration were prohibitively expensive to her, I would so require.
For the reasons set forth above, I find plaintiff's prohibitive cost argument to be moot. Thus, I conclude that plaintiff again fails to provide a genuine, factual dispute as to the validity of the arbitration agreement.
CONCLUSION
Because I conclude there is no genuine, factual question as to the validity and enforceability of the arbitration agreement to plaintiff's claims, Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 247-48 (1986), I will grant Option One's motion to stay the instant litigation pending arbitration in accordance with 9 U.S.C. § 3.
ORDER
And now, this 12th day of May, 2003, upon consideration of the motion of defendant Option One Mortgage Corp. to stay the action pending arbitration pursuant to 9 U.S.C. § 3 (Doc. 13); the plaintiff's response thereto (Doc. 17); and the defendant's reply thereto (Doc. 18), it is hereby ORDERED that defendant's motion to stay is GRANTED and the action is stayed as to defendant Option One Mortgage Corp. ONLY, pending arbitration pursuant to 9 U.S.C. § 3. It is further ORDERED that the motion of defendant Option One Mortgage Corp. to dismiss is denied without prejudice.