Sydnor v. Conseco Financial ( 2001 )

UNPUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
IRMA H. SYDNOR; VIVIAN E. WYATT, 
Plaintiffs-Appellees,
v.
CONSECO FINANCIAL SERVICING
CORPORATION,
Defendant-Appellant,  No. 00-2304
and
AAPCO OF RICHMOND WEST,
INCORPORATED,
Defendant.

Appeal from the United States District Court
for the Eastern District of Virginia, at Richmond.
Richard L. Williams, Senior District Judge.
(CA-00-396)
Argued: January 22, 2001
Decided: March 7, 2001
Before WILKINSON, Chief Judge, NIEMEYER, Circuit Judge,
and Malcolm J. HOWARD, United States District Judge
for the Eastern District of North Carolina, sitting by designation.
Reversed and remanded by unpublished per curiam opinion.
COUNSEL
ARGUED: Brian R. M. Adams, SPOTTS, FAIN, BUIS, CHAPPELL
& ANDERSON, Richmond, Virginia, for Appellant. Thomas Dean
2 SYDNOR v. CONSECO FINANCIAL SERVICING CORP.
Domonoske, THE LAW OFFICE OF DALE W. PITTMAN, Harri-
sonburg, Virginia, for Appellees. ON BRIEF: Michael B. Gunlicks,
SPOTTS, FAIN, BUIS, CHAPPELL & ANDERSON, Richmond,
Virginia, for Appellant. Dale W. Pittman, THE LAW OFFICE OF
DALE W. PITTMAN, Petersburg, Virginia, for Appellees.
Unpublished opinions are not binding precedent in this circuit. See
Local Rule 36(c).
OPINION
PER CURIAM:
This matter arises out of a home improvement loan received by the
plaintiffs in this case, Irma H. Sydnor ("Sydnor") and Vivian E. Wyatt
("Wyatt"), from Conseco Finance Servicing Corporation ("Conseco")
for work done by AAPCO of Richmond West, Inc. ("AAPCO"). For
the reason stated below, we reverse the judgment of the district court
and remand for the district court to hold a hearing under the Prima
Paint standard.
I.
In the spring of 1999, home improver AAPCO approached Sydnor
and Wyatt (collectively "appellees") about making improvements to
their home. The appellees agreed to the home improvement project,
and AAPCO located financing for the work through Conseco. Sydnor
and Wyatt sent a loan application to Conseco to obtain funding for the
improvements.
On July 9, 1999, Sydnor and Wyatt signed a financing contract
("contract") agreeing to a loan of $9,907.94, secured by a deed of trust
on Sydnor and Wyatt’s home. The contract contained a provision
requiring all disputes be referred to arbitration in accordance with the
Federal Arbitration Act, 9 U.S.C. § 1.
SYDNOR v. CONSECO FINANCIAL SERVICING CORP. 3
Conseco subsequently issued checks to Sydnor and Wyatt to cover
the home improvements by AAPCO. A dispute arose between the
appellees and the subcontractor — AAMOR Home Renovations —
who were hired by AAPCO to complete repairs on Sydnor and
Wyatt’s home.
Appellees filed suit against Conseco and AAPCO in the United
States District Court for the Eastern District of Virginia alleging vio-
lations of the Truth in Lending Act, Virginia’s Consumer Protection
Act, fraud, and conspiracy. Conseco sought to compel arbitration.
On September 27, 2000, Judge Richard L. Williams denied Conse-
co’s motion to compel arbitration. As basis for his ruling, Judge Wil-
liams found that 1) plaintiffs did not knowingly and voluntarily waive
their right to a jury trial; 2) the arbitration agreement was unconscio-
nable because of unknown fees, costs, and procedures; and 3) the
arbitration clause was unenforceable because plaintiffs alleged fraud
specific to the arbitration clause. J.A. 118-19.
Conseco filed this interlocutory appeal, 9 U.S.C. § 16, challenging
the district court’s order. We review a district court’s denial of a
motion to compel arbitration de novo. Cara’s Notions v. Hallmark
Cards, Inc., 140 F.3d 566, 569 (4th Cir. 1998).
II.
Recognizing a strong federal policy in favor of arbitration, Con-
gress passed the Federal Arbitration Act ("FAA") "to reverse the
longstanding judicial hostility to arbitration agreements." Gilmer v.
Interstate/Johnson Lane Corp., 500 U.S. 20, 24 (1991). The FAA
mandates that if parties execute a valid agreement to arbitrate dis-
putes, a federal court must compel arbitration.
While federal policy broadly favors arbitration, the initial inquiry
is whether the parties agreed to arbitrate their dispute. Mitsubishi
Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614, 626
(1985). Congress did not intend for the FAA to force parties who had
not agreed to arbitrate into a non-judicial forum, and therefore, federal
courts must first decide whether the parties entered into an agreement
4 SYDNOR v. CONSECO FINANCIAL SERVICING CORP.
to arbitrate their disputes. Volt Info. Sciences, Inc. v. Board of Trust-
ees, 489 U.S. 468, 478 (1989). In determining whether the parties
executed a valid agreement to arbitrate, courts generally apply ordi-
nary state-law principles that govern the formation of contracts. First
Options v. Kaplan, 514 U.S. 938, 944 (1995). Moreover, the FAA
provides that a party may seek revocation of a contract under "such
grounds as exist at law or in equity," including fraud, duress, and
unconscionability. 9 U.S.C. § 2. However, federal courts must not
"singl[e] out arbitration provisions for suspect status," and should
evaluate arbitration agreements with the same standards as contracts.
Doctor’s Assocs., Inc. v. Casarotto, 517 U.S. 681, 687 (1996).
The lower court’s decision provided three grounds for not enforc-
ing the arbitration agreement. We address these grounds in turn.
III.
We first decide whether the district court properly concluded that
the arbitration agreement was unconscionable. Principles of equity
may counsel for invalidation of an arbitration agreement if the
grounds for revocation relate specifically to the arbitration clause.
Hooters of America v. Phillips, 173 F.3d 933, 938 (4th Cir. 1999).
Unconscionability is a narrow doctrine whereby the challenged con-
tract must be one which no reasonable person would enter into, and
the "‘inequality must be so gross as to shock the conscience.’" L&E
Corp. v. Days Inns of America, Inc., 992 F.2d 55, 59 (4th Cir. 1993)
(quoting Smyth Bros.-McCleary-McClellan Co. v. Beresford, 104 S.E.
371, 382 (Va. 1920) (internal quotations omitted)). However, when
claims allege unconscionability of the contract generally, these issues
are determined by an arbitrator because the dispute pertains to the for-
mation of the entire contract, rather than the arbitration agreement.
Coleman v. Prudential Bache Sec., Inc., 802 F.2d 1350, 1352 (11th
Cir. 1986).
Sydnor and Wyatt alleged in the lower court that terms specific to
the arbitration agreement — unknown fees, costs, and procedures —
were unconscionable. The district court agreed and refused to compel
arbitration, relying heavily on an opinion by the United States Court
of Appeals for the Eleventh Circuit which held that an arbitration
agreement silent on fees and cost was unenforceable. Randolph v.
SYDNOR v. CONSECO FINANCIAL SERVICING CORP. 5
Green Tree Fin. Corp.-Alabama, 178 F.3d 1149, 1158 (11th Cir.
1999), rev’d, 121 S. Ct. 513 (2000).
The Supreme Court, however, subsequently reversed the Eleventh
Circuit’s decision. The court held that while "the existence of large
arbitration costs could preclude a litigant . . . from effectively vindi-
cating her federal statutory rights" in an arbitration forum, failure of
an arbitration agreement to address costs and fees does not alone
make the agreement unenforceable. Green Tree Fin. Corp.-Alabama
v. Randolph, 121 S. Ct. 513, 522 (2000). Instead, the party seeking to
avoid arbitration must prove that "arbitration would be prohibitively
expensive." Id.
The appellees presented little evidence from which the district
court could have concluded that arbitration was prohibitively expen-
sive. Appellant has also represented to this court its willingness to pay
arbitration fees arising from this dispute.
Moreover, our decision in Hooters of America v. Phillips, 173 F.3d
933 (4th Cir. 1999), provides guidance on the limited circumstances
in which a court may find an arbitration agreement unconscionable.
In Hooters, we stated that arbitration agreements would not be invali-
dated for failure to replicate a judicial forum. Id. at 940. Instead, the
finding of unconscionability in Hooters was based on a multitude of
biased and warped rules promulgated by Hooters which essentially
created a "sham [arbitration] system" which the court refused to
enforce. Id. The egregiously unfair arbitration rules in Hooters, how-
ever, provide only a limited departure from the general rule that arbi-
trators decide questions of fairness regarding arbitration proceedings.
Id. at 941. Arbitration is not inherently unconscionable, and Hooters
does not give a federal court license to make a "full-scale assault" on
arbitration. Id.
In light of the Supreme Court’s holding in Green Tree and our own
discussion in Hooters, we conclude that the district court erred in
finding that the arbitration agreement was unconscionable because of
unknown cost, fees, and procedures.
IV.
As a second basis for holding the arbitration agreement unenforce-
able, the district court held that because arbitration constitutes waiver
6 SYDNOR v. CONSECO FINANCIAL SERVICING CORP.
of a claimant’s Seventh Amendment right to a jury trial, the waiver
must be made in clear and unmistakable terms. The court continued
by concluding that Sydnor and Wyatt had not knowingly waived their
right to a jury trial. At the outset we note that the arbitration agree-
ment clearly states: "THE PARTIES VOLUNTARILY AND KNOW-
INGLY WAIVE ANY RIGHTS THEY HAVE TO A JURY TRIAL,
EITHER PURSUANT TO ARBITRATION UNDER THIS CLAUSE
OR PURSUANT TO A COURT ACTION BY YOU." J.A. 33.
Sydnor and Wyatt do not dispute that they signed a document that
clearly stated that they knowingly and voluntarily waived the right to
a jury trial. Instead, they assert that the defendants had a duty to
ensure that the appellees fully informed themselves of the arbitration
agreement and waiver of a jury trial. However, an elementary princi-
ple of contract law is that a party signing a written contract has a duty
"to inform himself of its contents before executing it, . . . and in the
absence of fraud or overreaching he will not be allowed to impeach
the effect of the instrument by showing that he was ignorant of its
contents or failed to read it." Corbett v. Bonney, 202 Va. 933, 938
(1961). That the appellees did not make themselves aware of the arbi-
tration clause and disclosure is irrelevant.
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. It is clear that a party may waive her right to
adjudicate disputes in a judicial forum. Similarly, the right to a jury
trial attaches in the context of judicial proceedings after it is deter-
mined that litigation should proceed before a court. Thus, the "loss of
the right to a jury trial is a necessary and fairly obvious consequence
of an agreement to arbitrate." Pierson v. Dean, Witter, Reynolds, Inc.,
742 F.2d 334, 339 (7th Cir. 1984). We therefore conclude that the dis-
trict court erred in finding that the appellees did not knowingly and
voluntarily waive their right to a jury trial.
V.
The district court concluded alternatively that the arbitration agree-
ment was unenforceable because Sydnor and Wyatt alleged fraud.
Under the Prima Paint standard, a federal court may only consider
claims of fraud in the inducement "if the fraud relates specifically to
SYDNOR v. CONSECO FINANCIAL SERVICING CORP. 7
the arbitration clause itself and not to the contract generally." Three
Valleys Mun. Water Dist. v. E.F. Hutton & Co., 925 F.2d 1136, 1140
(9th Cir. 1991). See generally Prima Paint Corp. v. Flood & Conklin
Mfg. Co., 388 U.S. 395 (1967). Claims of fraud applicable to the
entire contract are generally resolved by an arbitrator.
While the district court determined that appellees alleged fraud
"specific to the arbitration clause," J.A. 119, it is unclear from the
record how appellees’ allegations of fraud apply specifically to the
making of the arbitration agreement, as opposed to the whole con-
tract.
As noted above, Sydnor and Wyatt concede that they signed the
contract containing a bolded and all cap arbitration agreement. The
appellees’ allegations of fraud relate the Conseco’s use of an unli-
cenced settlement agent, failure of the agent to leave a copy of the
contract with Sydnor and Wyatt, and various other violations of state
and federal law. However, it is unclear if or how these allegations of
fraud would invalidate only the arbitration agreement, while leaving
the contract as a whole intact. As stated above, if the appellees’ fraud
claims apply to the contract as a whole, they must be resolved by an
arbitrator, and not the court.
Therefore, we reverse and remand with instructions for the district
court to hold a hearing under the Prima Paint standard to determine
whether the appellees’ allegations of fraud apply to the contract gen-
erally or specifically to the arbitration clause.
REVERSED AND REMANDED