Torrence v. Nationwide Budget Finance

NO. COA12-453
NORTH CAROLINA COURT OF APPEALS
Filed: 4 February 2014
JAMES P. TORRENCE, SR., and TONYA
BURKE, on behalf of themselves and
all other persons similarly
situated,
Plaintiffs
v. New Hanover County
No. 05 CVS 447
NATIONWIDE BUDGET FINANCE, QC
HOLDINGS, INC., QC FINANCIAL
SERVICES, INC. FINANCIAL SERVICES
OF NC, INC. and DON EARLY,
Defendants
Appeal by defendants from orders entered 25 January 2012 by
Judge D. Jack Hooks, Jr. in New Hanover County Superior Court.
Heard in the Court of Appeals 28 November 2012.
Hartzell & Whiteman, L.L.P., by J. Jerome Hartzell, and North
Carolina Justice & Community Development Center, by Carlene
McNulty, for plaintiff-appellees.
Ellis & Winters LLP, by Paul K. Sun, Jr. and Kelly Margolis
Dagger, and Katten Muchin Rosenman LLP, by Claudia Callaway,
for defendant-appellants.
STEELMAN, Judge.
Where the arbitrator named in the arbitration agreement was
no longer conducting arbitrations, the trial court erred in not
appointing a substitute arbitrator pursuant to § 5 of the Federal
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Arbitration Act. Based upon the decisions of the United States
Supreme Court in Concepcion and Italian Colors, the trial court
erred in holding that the arbitration agreement was unconscionable
and refusing to compel arbitration.
I. Factual and Procedural History
County Bank of Rehoboth Beach, Delaware (“County Bank”), an
FDIC-insured Delaware bank, began offering short-term consumer
loans to North Carolina residents in 2002. In March 2003, County
Bank retained Financial Services of North Carolina, Inc., (“FSNC”)
to offer County Bank loans at FSNC locations. Applications for
loans were submitted at FSNC locations, and were transmitted to
County Bank for approval. Approved applications were sent back by
County Bank with a proposed loan agreement.
Between May 2003 and February 2004, James Torrence
(“Torrence”) applied for eleven County Bank loans or renewals. On
each occasion, he signed an identical loan note and disclosure
agreement that contained a clause entitled “Agreement to Arbitrate
All Disputes.”
Between October 2003 and January 2004, Tonya Burke (“Burke”)
applied for seven County Bank loans and/or renewals. On each
occasion, she signed an identical loan note and disclosure
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agreement that contained a clause entitled “Agreement to Arbitrate
All Disputes.”
Each of the loans signed by the plaintiffs with County Bank
contained the following arbitration provisions:
AGREEMENT TO ARBITRATE ALL DISPUTES: You and
we agree that any and all claims, disputes or
controversies between you and us and/or the
Company, any claim by either of us against the
other or the Company (or the employees,
officers, directors, agents or assigns of the
other or the Company) and any claim arising
from or relating to your application for this
loan or any other loan you previously, now or
may later obtain from us, this Loan Note, this
agreement to arbitrate all disputes, your
agreement not to bring, join or participate in
class actions, regarding collection of the
loan, alleging fraud or misrepresentation,
whether under the common law or pursuant to
federal, state or local statute, regulation,
or ordinance, including disputes as to the
matters subject to arbitration, or otherwise,
shall be resolved by binding individual (and
not joint) arbitration by and under the Code
of Procedure of the National Arbitration Forum
(“NAF”) in effect at the time the claim is
filed.
This agreement to arbitrate all disputes shall
apply no matter by whom or against whom the
claim is filed. Rules and forms of the NAF
may be obtained and all claims shall be filed
at any NAF office, on the World Wide Web at
www.arb-forum.com, by telephone at 800-474-
2371, or at “National Arbitration Forum, P.O.
Box 50191, Minneapolis, Minnesota 55405.”
Your arbitration fees may be waived by the NAF
in the event you cannot afford to pay them.
The cost of any participatory, documentary or
telephone hearing, if one is held at your or
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our request, will be paid for solely by us as
provided in the NAF Rules and, if a
participatory hearing is requested, it will
take place at a location near your residence.
This arbitration agreement is made pursuant to
a transaction involving interstate commerce.
It shall be governed by the Federal
Arbitration Act, 9 U.S.C. Sections 1-16.
Judgment upon the award may be entered by any
party in any court having jurisdiction.
NOTICE: YOU AND WE WOULD HAVE HAD A RIGHT OR
OPPORTUNITY TO LITIGATE DISPUTES THROUGH A
COURT AND HAVE A JUDGE OR JURY DECIDE THE
DISPUTES BUT HAVE AGREED INSTEAD TO RESOLVE
DISPUTES THROUGH BINDING ARBITRATION.
AGREEMENT NOT TO BRING, JOIN OR PARTICIPATE IN
CLASS ACTIONS: To the extent permitted by law,
you agree that you will not bring, join or
participate in any class action as to any
claim, dispute or controversy you may have
against us, our employees, officers,
directors, servicers and assigns. You agree
to the entry of injunctive relief to stop such
a lawsuit or to remove you as a participant in
the suit. You agree to pay the attorney’s
fees and court costs we incur in seeking such
relief. This Agreement does not constitute a
waiver of any of your rights and remedies to
pursue a claim individually and not as a class
action in binding arbitration as provided
above.
SURVIVAL: The provisions of this Note dealing
with the Agreement to Arbitrate All Disputes
and the Agreement Not To Bring, Join Or
Participate In Class Actions shall survive
repayment in full and/or default of this Note.
Subsequent to plaintiffs executing the notes containing the
arbitration agreements, the National Arbitration Forum (“NAF”)
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ceased conducting arbitrations, in accordance with the terms of a
consent judgment entered into with the Attorney General of
Minnesota on 17 July 2009. This judgment arose from allegations
of bias on the part of NAF in favor of business claimants against
consumer claimants.
On 8 February 2005, plaintiffs filed a complaint in this
action as a class action. Plaintiffs alleged that defendants QC
Holdings, Inc., QC Financial Services, Inc., and Don Early, under
the name Nationwide Budget Finance (collectively, “defendants”)
violated the North Carolina Consumer Finance Act, the North
Carolina unfair trade practices laws, and North Carolina usury
laws. Plaintiffs further sought to pierce the corporate veil in
order to hold QC Holdings, Inc. and Don Early personally liable.
On 11 April 2005, defendants filed an answer, as well as a motion
to dismiss for lack of personal jurisdiction and a motion to compel
arbitration.
On 25 January 2012, the trial court filed three orders that:
(1) denied defendants’ motion to compel arbitration; (2) granted
plaintiffs’ motion for class certification; and (3) denied the
motions of QC Holdings, Inc. and Don Early to dismiss for lack of
personal jurisdiction.
Defendants appeal.
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On 20 June 2013, the United States Supreme Court handed down
its decision in American Express Co. v. Italian Colors Rest., ___
U.S. ___, 133 S.Ct. 2304, 186 L.Ed.2d 417 (2013). On 15 July 2013,
this Court granted the motion of plaintiffs-appellees to allow the
parties to submit supplemental briefs to this Court concerning
their respective positions on the impact of the Italian Colors
decision upon this case. Both plaintiffs and defendants submitted
supplemental briefs.
II. Interlocutory Appeal
The trial court’s orders do not constitute a final judgment
and are therefore interlocutory. Veazey v. City of Durham, 231
N.C. 357, 361-62, 57 S.E.2d 377, 381 (1950). “Generally, there is
no right of immediate appeal from interlocutory orders and
judgments.” Goldston v. Am. Motors Corp., 326 N.C. 723, 725, 392
S.E.2d 735, 736 (1990). However, where an interlocutory order
affects a substantial right, an immediate appeal may be taken.
N.C. Gen. Stat. § 1-277 (2013).
“The right to arbitrate a claim is a substantial right which
may be lost if review is delayed, and an order denying arbitration
is therefore immediately appealable.” Howard v. Oakwood Homes
Corp., 134 N.C. App. 116, 118, 516 S.E.2d 879, 881, review denied,
350 N.C. 832, 539 S.E.2d 288 (1999), cert. denied, 528 U.S. 1155,
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145 L.Ed.2d 1072 (2000). “Jurisdiction in this Court over an
interlocutory order is proper where the appeal is from the denial
of a motion to dismiss for lack of personal jurisdiction.” Hammond
v. Hammond, 209 N.C. App. 616, 621, 708 S.E.2d 74, 78 (2011)
(citing N.C. Gen. Stat. § 1-277(b)).
The trial court’s rulings denying defendants’ motion to
compel arbitration and to dismiss for lack of personal jurisdiction
are properly before this Court.
III. Standard of Review
The standard governing our review of this case
is that “findings of fact made by the trial
judge are conclusive on appeal if supported by
competent evidence, even if ... there is
evidence to the contrary.” Lumbee River Elec.
Membership Corp. v. City of Fayetteville, 309
N.C. 726, 741, 309 S.E.2d 209, 219 (1983)
(citation omitted). “Conclusions of law drawn
by the trial court from its findings of fact
are reviewable de novo on appeal.” Carolina
Power & Light Co. v. City of Asheville, 358
N.C. 512, 517, 597 S.E.2d 717, 721 (2004).
Tillman v. Commercial Credit Loans, Inc., 362 N.C. 93, 100-01, 655
S.E.2d 362, 369 (2008).
IV. Defendants’ Motion to Compel Arbitration
The trial court entered a detailed order denying defendants’
motion to compel arbitration. This order contained a number of
separate rulings. First, the trial court held that “[t]he
designation of the National Arbitration Forum (“NAF”) as the sole
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arbitration provider and the designation of NAF rules were integral
features of the arbitration clause.” Second, the trial court held
that there was not a valid arbitration agreement because of the
taint of NAF, “because there was no legally effective and knowing
consent.” Third, the trial court held as a matter of law that the
North Carolina Supreme Court case of Tillman v. Commercial Credit
Loans, Inc., 362 N.C. 93, 655 S.E.2d 362 (2008) was not overruled
by the United States Supreme Court case of AT&T Mobility v.
Concepcion, ___ U.S. ___, 131 S.Ct. 1740, 179 L.Ed.2d 742 (2011).
Fourth, the trial court held that the arbitration agreement was
substantively unconscionable. Fifth, the trial court held that
the arbitration agreement was procedurally unconscionable. Sixth,
the trial court held that the arbitration clause prohibiting class
actions “is an unlawful exculpatory clause and is unenforceable.”1
V. Appointment of a Substitute Arbitrator
In their first argument, defendants contend that the trial
court erred in not compelling arbitration and appointing a
substitute arbitrator. This argument encompasses the first two
rulings of the trial court outlined above. We agree.
1 In their Supplemental Memorandum filed 25 July 2013, plaintiffs
acknowledged that pursuant to the United States Supreme Court’s
ruling in Italian Colors, the exculpatory clause ground for the
trial court’s decision “is no longer valid.” We therefore do not
address this ground in our opinion.
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There is no dispute that the parties entered into an agreement
for binding arbitration governed by the Federal Arbitration Act
(“FAA”), codified at 9 U.S.C. § 1 et seq. There is no dispute
that NAF can no longer serve as arbitrator of any dispute between
the parties, by virtue of the consent judgment entered into with
the Attorney General of Minnesota. There is also no dispute that
the FAA contains a specific provision that controls a situation
where the arbitrator named in the agreement is unable to serve, or
the method agreed upon for the selection of the arbitrator fails.
§ 5 of the FAA provides:
If in the agreement provision be made for a
method of naming or appointing an arbitrator
or arbitrators or an umpire, such method shall
be followed; but if no method be provided
therein, or if a method be provided and any
party thereto shall fail to avail himself of
such method, or if for any other reason there
shall be a lapse in the naming of an arbitrator
or arbitrators or umpire, or in filling a
vacancy, then upon the application of either
party to the controversy the court shall
designate and appoint an arbitrator or
arbitrators or umpire, as the case may
require, who shall act under the said
agreement with the same force and effect as if
he or they had been specifically named
therein; and unless otherwise provided in the
agreement the arbitration shall be by a single
arbitrator.
9 U.S.C. § 5.
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In the recent case of King v. Bryant, ___ N.C. App. ___, 737
S.E.2d 802 (2013), we analyzed the effect of § 5 of the FAA upon
an agreement to arbitrate. The trial court held that an
arbitration agreement, under the terms of which the parties agreed
to select three arbitrators, was nothing more than an “agreement
to agree” and was an unconscionable agreement. We held that:
Congress enacted the FAA, 9 U.S.C. § 1 et seq.,
“[t]o overcome judicial resistance to
arbitration,” Buckeye Check Cashing, Inc. v.
Cardegna, 546 U.S. 440, 443, 126 S.Ct. 1204,
163 L.Ed.2d 1038 (2006), and to declare “a
national policy favoring arbitration of claims
that parties contract to settle in that
manner.” Preston v. Ferrer, 552 U.S. 346, 353,
128 S.Ct. 978, 169 L.Ed.2d 917 (2008)
(quotation marks and citation omitted).
King, ___ N.C. App. at ___, 737 S.E.2d at 806. We further held
that the trial court had failed to consider the applicability of
§ 5 of the FAA, which “provides the trial court authority to
appoint a panel of arbitrators if the parties cannot come to an
agreement.” Id. at ___, 737 S.E.2d at 807. Indeed, § 5 is explicit
on that point, providing a vehicle for the court to appoint an
arbitrator where there is evidence that the parties agreed to
arbitrate. Similarly, under North Carolina law, “[w]here the
mandate of an arbitrator terminates for any reason, a substitute
arbitrator shall be appointed according to the rules that were
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applicable to the appointment of the arbitrator being replaced.”
N.C. Gen. Stat. § 1-567.45(a) (2013).
The specific issue of the enforceability of arbitration
agreements with reference to NAF has been addressed in other courts
as well. For example, the United States Court of Appeals for the
Seventh Circuit has noted that:
Two courts of appeals have held that the
identity of the Forum as arbitrator is not
“integral” to arbitration agreements and that
§ 5 may be used to appoint a substitute. Khan
v. Dell, Inc., 669 F.3d 350 (3d Cir. 2012);
Pendergast v. Sprint Nextel Corp., 691 F.3d
1224, 1236 n. 13 (11th Cir. 2012); Brown v.
ITT Consumer Financial Corp., 211 F.3d 1217,
1222 (11th Cir. 2000). The Supreme Court must
have assumed this in CompuCredit Corp. v.
Greenwood, ––– U.S. ––––, 132 S.Ct. 665, 181
L.Ed.2d 586 (2012), which held that claims
under the Credit Repair Organizations Act are
arbitrable. The agreement in that case
specified use of the Forum, see id. at 677 n.
2 (Ginsburg, J., dissenting), yet the Court
saw no obstacle to enforcing the arbitration
clause. We grant that Ranzy v. Tijerina, 393
Fed. Appx. 174 (5th Cir. 2010), deems
designation of the Forum “important” to
arbitration and makes an agreement
unenforceable once the Forum becomes
unavailable, but Ranzy is not precedential.
The decisions of the third and eleventh
circuits, and the assumption of the Supreme
Court, deserve greater weight.
Green v. U.S. Cash Advance Illinois, LLC, 724 F.3d. 787, 790 (7th
Cir. 2013). The Seventh Circuit correctly notes that CompuCredit,
which the United States Supreme Court decided after the 2009
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consent judgment against NAF, held that the arbitration clause
involving NAF could nonetheless be enforced.
The opinions cited above reaffirm the proposition that the
key aspect of the analysis of an agreement to arbitrate is the
intent of the parties to arbitrate, not the identity of the
arbitrator. We further note the United States Supreme Court’s
assertion that “[a]lthough § 2's saving clause preserves generally
applicable contract defenses, nothing in it suggests an intent to
preserve state-law rules that stand as an obstacle to the
accomplishment of the FAA's objectives.” Concepcion, ___ U.S. at
___, 131 S.Ct. at 1748, 179 L.Ed.2d at 753. The United States
Supreme Court has made it clear that it will no longer tolerate
State courts or laws which seek to frustrate the intent of Congress
in enacting the FAA.
We hold that the agreement of the parties evinced a clear
intent to resolve disputes through arbitration. The trial court
erred in not appointing a substitute arbitrator pursuant to § 5 of
the FAA.
The trial court’s second ruling was that the lack of
impartiality of NAF was a basis for voiding the arbitration
agreement. At the time that the defendants’ motion to compel
arbitration was heard by the trial court, NAF was no longer
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conducting arbitration, and since it was not going to arbitrate
the claims between the parties, its prior conduct was not a
relevant consideration for the trial court. Accordingly, we hold
that the trial court erred in considering the lack of impartiality
of a body which, the trial court acknowledged, could not serve as
an arbitrator in this case.
VI. Unconscionability
In their second argument, defendants contend that the trial
court erred in ruling that the arbitration agreement was
unconscionable. This argument encompasses the fourth and fifth
rulings of the trial court set forth in Section IV of this opinion.
We agree.
A. Tillman
The leading case in North Carolina dealing with
unconscionability in the context of an agreement to arbitrate is
Tillman v. Commercial Credit Loans, Inc., 362 N.C. 93, 655 S.E.2d
362 (2008). In Tillman, plaintiffs obtained loans from defendants.
Each of the loan agreements contained arbitration provisions that
required any disputes to be resolved by binding arbitration in
accordance with the FAA.2 Plaintiffs filed suit against the
2 While the agreements called for arbitration under the FAA, the
plurality opinion and the concurring opinion of the Supreme Court
make no reference to the FAA, and contain no analysis under the
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defendant lender seeking damages arising out of the lender’s
requirement that they purchase single premium credit life
insurance in connection with the loans. Defendants sought to
compel arbitration. The trial court found the agreement to
arbitrate to be unconscionable and unenforceable. On appeal, a
divided panel of the Court of Appeals reversed and remanded the
case to the trial court for entry of an order to compel
arbitration. Tillman v. Commercial Credit Loans, Inc., 177 N.C.
App. 568, 629 S.E.2d 865 (2006). On appeal, the North Carolina
Supreme Court reversed the Court of Appeals, holding the
arbitration agreement to be unconscionable.
In that case, a plurality of three justices concurred in the
decision of the Court, two justices concurred in the result only,
and two justices dissented. The plurality opinion stated that
unconscionability was an affirmative defense, and that the party
asserting that defense had the burden of establishing that the
agreement was unconscionable. Tillman, 362 N.C. at 102, 655
S.E.2d at 369. To establish unconscionability, a party must
demonstrate both procedural unconscionability and substantive
unconscionability. Id. at 102, 655 S.E.2d at 370 (citing Martin
v. Sheffer, 102 N.C. App. 802, 805, 403 S.E.2d 555, 557 (1991); 1
FAA. The dissent makes only a passing reference to the FAA.
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James J. White & Robert S. Summers, Uniform Commercial Code § 4–
7, at 315 (5th ed. 2006)). While both elements of
unconscionability must be present, a court may rule that a contract
is unconscionable “when [the] contract presents pronounced
substantive unfairness and a minimal degree of procedural
unfairness, or vice versa.” Id. at 103, 655 S.E.2d at 370.
The Supreme Court began its analysis by restating North
Carolina’s policy in favor of arbitration. Id. at 101, 655 S.E.2d
at 369. The Court first examined the issue of unconscionability
based upon procedural unconscionability:
In the instant case, the trial court did not
explicitly conclude that the facts supported
a finding of procedural unconscionability. We
note, however, that the trial court made the
following finding of fact, which is supported
by evidence in the record: “[Mrs.] Tillman and
[Mrs.] Richardson were rushed through the loan
closings, and the Commercial Credit loan
officer indicated where [Mrs.] Tillman and
[Mrs.] Richardson were to sign or initial the
loan documents. There was no mention of credit
insurance or the arbitration clause at the
loan closings.” In addition, defendants admit
that they would have refused to make a loan to
plaintiffs rather than negotiate with them
over the terms of the arbitration agreement.
Finally, the bargaining power between
defendants and plaintiffs was unquestionably
unequal in that plaintiffs are relatively
unsophisticated consumers contracting with
corporate defendants who drafted the
arbitration clause and included it as
boilerplate language in all of their loan
agreements. We therefore conclude that
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plaintiffs made a sufficient showing to
establish procedural unconscionability.
Id. at 103, 655 S.E.2d at 370.
With regard to substantive unconscionability, the Court
restated the trial court’s conclusion, noting that:
The trial court found the arbitration clause
to be substantively unconscionable because (1)
the arbitration costs borrowers may face are
“prohibitively high”; (2) “the arbitration
clause is excessively one-sided and lacks
mutuality”; and (3) the clause prohibits
joinder of claims and class actions. We agree
that here, the collective effect of the
arbitration provisions is that plaintiffs are
precluded from “effectively vindicating
[their] ... rights in the arbitral forum.”
Green Tree Fin. Corp.-Ala. v. Randolph, 531
U.S. 79, 90, 121 S.Ct. 513, 148 L.Ed.2d 373(2000).
Id. at 104, 655 S.E.2d at 370-71. Relying on Green Tree, and on
the Fourth Circuit’s decision in Bradford v. Rockwell
Semiconductor Sys., Inc., 238 F.3d 549, 556 (4th Cir. 2001), the
Court held that, because plaintiffs were financially ill-equipped
to cover the costs of arbitration, the “loser pays” provision of
the arbitration agreement presented a powerful deterrent. The
Court then contrasted arbitration with litigation, and stated that
“paying for arbitrators is a significant cost that is simply not
faced in filing a lawsuit in court[,]” but that “the trial court
found that it is ‘unlikely that any attorneys would be willing to
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accept the risks attendant to pursuing [these] claims.’” Id. at
105, 655 S.E.2d at 371. The Court concluded that “the combination
of the loser pays provision, the de novo appeal process, and the
prohibition on joinder of claims and class actions creates a
barrier to pursuing arbitration that is substantially greater than
that present in the context of litigation. We agree with the trial
court that ‘[d]efendant's arbitration clause contains features
which would deter many consumers from seeking to vindicate their
rights.’” Id. at 106, 655 S.E.2d at 372.
Finally, the Court examined unconscionability based on the
provision prohibiting class actions and joinder. The Court
observed that:
Taken alone, such a prohibition may be
insufficient to render an arbitration
agreement unenforceable, but Brenner
instructs that an unconscionability analysis
must consider all of the facts and
circumstances of a particular case. Therefore,
the trial court correctly concluded that a
prohibition on joinder of claims and class
actions is a factor to be considered in
determining whether an arbitration provision
is unconscionable.
Id. at 107, 655 S.E.2d at 373 (citations and quotations omitted).
The Court observed, however, that:
In the instant case, the prohibition on
joinder of claims and class actions affects
the unconscionability analysis in two specific
ways. First, the prohibition contributes to
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the financial inaccessibility of the arbitral
forum as established by this arbitration
clause because it deters potential plaintiffs
from bringing and attorneys from taking cases
with low damage amounts in the face of large
costs that cannot be shared with other
plaintiffs. Second, the prohibition
contributes to the one-sidedness of the clause
because the right to join claims and pursue
class actions would benefit only borrowers.
Id. at 108, 655 S.E.2d 373.
The Court concluded that:
[T]he arbitration clause in plaintiffs' loan
agreements is unconscionable and therefore
unenforceable. The inequality of bargaining
power between the parties and the oppressive
and one-sided nature of the clause itself lead
us to this conclusion. Through the arbitration
clause at issue in this case, defendants have
not only unilaterally chosen the forum in
which they want to resolve disputes, but they
have also severely limited plaintiffs' access
to the forum of their choice. Defendants argue
that finding this clause to be unconscionable
would be “hostile to arbitration.” We disagree
but at the same time reaffirm this Court's
previous statements acknowledging the State's
strong public policy favoring arbitration.
However, this particular arbitration clause
simply does not allow for meaningful redress
of grievances and therefore, under Green Tree,
must be held unenforceable.
Id. at 108-09, 655 S.E.2d 373-74.
Our Supreme Court analyzed Tillman solely under
unconscionability. It did not address any issues under the FAA,
which clearly governed the agreement. Further, the Supreme Court
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did not have the benefit of two cases subsequently decided by the
United States Supreme Court, construing arbitration agreements
under the FAA; AT&T Mobility v. Concepcion, ___ U.S. ___, 131 S.Ct.
1740, 179 L.Ed.2d 742 (2011), and American Express Co. v. Italian
Colors Rest., ___ U.S. ___, 133 S.Ct. 2304, 186 L.Ed.2d 417 (2013).
B. Concepcion
In Concepcion, plaintiffs entered into a cellular telephone
contract with defendant. This contract included an arbitration
provision that contained a class action waiver. Plaintiffs filed
a putative class action suit in the federal district court seeking
damages for false advertising and fraud. Defendant’s motion to
compel arbitration was denied by the district court, and this
ruling was affirmed by the United States Court of Appeals for the
Ninth Circuit. The district court and Court of Appeals relied
upon a decision of the California Supreme Court in Discover Bank
v. Superior Court, 36 Cal.4th 148, 113 P.3d 1100 (2005). The
holding in Discover Bank was that class waivers in consumer
arbitration agreements were unconscionable if the agreement was
contained within a contract of adhesion. Discover Bank, 36 Cal.4th
at 162-63, 113 P.3d at 1110.
The United States Supreme Court recited § 2 of the FAA as
follows:
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A written provision in any maritime
transaction or a contract evidencing a
transaction involving commerce to settle by
arbitration a controversy thereafter arising
out of such contract or transaction ... shall
be valid, irrevocable, and enforceable, save
upon such grounds as exist at law or in equity
for the revocation of any contract.
Concepcion, ___ U.S. at ___, 131 S.Ct. at 1745, 179 L.Ed.2d at
750-51 (quotations omitted).
The Supreme Court held that this provision
permits arbitration agreements to be declared
unenforceable “upon such grounds as exist at
law or in equity for the revocation of any
contract.” This saving clause permits
agreements to arbitrate to be invalidated by
“generally applicable contract defenses, such
as fraud, duress, or unconscionability,” but
not by defenses that apply only to arbitration
or that derive their meaning from the fact
that an agreement to arbitrate is at issue.
Id. at ___, 131 S.Ct. at 1746, 179 L.Ed.2d at 751 (citations
omitted). The Court further stated that “[a]lthough § 2's saving
clause preserves generally applicable contract defenses, nothing
in it suggests an intent to preserve state-law rules that stand as
an obstacle to the accomplishment of the FAA's objectives.” Id.
at ___, 131 S.Ct. at 1748, 179 L.Ed.2d at 753. The Court cited to
a number of its own prior opinions to emphasize that these prior
cases clearly stated that the FAA supersedes any state law that
sets aside arbitration agreements or holds them to be
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unconscionable upon grounds that are exclusive to arbitration
agreements.
The Supreme Court expressly overruled Discover Bank, which
invalidated class action waivers, holding that it had the effect
of “manufacturing” class arbitration, contrary to the express
intent of the parties, which was “inconsistent with the FAA.”
Concepcion, ___ U.S. at ___, 131 S.Ct. at 1753, 179 L.Ed.2d at
759. The Court further dismissed the notion that class action
waivers somehow prevented consumers from seeking relief.
Subsequent to Concepcion, the question of whether the
provisions of the FAA superseded state court rulings similar to
Discover Bank has been discussed in a number of cases. The Fourth
Circuit recently followed Concepcion in holding that the trial
court erred in finding a class action waiver in an arbitration
agreement to be unconscionable. Muriithi v. Shuttle Exp., Inc.,
712 F.3d 173, 180-81 (4th Cir. 2013). In Muriithi, the Fourth
Circuit held that the holding of Concepcion was broader than simply
overruling Discover Bank:
In Concepcion, the Supreme Court cautioned
that the generally applicable contract defense
of unconscionability may not be applied in a
manner that targets the existence of an
agreement to arbitrate as the basis for
invalidating that agreement. 131 S.Ct. at
1746–47. Applying that principle to the
Discover Bank “rule” at issue, the Court
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explained that state law cannot “stand as an
obstacle to the accomplishment of the FAA's
objectives,” by interfering with “the
fundamental attributes of arbitration.” 131
S.Ct. at 1748.
We recently discussed the holding in
Concepcion in our decision in Noohi v. Toll
Bros., Inc., 708 F.3d 599, 606–07 (4th Cir.
2013). We explained that the holding
“prohibited courts from altering otherwise
valid arbitration agreements by applying the
doctrine of unconscionability to eliminate a
term barring classwide procedures.” Id.(citing Concepcion, 131 S.Ct. at 1750–53).
Thus, contrary to Muriithi's contention, the
Supreme Court's holding was not merely an
assertion of federal preemption, but also
plainly prohibited application of the general
contract defense of unconscionability to
invalidate an otherwise valid arbitration
agreement under these circumstances. The
district court in the present case, deciding
the same issue of unconscionability prior to
Concepcion, reached the opposite conclusion.
Accordingly, we conclude that the district
court erred in holding that the class action
waiver was unconscionable.
Id.C. Italian Colors
In the recent case of Italian Colors, the United States
Supreme Court considered the question of whether “the Federal
Arbitration Act permits courts ... to invalidate arbitration
agreements on the ground that they do not permit class arbitration
of a federal-law claim[.]” Italian Colors, ___ U.S. at ___, 133
S.Ct. at 2308, 186 L.Ed.2d at 423 (citing petition for certiorari).
-23-
The United States Court of Appeals for the Second Circuit held
that the class action waiver was unenforceable and therefore that
arbitration could not proceed. It then held Concepcion to be
inapplicable because it was a case involving pre-emption.
The Supreme Court reiterated its prior holding that “Congress
enacted the FAA in response to widespread judicial hostility to
arbitration.” Id. at ___, 133 S.Ct. at 2308-09, 186 L.Ed.2d at423-24 (citing Concepcion, ___ U.S. at ___, 131 S.Ct. at 1745).
Plaintiffs argued that if they were required to arbitrate their
claims individually, it would contravene the policies of the
antitrust laws. The Supreme Court held that:
The antitrust laws do not “evinc[e] an
intention to preclude a waiver” of class-
action procedure. Mitsubishi Motors Corp. v.
Soler Chrysler–Plymouth, Inc., 473 U.S. 614,
628, 105 S.Ct. 3346, 87 L.Ed.2d 444 (1985).
The Sherman and Clayton Acts make no mention
of class actions. In fact, they were enacted
decades before the advent of Federal Rule of
Civil Procedure 23, which was “designed to
allow an exception to the usual rule that
litigation is conducted by and on behalf of
the individual named parties only.” Califano
v. Yamasaki, 442 U.S. 682, 700–701, 99 S.Ct.
2545, 61 L.Ed.2d 176 (1979). The parties here
agreed to arbitrate pursuant to that “usual
rule,” and it would be remarkable for a court
to erase that expectation.
Id. at ___, 133 S.Ct. at 2309, 186 L.Ed.2d at 424-25.
-24-
Plaintiffs then advanced the argument that there was a judge-
made exception to the FAA that allowed courts to invalidate
agreements that prevent the "effective vindication” of a federal
statutory right. While acknowledging the existence of the cases
dealing with “effective vindication,” the Supreme Court held that:
The class-action waiver merely limits
arbitration to the two contracting parties. It
no more eliminates those parties' right to
pursue their statutory remedy than did federal
law before its adoption of the class action
for legal relief in 1938[.]
Id. at ___, 133 S.Ct. at 2311, 186 L.Ed.2d at 426 (citations
omitted).
The Supreme Court then concluded:
Truth to tell, our decision in AT&T Mobility
all but resolves this case. There we
invalidated a law conditioning enforcement of
arbitration on the availability of class
procedure because that law “interfere[d] with
fundamental attributes of arbitration.” 563
U.S., at ––––, 131 S. Ct. 1740, 179 L. Ed. 2d
742. “[T]he switch from bilateral to class
arbitration,” we said, “sacrifices the
principal advantage of arbitration—its
informality—and makes the process slower, more
costly, and more likely to generate procedural
morass than final judgment.” Id., at ––––, 131
S. Ct. 1740, 179 L. Ed. 2d 742. We specifically
rejected the argument that class arbitration
was necessary to prosecute claims “that might
otherwise slip through the legal system.” Id.,at ––––, 131 S. Ct. 1740, 179 L. Ed. 2d 742.
Id. at ___, 133 S.Ct. at 2312, 186 L.Ed.2d at 427.
-25-
D. Conclusions from Tillman, Concepcion and Italian Colors
The FAA embodies a strong Congressional policy in favor of
arbitration. Concepcion and Italian Colors clearly state that the
United States Supreme Court is weary of state and federal trial
courts assisting plaintiffs in getting around the mandatory
provisions of the FAA. While both Concepcion and Italian Colors
dealt with class action waivers, underlying those decisions was a
broader theme that unconscionability attacks that are directed at
the arbitration process itself will no longer be tolerated. See
Muriithi, supra.
This places the North Carolina Court of Appeals in the
difficult position that the holdings of the North Carolina Supreme
Court in Tillman conflict with those of the United States Supreme
Court in Concepcion and Italian Colors. Ultimately, we are bound
by the decisions of the United States Supreme Court construing
federal laws, such as the FAA. In re Fifth Third Bank, Nat. Ass'n,
___ N.C. App. ___, ___, 716 S.E.2d 850, 855 (2011) (quoting Dooley
v. Seaboard Air Line Ry. Co., 163 N.C. 454, 457–58, 79 S.E. 970,
971 (1913)). Certain of the holdings of Tillman may be
distinguished, because even though arbitration provisions of the
Tillman contract referred to the FAA, none of the analysis
-26-
contained in either the plurality or concurring opinions discussed
the FAA and federal law principles.
As noted in Section VI-A of this opinion, a key element of
the plurality opinion in Tillman on unconscionability is the
section dealing with substantive unconscionability. Our Supreme
Court cited three factors, the collective effect of which was to
preclude plaintiffs from effectively vindicating their rights in
an arbitration proceeding. First was the “prohibitively high”
potential arbitration costs. Tillman, 362 N.C. at 104, 655 S.E.2d
at 370-71. In Italian Colors, the United States Supreme Court
expressly rejected the model proposed by the Court of Appeals for
the Second Circuit, which would have required “that a federal court
determine (and the parties litigate) the legal requirements for
success on the merits claim-by-claim and theory-by-theory, the
evidence necessary to meet those requirements, the cost of
developing that evidence, and the damages that would be recovered
in the event of success.” Italian Colors, ___ U.S. at ___, 133
S.Ct. at 2312, 186 L.Ed.2d at 427. The Supreme Court went on to
hold that the imposition of such a “preliminary litigating hurdle”
at the point in the proceedings where the issue was whether or not
the parties were to proceed to arbitration “would undoubtedly
destroy the prospect of speedy resolution that arbitration in
-27-
general and bilateral arbitration in particular was meant to
secure.” Id. We can only construe this language as eliminating
the type of cost analysis applied by the North Carolina Supreme
Court in Tillman.
Second, the North Carolina Supreme Court in Tillman held that
there was substantive unconscionability based upon the arbitration
clause being “excessively one-sided and lack[ing] mutuality[.]”
Tillman, 362 N.C. at 104, 655 S.E.2d at 371. The United States
Supreme Court in Concepcion noted, however, that “the times in
which consumer contracts were anything other than adhesive are
long past.” Concepcion, ___ U.S. at ___, 131 S.Ct. at 1750, 179
L.Ed.2d at 755. The Court in Concepcion was dismissive of the
idea that an arbitration agreement, apart from any other form of
contract, could be found substantively unconscionable based solely
upon its adhesive nature. This was an explicit part of the Supreme
Court’s reasoning in overruling Discover Bank. We must therefore
hold that the one-sided quality of an arbitration agreement is not
sufficient to find it substantively unconscionable.
Third, the North Carolina Supreme Court in Tillman held that
there was substantive unconscionability based upon the arbitration
provision “prohibit[ing] joinder of claims and class actions.”
Tillman, 362 N.C. at 104, 655 S.E.2d at 371. Both Concepcion and
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Italian Colors hold that a class action waiver does not render an
arbitration agreement unconscionable. Italian Colors specifically
holds that a party can “effectively vindicate” their rights in the
context of a bilateral arbitration. Italian Colors, ___ U.S. at
___, 133 S.Ct. at 2311, 186 L.Ed.2d at 426.
Thus, the legal theories upon which Tillman’s substantive
unconscionability analysis is based have been undermined by
subsequent decisions of the United States Supreme Court in the
context of cases under the FAA.
E. Ruling of the Trial Court
The trial court in the instant case, relying upon Tillman as
precedent, made the following findings of fact as to substantive
unconscionability:
H. SUBSTANTIVE UNCONSCIONABILITY.
42. No individual arbitration cases have ever
been brought challenging payday lending in
North Carolina, either against the defendants
in this case or against any other payday
lenders. In light of the large number of North
Carolina payday loan transactions that were
undertaken by these defendants and the
defendants in the other class cases after the
statutory authority for payday lending in
North Carolina expired on August 31, 2001, and
in light of the evidence that all payday
lenders required customers to sign loan
agreements with arbitration clauses
prohibiting participation in class actions,
the complete absence of any individual
arbitration cases tends to confirm that legal
-29-
challenges to North Carolina payday lending
conducted in cooperation with out-of-state
banks could not be challenged in individual
arbitration cases.
43. The language calling for arbitration
before the NAF required plaintiffs to submit
claims to an arbitration organization that
sought to build business by encouraging
relationships and providing accommodations to
debt-collector arbitration claimants, and
that on June 27, 2007, sold a 40% ownership
interest to participants in the consumer debt
collection industry. The NAF's lack of
neutrality affected arbitrator selection. The
arbitration clause requiring arbitration
before the NAF was substantively
unconscionable.
44. Plaintiffs offered the affidavit and
deposition testimony of attorneys George
Hausen, Glenn Barfield and Kenneth Schorr,
with live testimony of Mr. Barfield and Mr.
Hausen, each offering their opinion it was
unlikely an individual payday borrower,
proceeding on an individual (non-class) basis,
would be able to obtain legal counsel to
prosecute claims against defendants such as
those raised in this proceeding.
45. The Court notes that each of these
witnesses has been involved in recruiting
North Carolina lawyers to take civil cases on
behalf of low and moderate income persons in
North Carolina, specifically including
efforts to recruit lawyers both on a pro bono
basis and on a fee basis. Mr. Hausen is and
since 2002 has been the Executive Director of
Legal Aid of North Carolina. Mr. Schorr is the
Executive Director of Legal Services of the
Southern Piedmont, a nonprofit indigent civil
legal services program, serving Charlotte and
the western part of North Carolina. Mr.
Barfield is a lawyer in private practice who
-30-
is past president of Legal Services of North
Carolina, Inc., and past chairman of the board
of directors of Legal Aid of North Carolina.
Both Mr. Hausen and Mr. Schorr are and have
since 2005 been members of the North Carolina
Equal Access to Justice Commission.
Accordingly, the Court finds that these
witnesses are particularly knowledgeable as to
what cases North Carolina lawyers will accept,
both on a fee basis and on a pro bono basis.
46. The Court accepts the testimony of Messrs.
Barfield, Hausen and Schorr as experts. In
addition, because the Court has had the
opportunity to observe the demeanor of Mr.
Hausen and Mr. Barfield, witnesses, the Court
attaches particular weight to their testimony.
47. Mr. Barfield opined that, given the
complexity involved in cases challenging
payday lending in North Carolina presenting
questions such as are in issue in this case,
coupled with the motivation of the defendants
to vigorously defend, the necessity for out-
of-pocket expenditures, the uncertainty of
prevailing and the lack of ability to use
precedent in an arbitration forum, it is very
unlikely that any North Carolina lawyer would
be willing to bring such an individual case in
arbitration. Mr. Barfield regularly
represented defendants/counterclaimants in
cases brought by "debt buyers" in counties
close to his office. He wrote a manuscript to
encourage attorneys across the state to engage
in this work, but had virtually no success. In
Mr. Barfield's opinion, the complexity of
payday lending cases such as this case far
exceeds the complexity of the cases he handled
on behalf of consumers in the debt buyer
cases. Mr. Barfield testified that it is
simply not economically feasible to prosecute
payday lending cases such as this case, in
court or in arbitration on an individual
basis.
-31-
48. Mr. Hausen opined that it is very unlikely
that a payday borrower would be able to get
representation from a Legal Aid or pro bono
attorney in North Carolina. The demand for
services far exceeds the capacity to provide
legal representation. Legal Aid offices across
the state prioritize cases involving basic
needs such as preservation of shelter, access
to health care, access to public benefits such
as food stamps and Medicaid, and protection
from domestic violence. Neither Legal Aid nor,
in Mr. Hausen's opinion, the private attorneys
whom [L]egal Aid recruits to act as pro bono
volunteer attorneys, would have the resources
to act as attorneys for individual payday
borrowers. While his office has devoted
significant resources to foreclosure defense,
including developing and implementing a series
of training events for the private bar as a
way to encouraging [sic] referrals, it is not
likely that such an effort would be replicated
in an effort to represent payday lending
borrowers. Neither Legal Aid nor the volunteer
attorneys recruited to assist Legal Aid have
enough resources to accept cases seeking the
return of money from payday lenders.
49. Mr. Schorr testified that in his opinion,
people who were payday lending borrowers would
not be able to find attorneys at private firms
or with nonprofit organizations to handle
their claims on an individual basis. He
testified that the amount of damages and
attorneys' fees involved was not nearly at the
threshold that would make it likely that a
private attorney would take such a [c]ase, and
that nonprofit agencies would not handle them.
50. Messrs. Barfield, Hausen and Schorr each
opined that because the stakes of an
individual arbitration on behalf of a payday
borrower are so small, no attorney would be
willing to pursue a claim on behalf of a payday
-32-
borrower on an individual basis. They go
further to state that this is true despite the
availability of statutory attorney fees under
G.S. § 75-1.1 et seq. The individual claims
for individual borrowers that are at issue in
this case are in fact modest in amount.
Plaintiffs represent that Mr. Torrence's
largest damages claim is for treble the amount
of his net interest, which, after trebling, is
a total of $2,788.50. Ms. Burke's largest
claim is for recovery of all amounts paid, but
without trebling, which is a total of $561.
51. These witnesses also opined that because
of the nature of the claim and the federal
preemption issue, the claims in the instant
case are complex. The instant case is complex
because defendants contend they were engaged
in marketing and servicing loans for County
Bank. The Consumer Finance Act provides an
exemption for banks. Under federal preemption
laws, banks are not subject to state interest
rate limits. To prove that defendants are
subject to the CFA, a consumer must respond to
defendants' claims concerning exemption and
preemption. The complexity and proof will be
substantially the same regardless of whether
a claim is asserted on behalf of a single
individual or on behalf of a class.
52. The CFA assigns regulatory responsibility
over the small loan business to the North
Carolina Commissioner of Banks. The
Commissioner of Banks conducted an
administrative case against Advance America,
to determine whether that company was in
violation of the CFA by conducting payday
lending in North Carolina in cooperation with
an out-of-state bank. An order in that case
was rendered on December 22, 2005 (the "COB
Opinion"), ruling that Advance America was in
violation of the CFA.
53. The COB Opinion reflects that the issue of
-33-
whether payday lenders can avoid application
of the CFA by entering into contracts with
banks is complicated. The COB Opinion is 54
single spaced pages and has 292 footnotes.
Following an appeal, the COB Opinion was
affirmed by order rendered by Judge Donald W.
Stephens of Wake County Superior Court on
March 29, 2010, who found that the required
analysis is "heavily fact
dependent," and that Advance America's claim
to preemption was "not supported by the facts
in this matter."
54. A legal challenge to the issue of whether
defendants are lawfully permitted to
participate in payday lending in North
Carolina by purporting to act on behalf of an
out-of-state bank would present a fundamental
issue concerning whether defendants and other
payday lenders with similar bank arrangements
could continue to operate in North Carolina.
A legal challenge over such a fundamental
issue should be expected to give rise to a
vigorous defense supported by resources that
are more substantial that the amount in
controversy in a single individual
arbitration.
55. The successful prosecution of an
individual claim that defendants in this case
violated the CFA will likely require factual
development through depositions, document
review and expert analysis, just as the COB
Opinion reflected factual development through
depositions, document review and expert
analysis.
56. The COB Opinion devoted substantial
attention to financial relationships between
Advance America and the various banks, to the
actual results of such financial
relationships, to the historical development
of the relationships, to the companies'
apparent business objectives, and similar
-34-
matters.
57. Plaintiffs have submitted the affidavits
and depositions of two financial experts. One
of these experts, Ronald E. Copley, holds a
Ph.D. in Finance, has been a tenured professor
of Finance at the University of North Carolina
at Wilmington, is a Chartered Financial
Analyst, and is a licensed investment advisor.
Dr. Copley reviewed the COB Opinion and has
opined that it would require a minimum of 100
hours to perform financial analysis similar to
the analysis performed by the Commissioner of
Banks. The other of these experts, Michael J.
Minikus, is a North Carolina certified public
accountant. Mr. Minikus has opined that it
would require a minimum of 65 hours to perform
an analysis similar to the analysis performed
by the Commissioner. Dr. Copley charges $225
per hour for his services. Mr. Minikus charges
$125 per hour for his services. Regardless of
how many hours must be devoted to analysis by
a finance professional or a certified public
accountant, the costs of such experts are
likely to exceed the amount in controversy in
an individual case.
58. Regardless of whether the instant case
will require as much analysis as set out in
the COB Opinion, the legal issues in this case
are too factually and legally complex to be
addressed in an arbitration case involving
only the amount of damages that would be at
issue for a single plaintiff, because the time
and expense required to be invested in such a
case would be substantially in excess of the
amount that could be recovered if the case was
successful.
59. Defendants tendered the testimony of two
North Carolina lawyers, Samuel Forehand and
Woodward Webb, who stated that, in their
opinion, some North Carolina lawyer would
probably be willing to bring individual payday
-35-
loan arbitration cases.
60. Attorneys Forehand and Webb acknowledged
that they did not consider the complexities of
a CFA case challenging payday lending in North
Carolina done in cooperation with a bank, such
as the preemption issue and the other issues
identified in the COB Opinion. Mr. Webb
provided representative examples of cases
brought by consumer attorneys in North
Carolina and other states in an effort to
support his opinion that attorneys would
accept representation on behalf of a payday
borrower. None of these cases, however,
involved usury claims, federal preemption,
claims against a bank or a need for expert
witness testimony. Until the preemption issues
were brought to his attention at his
deposition, Mr. Forehand was not aware that
such a defense was likely to be involved in
this case. Mr. Forehand acknowledged that he
had no basis for disputing this Court's
earlier finding in prior cases that litigating
the preemption issue will require extensive
deposition, document review and expert
analysis as is reflected by the order of the
Commissioner of Banks, or that the cost of
expert witnesses alone would likely exceed the
amounts at issue in individual cases.
61. The significance of the opinion testimony
by attorneys Forehand and Webb is also
diminished by their failure to identify any
North Carolina lawyers who would in fact take
such cases. Mr. Webb acknowledged that he
would not accept one of these cases himself.
In his deposition Mr. Webb mentioned three
attorneys whom he thought might. However one
of the attorneys mentioned was no longer in
practice, and the other two attorneys signed
affidavits stating that they would not take
such cases on an individual basis. In his
hearing testimony Webb mentioned a fourth
attorney, but merely said he had spoken with
-36-
the attorney in passing who said he would
"look at it."
62. Defendants have objected to the tender of
affidavits of expert witnesses who were not
identified in interrogatory responses. The
Court understands this to be an objection to
Plaintiffs' Exhibits 47-49 (affidavits of
Carlene McNulty, John Van Alst and M. Jason
Williams). These affidavits are directed
simply to the issue of three specific lawyers'
willingness to take on individual cases
challenging bank-contract payday lending. The
objections are overruled.
63. Mr. Forehand testified that he would need
to undertake a detailed case acceptance
analysis before deciding whether he would take
one of these cases, which he has not yet been
able to complete; that even if he went through
the process outlined in his affidavit, he
would not be competent to state whether he
would file an individual arbitration claim,
having no prior experience with arbitration;
and that he could not identify any attorney
willing to represent a payday borrower or even
meet with a payday borrower.
64. Defendants introduced two letters written
by attorneys in North Carolina as evidence to
show that payday lending borrowers were able
to find legal representation. One letter made
allegations that the payday loan was illegal
and demanded that the payday loan company
cease collection efforts. The other letter
alleged that a payday borrower's check had
been cashed prematurely. The defendants
presented no evidence indicating that any
relief was provided to the clients as a result
of either letter, and no evidence that either
of these attorneys undertook further
representation on behalf of these borrowers or
any other borrowers such as filing suit in
court.
-37-
65. Even if North Carolina attorneys were
willing to pursue an individual arbitration on
behalf of an individual payday borrower, it is
unlikely that payday borrowers generally would
be able to obtain legal representation for
individual claims, given all witnesses'
inability to identify any lawyer who would
accept such individual cases.
66. It is extremely unlikely that payday
borrowers could effectively represent
themselves in pro se litigation or arbitration
against defendants in light of the complexity
of the issues, including the factual and legal
basis for federal preemption and statutory
exemption.
67. Unless consumers received legal assistance
that involved analyzing the legal legitimacy
of payday lenders' claims to federal
preemption and exemption, consumers would be
unaware that they possessed any sound basis
for a legal claim.
68. Defendants' witness Stephen Ware opined
that NAF arbitration afforded consumers a
reasonably accessible forum. Mr. Ware has
never practiced law in North Carolina and has
no familiarity with North Carolina law or
North Carolina lawyers, and did not identify
any North Carolina lawyer who is willing to
take individual payday loan cases such as the
instant case. Mr. Ware also did not review any
pleadings in this case other than the
complaint, did not review any of the briefs,
affidavits or depositions in the case; and did
not know what plaintiffs would have to prove
in order to prevail. He had no opinion as to
how many witnesses would be required to make
out a claim, or whether expert testimony would
be required; and had no knowledge of whether
proof of intent would be required.
-38-
69. Mr. Ware based his opinion that NAF
arbitration afforded consumers a reasonably
accessible forum, by comparing the NAF to our
court system as he contends it actually
exists. Mr. Ware testified that, even taking
the allegations of bias and corruption
asserted by former managerial employee Deanna
Richert as true, the NAF compares favorably to
our court system, "given the pressure on a
judge to rule in a particular way from a
governor or legislator or a contributor to a
judge's campaign."
70. Mr. Ware further based his opinion that
NAF arbitration afforded consumers a
reasonably accessible forum on information
that thirteen individual arbitration claims
had been advanced by Texas attorney Brian
Blakeley in arbitration cases before the
American Arbitration Association in which Mr.
Blakeley contended that "QC Financial Services
of Texas, Inc. was the 'true' lender for these
payday loan transactions and that the fees
collected by respondent constitute a deceptive
practice and that the respondent has violated
the Texas Credit Services Organization Act
and/or engaged in usury."
71. Mr. Blakeley provided an affidavit which
was introduced in evidence in the present
case, and Mr. Blakeley was deposed by
defendants. According to his affidavit, Mr.
Blakeley began pursuing cases against Texas
"credit service organizations" ("CSO's") in
late 2009, and sought to assert usury claims
on the ground that fees paid by his clients
that were purportedly credit service
organizations fees "should be considered to be
interest because the CSO should be regarded as
the true lender in the transaction; or because
the relationship between the CSO and the
purported lender is such that the purported
lender and the CSO are not truly independent."
Mr. Blakeley attached to his affidavit a Texas
-39-
Attorney General letter opining that
"[determining the true relationship between a
CSO and a lender would be a fact intensive
endeavor."
72. However Mr. Blakeley stated in his
affidavit and testified at his deposition that
he had abandoned usury claims against Texas
CSO's and was no longer asserting usury claims
in connection with payday lending in Texas.
Mr. Blakeley opined that "it is not possible
to pursue usury claims on an individual basis
in individual arbitrations conducted by the
[AAA] for the following reasons," and gave
five reasons that he believed such claims
could not be pursued in AAA consumer
proceedings.
73. Mr. Blakeley was deposed by defendants and
provided testimony consistent with his
affidavit. He continues to accept payday
lending clients, and has been successful in
seven out of twenty-two arbitration claims so
far in cases involving Texas law disclosure
claims unlike the claims in the present case.
However, Mr. Blakeley has unequivocally
abandoned all claims for usury and has no
intention of bringing those claims in the
future. Whether or not his decision to abandon
these claims is because Mr. Blakeley is "lazy"
as characterized by defendants or because the
claims are not economically viable, the fact
remains that Mr. Blakeley is not providing
legal representation to Texas payday borrowers
with fact-intensive claims concerning payday
lenders' business relationships with third
parties, and is not providing (nor has ever
provided) any representation to North Carolina
payday borrowers.
74. Mr. Blakeley practices law exclusively in
Texas, and is not licensed to practice law in
North Carolina. The claims brought by Mr.
Blakeley in the payday arbitration cases were
-40-
brought under Texas law, not North Carolina
law.
75. The Court finds that payday borrowers
would not be able to effectively vindicate the
type of claims raised by plaintiffs here, even
if the claims are legally justified and
correct, if payday borrowers are required to
proceed on an individual rather than class
basis. The facts demonstrate that this
conclusion is true, regardless of whether
consumers were to attempt to pursue their
claims in court or in arbitration.
76. The North Carolina Attorney General filed
an amicus brief in Kucan v. Advance America,
a North Carolina payday lending case alleging
similar legal issues as are alleged in the
instant case, stating that "no Attorney
General will ever have the funds or personnel
to pursue every remedy against every person or
company preying on North Carolina customers"
and that "it is critically important that
consumers be able to rely on the private bar—
as the legislature intended— for assistance in
obtaining restitution for injuries caused by
unfair or deceptive business practices."
77. Defendants' practice of holding customer
checks as security for loans gave defendants
considerable leverage in the event of a
nonpayment or dispute, making resort to court
or arbitration unnecessary: if the customer
failed to pay defendants could simply deposit
the check, either resulting in payment to
defendants or causing the customer to be faced
with the legal and practical consequences of
having their check bounce.
78. The arbitration agreements restrict
customers from bringing a class action. The
agreement contains no corresponding
prohibition against County Bank or any of the
defendants bringing or participating in a
-41-
class action.
This type of detailed analysis of the types of evidence
required for plaintiffs to pursue their claims and of the potential
costs of obtaining such evidence, at the stage of the proceeding
where the court determines whether the case should be sent to
arbitration, is precisely the approach rejected by the United
States Supreme Court in Italian Colors. See Italian Colors, ___
U.S. at ___, 133 S.Ct. at 2312, 186 L.Ed.2d at 427. This type of
analysis, based upon extensive evidentiary presentation, is not
only costly, but defeats the very purpose of arbitration, which is
for the parties to have a quick, expedited resolution of their
dispute.
We hold that, based upon Italian Colors, the trial court erred
in ruling that the arbitration agreement was substantively
unconscionable. In the absence of substantive unconscionability,
the entire unconscionability analysis must fail. See Tillman, 362
N.C. at 102-03, 655 S.E.2d at 370. Because there was no
substantive unconscionability, it is not necessary to review
procedural unconscionability. The trial court erred in not
granting defendants’ motion to compel arbitration.
VII. Impact of Concepcion upon Tillman
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Finally, the third basis of the trial court’s decision in the
instant case (as set forth in Section IV of this opinion) was that
Concepcion did not affect the Tillman analysis.
The trial court in the instant case acknowledged that
Concepcion overruled Discover Bank. It concluded, however, that
Discover Bank was distinct from Tillman, because where Discover
Bank featured a “rule of automatic invalidation, in a case in which
the plaintiff would be able to effectively vindicate his rights in
arbitration[,]” Tillman involved “consideration of all facts and
circumstances[.]” The trial court concluded that Tillman applied
because “the instant case involves plaintiffs who would not be
able to effectively vindicate their rights in NAF arbitration.”
The trial court’s attempt to distinguish Concepcion from
Tillman was in error. Concepcion, in overruling Discover Bank,
made clear that the FAA preempts any state law that prevents
bilateral arbitration of claims. Concepcion, ___ U.S. at ___, 131
S.Ct. at 1747, 179 L.Ed.2d at 752 (holding that “[w]hen state law
prohibits outright the arbitration of a particular type of claim,
the analysis is straightforward: The conflicting rule is displaced
by the FAA”). This applies regardless of whether the state
standard is “a rule of automatic invalidation,” as in Discover
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Bank, or “consideration of all facts and circumstances[,]” as in
Tillman.
The trial court further concluded that the fact that the
agreement was non-negotiable, along with the fact that “all payday
lenders doing business in North Carolina required borrowers to
execute loan agreements containing arbitration clauses prohibiting
participation in class actions[,]” was further evidence of
unconscionability. Yet the United States Supreme Court observed
in Concepcion that “the times in which consumer contracts were
anything other than adhesive are long past.” Id. at ___, 131 S.Ct.
at 1750, 179 L.Ed.2d at 755. That Court observed in a footnote
that:
Of course States remain free to take steps
addressing the concerns that attend contracts
of adhesion—for example, requiring class-
action-waiver provisions in adhesive
arbitration agreements to be highlighted. Such
steps cannot, however, conflict with the FAA
or frustrate its purpose to ensure that
private arbitration agreements are enforced
according to their terms.
Id., fn. 6. The United States Supreme Court’s position is explicit
– where the FAA governs, state laws (including Tillman) cannot
carve out exceptions.
VII. Personal Jurisdiction
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In their third argument, defendants contend that the trial
court erred in exercising personal jurisdiction over defendant Don
Early. However, because we have previously determined that the
case should have been submitted to arbitration, the matter was not
properly before the trial court. We therefore need not address
defendants’ contention that personal jurisdiction was improper.
See, e.g., Miller v. Two State Const. Co., Inc., 118 N.C. App.
412, 418, 455 S.E.2d 678, 682 (1995) (holding that where the
arbitration agreement was valid, we “need not address the other
issues raised by defendants”). These issues are properly to be
determined by an arbitrator.
VIII. Conclusion
The United States Supreme Court has made it clear that the
use of unconscionability attacks directed at the arbitration
process can no longer serve as a basis to invalidate arbitration
agreements. The intent of Congress in enacting the FAA was to
overcome judicial hostility to arbitration.
The trial court erred in not designating a substitute
arbitrator in this case pursuant to § 5 of the FAA; in determining
that the arbitration was unconscionable; and in not entering an
order compelling arbitration.
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The orders of the trial court denying defendants’ motion to
compel arbitration, granting plaintiffs’ motion for class
certification, and denying the motions of QC Holdings and Don Early
to dismiss for lack of personal jurisdiction are vacated, and this
matter is remanded to the trial court for entry of an order
directing that the parties arbitrate plaintiffs’ claims, and
appointing a substitute arbitrator.
VACATED AND REMANDED.
Judges STEPHENS and McCULLOUGH concur.