One surefire way to make sure a court won’t enforce your arbitration agreement is to ask it to do more than get you in front of an arbitrator. I can’t tell you the number of arbitration agreements I’ve seen that indicate the drafter got piggy, trying to use the arbitration agreement as a means of tipping the balance in a dealer’s or creditor’s favor.

Even though this case involves mortgage credit rather than car credit, it illustrates the point nicely.

Donald and Roxanne Abner signed a promissory note held by Bank of New York and secured by a mortgage held by Mortgage Electronic Registration Systems, Inc. (MERS). The mortgage contained an arbitration clause stating: “If the appointed arbitrator should award any damages, such damages shall be limited to actual and direct damages and shall in no event include consequential, punitive, exemplary or treble damages as to which the borrower and lender expressly waive any right to claim to the fullest extent permitted by law.” Hint to the drafter – you just drew a big bull’s-eye on your client.

MERS and Bank of New York filed a foreclosure action, and the Abners counterclaimed, alleging violations of the Home Ownership and Equity Protection Act (HOEPA), usury, and breach of contract. The Abners also sought to rescind the mortgage.

MERS and Bank of New York moved to compel arbitration. The trial court denied the motion, finding that the arbitration clause was unconscionable. MERS and the Bank of New York appealed.

The Kentucky Court of Appeals affirmed the trial court’s decision. The appellate court found that the Abners could be entitled to statutory damages for any Truth in Lending Act disclosure violation, as well as statutory damages for violations of HOEPA. The appellate court also found that if the Abners proved their claim for usury, they could be entitled to remedies including forfeiture of all interest on the note and recovery of damages in the amount of twice the interest paid. Finally, the appellate court noted that the Abners were seeking punitive damages for unfair and deceptive practices under the Kentucky Consumer Protection Act.

The appellate court concluded that the mortgage’s arbitration clause was unconscionable and unenforceable, stating that it prevented the Abners from meaningfully pursuing any of their statutory claims because it disallowed recovery for statutory damages.

The creditor here was left without the protection of an arbitration agreement because the drafter of the agreement got piggy and tried to pick the consumer’s pocket. Remember that the two reasons dealers and creditors should use mandatory arbitration agreements are to avoid class actions and to stay away from juries, which typically don’t like creditors and dealers. Don’t try to use the agreements to limit the consumer’s remedies or expand on the creditor’s rights.

You’ll get slaughtered.

Vol 5, Issue 11