Occasionally a court decision involving mortgage lending addresses issues that are equally applicable on the auto sales and finance side of the consumer credit business.  This is one of those decisions.

The decision is noteworthy for a couple of reasons.  The court is the U.S. District Court for the Southern District of West Virginia.  West Virginia courts have shown some hostility to arbitration provisions, and this decision upholds the enforceability of such a provision.  The decision also deals with a wide-ranging attack on an arbitration agreement that uses most of the arguments commonly asserted by plaintiffs’ lawyers around the country, rejecting them one by one.  All in all, it’s a fun read.

Borrowers James and Kathy Miller sued lender Equifirst Corporation of West Virginia and others for alleged improprieties associated with the marketing, brokering and closing of a mortgage refinance transaction.  Five counts of the Millers’ complaint challenged the validity of the arbitration clause included in the transaction documents. 

Equifirst moved to compel arbitration and stay judicial proceedings, or dismiss the Millers’ complaint.  The U.S. District Court for the Southern District of West Virginia granted Equifirst’s motion to compel arbitration.

First, the court considered the Millers’ argument that the arbitration agreement was an unenforceable contract of adhesion and unconscionable.  The court stated that contracts of adhesion may be enforceable if they are not unconscionable.  A finding of unconscionability hinges on both the relative bargaining positions of the parties and the existence of unfair terms in the contract.  The court found that the Millers could not show their arbitration agreement was unconscionable.  The court was especially persuaded by the Millers’ level of education, their opportunity to review the terms of the arbitration agreement and the relatively balanced terms of the agreement. 

Second, the court turned to the Millers’ claim that the arbitration entity selected in the agreement was unfairly biased in favor of lenders (note – this is why you often see arbitration agreements that permit the consumer to select the arbitration organization from among a list of two or three such organizations) .  The court rejected this claim as well, finding that the arbitration entity’s code of procedure contained adequate checks and balances to protect against bias and uphold the neutrality of the process. 

Third, the court considered the Millers’ claim that the arbitration agreement improperly barred the Millers from seeking remedies available in litigation, such as declaratory, injunctive and class action relief.  The court found that declaratory and injunctive relief were available in the arbitration process and that parties could, by contract, waive the availability of class action relief.  Thus, the court rejected this claim as well.  The decision regarding class relief is in sharp contrast with courts in California and New Jersey that have called class action waivers in arbitration agreements into question.

Finally, the court determined whether other defendants, non-parties to the arbitration agreement between the Millers and Equifirst, could require the Millers to arbitrate claims against them.  The court applied the “intertwined claims” test, which considers whether allegations against a non-party concern substantially interdependent and concerted misconduct.  The court found that this test was satisfied and concluded that the Millers’ claims against Community Home Mortgage, a non-party to the arbitration agreement, must proceed in arbitration.

This decision provides strong support for the enforceability of arbitration agreements, in the process dashing many of the most popular attacks on such agreements.  The fact that it comes from West Virginia, a very consumer-protective state, is just icing on the cake.

Miller v. Equifirst Corporation of WV, 2006 WL 2571634 (S.D. W.Va. September 5, 2006)

Vol 3, Issue 12