The New Mexico Court of Appeals affirmed that a lender's arbitration scheme was unconscionable, because it gave itself access to the courts, but not to the borrower.
Eileen Dalton’s claims involved two finance contracts made with a car dealership operated by Performance Automotive Group.
She made timely payments to the finance company and to her surprise, both vehicles were repossessed shortly after purchase.
Defendant Santander Consumer USA purchased the finance contracts from Performance Automotive Group.
After the second vehicle was repossessed without reason, Dalton filed suit against Santander for breach of contract, fraud, conversion, breach of warranty of title, and violations of the Uniform Commercial Code and the Unfair Practices Act.
On appeal, Santander argued that giving itself the self-help and small claims options were not unconscionable and that the district court had improperly shifted the burden of proof to the defendant on the issue of the small claims provisions.
Dalton originally financed a Cadillac and made payments on time for eight months. Unexpectedly, the Cadillac was repossessed because Performance failed to pay a prior lien.
At the dealership's request, Dalton agreed to receive a credit for the payments made on the first vehicle toward the purchase of a second vehicle. Dalton signed a second finance and purchase agreement with a higher monthly payment.
Shortly after this transaction, the second repossession caused Dalton to initiate the suit. She was left without a vehicle or a refund for payments made.
Each finance contract contained an identical arbitration clause with a separate statement exempting certain issues from mandatory arbitration.
The arbitration clauses were one sided and left the Plaintiff without a remedy. The separate clause at issue stated:
You and we retain any rights to self-help remedies, such as repossession. You and we retain the right to seek remedies in small claims court for disputes or claims within that court’s jurisdiction, unless such action is transferred, removed or appealed to a different court. Neither you nor we waive the right to arbitrate by using self-help remedies or filing suit.
The clause on its face is neutral and seemed favorable to both parties, and for this reason Santander requested the court to instruct Dalton to comply with the agreement.
The district court disagreed and rejected the motion.
Unconscionability is a doctrine that allows the court to void contracts or agreements that are unreasonably unfair to one party.
The defendant argued the agreement's language was used to show repossession as an option to the lender that would be exempt from the courts and arbitration.
However, this court decided even if the provision seemed facially neutral, its application left Santander with access to the courts and the option to repossess the vehicle; Dalton was left to settle her claims through arbitration. Rivera v. Am. Gen. Fin. Serv, 242 P.3d 351, 354 (NM Ct. App. 2010) (borrower filed suit against lender for “Covered Claims” provisions that excluded borrower’s claims from judicial remedies).
Generally, if a borrower fails to pay the loan the lender may repossess the vehicle and sue the borrower for the deficiency in small claims court. Santander's clause allowed the lender to sue for any deficiencies and repossess the vehicle.
Any remedies to the borrower would be subject to the arbitration clause, making the clause unfairly one-sided.
It is the plaintiff's burden to present evidence to show the enforcement of such contracts or agreements were unfairly one-sided. Once Dalton presented enough evidence the burden of proof shifted to the defendant to prove the opposite.
Santander contended the court improperly raised and decided the issue of small claims exemption sua sponte without Dalton presenting any evidence.
The court quickly dismissed the argument stating there is no authority to prove the burden is shifted because the court asks the opposing party questions on the issue at a hearing.
The court said that Santander received adequate notice of Dalton's defense to the small claims exemption and was aware the court would consider the point. The plaintiff sufficiently argued the small claims provisions undoubtedly favored the lenders.
Although arbitrators have the ability to decide equitable and statutory claims, this case ultimately gives borrowers an opportunity to have claims central to the agreement heard through judicial proceedings and not through forced arbitration.
This case is Dalton v. Santander Consumer USA, Inc, No. 33,136 (N.M. Ct. App. Dec 30, 2014).
Plaintiff's counsel was Adrian Alvarez of Public Justice, P.C., Washington, D.C.
Representing the Defendant, Ross L. Crown and Jason C. Bousliman of Lewis Roca Rothberger LLP, Albuquerque, NM.