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Timothy Eble

NESS, MOTLEY, LOADHOLT, RICHARDSON & POOLE

28 Bridgeside Boulevard

Mount Pleasant, SC 29464

843/216-9173

Victoria Nugent

F. Paul Bland, Jr.

TRIAL LAWYERS FOR PUBLIC JUSTICE

1717 Massachusetts Avenue, NW

Suite 800

Washington, D.C. 20036

202/797-8600

Trial Lawyers for Public Justice hereby incorporates the Statement of Issues on Appeal of Petitioners Anthony and Patricia Munoz. This brief will address only one of the issues identified by Petitioners: Did the Court of Appeals Err in Holding Lack of Mutuality Did Not Render the Arbitration Clause Unconscionable and Unenforceable?

Trial Lawyers for Public Justice hereby incorporates the Statement of the Case of Petitioners Anthony and Patricia Munoz.

Trial Lawyers for Public Justice hereby incorporates the Statement of the Facts of Petitioners Anthony and Patricia Munoz and re-states only the salient facts relevant to the issue addressed in this brief.

Respondent secured the Munozs’ signatures on a contract that included an arbitration clause. The arbitration clause provides:

All disputes, claims or controversies arising from or relating to this contract or the relationships which result from this contract...shall be resolved by binding arbitration...The parties agree and understand that they choose arbitration instead of litigation to resolve disputes . . .

THE PARTIES VOLUNTARILY AND KNOWINGLY WAIVE ANY RIGHT THEY HAVE TO A JURY TRIAL, EITHER PURSUANT TO ARBITRATION UNDER THIS CLAUSE OR PURSUANT TO A COURT ACTION BY US (AS PROVIDED HEREIN). . . .

Notwith-standing anything hereunto the contrary, we retain an option to use judicial or non-judicial relief to enforce a mortgage, deed of trust, or other security agreement relating to the real property secured in a transaction underlying this arbitration agreement, or to enforce the monetary obligation secured by the real property, or to foreclose on the real property . . .The institution and maintenance of an action [for the foregoing purposes], shall not constitute a waiver of the right of any party to compel arbitration regarding any other dispute or remedy subject to arbitration in this contract, including the filing of a counterclaim in a suit brought by us pursuant to this provision.

Trial Lawyers for Public Justice (“TLPJ”) is a national public interest law firm that specializes in precedent-setting and socially significant civil litigation and is dedicated to pursuing justice for the victims of corporate and governmental abuses. Litigating throughout the federal and state courts, TLPJ prosecutes cases designed to advance consumers' and victims' rights, environmental protection and safety, civil rights and civil liberties, occupational health and employees' rights, the preservation and improvement of the civil justice system, and the protection of the poor and the powerless. TLPJ is currently representing a consumer litigating the validity of the Green Tree arbitration clause disputed here in the Georgia Court of Appeals in Green Tree Financial Servicing Corp. v. Crawford, Appeal No. A00A0542.

Over the past two years, TLPJ has been contacted by more than two hundred consumer attorneys around the nation who were faced with mandatory arbitration schemes that threatened to deprive their clients of their day in court. In these cases, the clients were consumers who wished to pursue their claims through the civil justice system for decision by a jury of their peers; they were facing corporate defendants (typically credit card issuers, insurers and subprime lenders) who were determined to force the consumers to submit their claims to an arbitrator. As a result of our investigations and research, TLPJ has become convinced that far too many unilaterally imposed (as opposed to bilaterally negotiated) arbitration clauses fail to comply with generally applicable state contract doctrines and represent a significant threat – as a matter of form and substance – to consumer rights.

In this case, several issues are raised on appeal. TLPJ is particularly concerned with the unilateral (or, non-mutual) obligation to arbitrate that Green Tree’s clause imposes upon the Munozs. This brief will be address that issue only.

In recent years dozens of state and federal appellate courts have refused to enforce unfair and one-sided arbitration agreements under generally applicable state contract grounds. One type of provision that courts have repeatedly found to render an arbitration clause unenforceable are “non-mutual” provisions, where an arbitration clause requires the drafter’s customers or employees to submit their disputes to arbitration, but permits the drafter to litigate its claims.

The Green Tree clause is a classic non-mutual arbitration provision. Under it, any and every claim that the Munozs may assert is forced into mandatory arbitration. The corporate lender, Green Tree, however, has retained its right to seek judicial relief to enforce the monetary obligation secured by the Munoz home or foreclose upon the Munoz home. (R. p. 57.) The clause further bars the Munozs from raising a counter-claim in court in the event that Green Tree initiates a judicial action to enforce the security agreement underlying the loan.

The trial court concluded that this non-mutuality rendered the clause unenforceable under two South Carolina contract doctrines. First, the trial court held that the non-mutuality combined with the several other factors (an absence of meaningful choice, the disparity in bargaining power evident between the parties, the inferior knowledge and sophistication of the Munozs, and the advantage given to Green Tree in selecting the arbitrator) was unconscionable.(R. p. 8.) Second, and independently, the trial court held that the non-mutuality fell short of establishing the consideration or mutuality of obligation required to support an agreement. (R. pp. 8-9.)

The trial court ruling is supported by the facts presented in this case and by legal authority. The Court of Appeals ruling to the contrary should be reversed.

In South Carolina, as in the other states, a contract must be supported by consideration. Furse v. Timber Acquisition, 303 S.C. 388, 401 S.E.2d 155, 156 (1991). Mutual promises will stand for consideration. Rickborn v. Liberty Life Ins. Co., 321 S.C. 291, 304, 468 S.E.2d 292, 300 (1996).The requirement of mutuality in this setting is not – as Green Tree and the banking association amici (the South Carolina Bankers Association, the American Bankers Association, the American Financial Services Association and the Consumer Bankers Association which have jointly filed an amicus brief in support of Green Tree, herein “the Bankers”) have suggested – a requirement that parties assume equal and opposite obligations. In contracts that facially impose a unilateral obligation to arbitrate on one of the parties, courts have recognized that the consenting party is not deprived of consideration where the contract as a whole is supported by consideration.

As Green Tree emphasizes, arbitration agreements are generally enforceable and are generally supported by public policy. Despite these facts, however, in recent years more than a dozen federal and state appellate courts have refused to enforce particularly unfair arbitration clauses.

In recent years dozens of state and federal appellate courts have refused to enforce unfair and one-sided arbitration agreements under generally applicable state contract grounds.One type of provision that courts have repeatedly found to render an arbitration clause unenforceable are “non-mutual” provisions, where an arbitration clause requires the drafter’s customers or employees to submit their disputes to arbitration, but permits the drafter to litigate its claims.

The Green Tree clause is a classic non-mutual arbitration provision.Under it, any and every claim that the Munozs may assert is forced into mandatory arbitration.The corporate lender, Green Tree, however, has retained its right to seek judicial relief to enforce the monetary obligation secured by the Munoz home or foreclose upon the Munoz home.(R. p. 57.)The clause further bars the Munozs from raising a counter-claim in court in the event that Green Tree initiates a judicial action to enforce the security agreement underlying the loan.

The trial court concluded that this non-mutuality rendered the clause unenforceable under two South Carolina contract doctrines.First, the trial court held that the non-mutuality combined with the several other factors (an absence of meaningful choice, the disparity in bargaining power evident between the parties, the inferior knowledge and sophistication of the Munozs, and the advantage given to Green Tree in selecting the arbitrator) was unconscionable.(R. p. 8.)Second, and independently, the trial court held that the non-mutuality fell short of establishing the consideration or mutuality of obligation required to support an agreement.(R. pp. 8-9.)

The trial court ruling is supported by the facts presented in this case and by legal authority. The Court of Appeals ruling to the contrary should be reversed.

I. THE TRIAL COURT RULING IS SQUARELY CONSISTENT WITH AUTHORITY FROM JURISDICTIONS AROUND THE COUNTRY THAT HAVE REVIEWED NON-MUTUAL ARBITRATION CLAUSES

A. Non-mutual arbitration requirements are unnecessarily one-sided or unnecessarily harsh terms that are unconscionable and are thus unenforceable.

Unconscionable contracts are not enforced in South Carolina.Fanning v. Fritz’s Pontiac Cadillac Buick, Inc., 322 S.C. 399, 472 S.E.2d 242 (1996). While the South Carolina courts have not, as yet, articulated a detailed set of objective criteria for evaluating a contract under this doctrine, the Fourth Circuit – in applying South Carolina’s unconscionability principles – has identified factors relevant to the unconscionability inquiry. See Hooters of America v. Phillips, 39 F. Supp. 2d 582, 612-13 (D.S.C. 1998), aff’d, 173 F.3d 933 (4th Cir. 1999); Carlson v. General Motors Corp., 883 F.2d 287, 293 (4th Cir. 1989). These factors track the procedural/substantive unconscionability analysis that many states have adopted, and make recent decisions from the high courts of other states instructive here.

The West Virginia Supreme Court recently contemplated a situation like the one presented here in Arnold v. United Companies Lending Corp., 511 S.E.2d 854 (W.Va. 1998). In Arnold, grossly unequal parties, which the court characterized as a “national corporate lender” and unsophisticated consumers, had signed a contract that included an arbitration clause. Arnold, 511 S.E.2d at 861. The arbitration clause, like the one presented here, bound the lender to arbitrate all claims – except for any action to collect the debt owed. Arnold, 511 S.E2d at 858. Suggesting that this type of provision would appear in a contract between rabbits and foxes, the court found the clause unreasonably favorable to United Lending, stating, “United Lending’s acts or omissions could seriously damage the Arnolds, yet the Arnolds’ only recourse would be to submit the matter to binding arbitration. At the same time, United Lending’s access to the courts is wholly preserved in every conceivable situation where United Lending would want to secure judicial relief against the Arnolds.” Arnold, 511 S.E.2d at 861. The court concluded that such an agreement is unconscionable and, subsequently, void and unenforceable as a matter of law. Arnold, 511 S.E.2d at 862.

The Montana Supreme Court reached the same conclusion in Iwen v. U.S. West Direct, 977 P.2d 989 (Mont. 1999) where a consumer sought to sue a vendor for damages arising from a sales transaction. In Iwen, the parties agreed to arbitrate any disputes arising from the transaction, but the vendor reserved its right to bring an action to collect any amount owed under the sales contract. Iwen, 977 P.2d at 993. As is the case here, the language of the clause left open a range of dubious legal actions against the consumer that the drafting party could be required to arbitrate, but the court reasoned that as a practical matter, the only claim the vendor was likely to bring would be one for debt collection. Iwen, 977 P.2d at 995. The court concluded, this case presents a clear example of an arbitration provision that lacks mutuality of obligation, is one-sided, and contains terms that are unreasonably favorable to the drafter. . . .Certainly this does not mean arbitration agreements must contain mutual promises that give the parties identical rights and obligations, or that the parties must be bound in the exact same manner.This simply restates the rule of law that disparities in the rights of the contracting parties must not be so one-sided and unreasonably favorable to the drafter, as they are in this case, that the agreement becomes unconscionable and oppressive.

Iwen, 977 P.2d at 996.

A unilateral obligation recently prompted the California Court of Appeal to articulate with precision why unilateral arbitration requirements run afoul of contract law doctrine and, more broadly, principles of justice. In Kinney v. United Healthcare Services, Inc., 83 Cal. Rptr. 2d 348 (Cal. Ct. App. 1999), the court held a one-sided requirement to arbitrate to be procedurally and substantively unconscionable. There, the court concluded that a contract signatory (an employee) would require a certain level of sophistication – as is the case here – to understand that the drafter was not covered by the arbitration requirement. As the court noted, the language used in the policy to describe its scope is so extensive as to render it difficult for a lay person to read and understand the parameters of the policy. This is particularly true regarding the unilateral nature of the arbitration obligation; after a statement of intent extolling the virtues of utilizing the arbitration process, the policy provides, in a fairly lengthy paragraph, that United is not required to pursue any claim of its own in an arbitration setting.

Kinney, 83 Cal. Rptr. 2d at 353. The court found that this obfuscation constituted “surprise” within the context of procedural unconscionability. Id. Here, the language is similarly confusing. After stating – in capital letters and bold ink – that both parties are waiving their right to a jury trial, the clause releases the lender from this pledge in a confusing series of modifications couched in numbing legalese. (R. p. 57.)

Further, the Kinney court concluded that the unilateral arbitration requirement was substantively unconscionable, holding:

The party who is required to submit his or her claims to arbitration forgoes the right, otherwise guaranteed by the federal and state Constitutions, to have those claims tried before a jury. . . .F urther, except in extraordinary circumstances, that party has no avenue of review for an adverse decision, even if that decision is based on an error of fact or law that appears on the face of the ruling and results in substantial injustice to that party. . . .By contrast, the party requiring the other to waive these rights retains all of the benefits and protections the right to a judicial forum provides. Given the basic and substantial nature of [the right – guaranteed by federal and state constitutions – to have claims tried before a jury] we find that the unilateral obligation to arbitrate is itself so one-sided as to be substantively unconscionable.

Kinney, 83 Cal. Rptr. 2d at 354.

These cases represent the leading authority on non-mutuality, but other courts have reached the same conclusion. See Nicholson v. Labor Ready, Inc., 1997 U.S. Dist. LEXIS 23494 at *15 (N.D. Cal. 1997) (stating that the court could “not imagine any [business or other reason] that would justify requiring plaintiff to forgo his right to trial by jury while preserving such right for defendant,” and finding arbitration clause unconscionable and unenforceable); Worldwide Ins. Group v. Klopp, 603 A.2d 788, 791-92 (Del. 1992) (refusing to enforce arbitration agreement that preserved insurer’s right to appeal and obtain trial de novo if arbitrator’s award exceeded certain limits, but denied insured the same right if an award was below those limits). See also Ex Parte Parker, 730 So. 2d 168, 171 (Ala. 1999) (stating that non-mutuality was a factor that “along with others . . . a court may consider in determining whether an arbitration clause is unconscionable”).

In South Carolina, as in the other states, a contract must be supported by consideration. Furse v. Timber Acquisition, 303 S.C. 388, 401 S.E.2d 155, 156 (1991). Mutual promises will stand for consideration. Rickborn v. Liberty Life Ins. Co., 321 S.C. 291, 304, 468 S.E.2d 292, 300 (1996). The requirement of mutuality in this setting is not – as Green Tree and the banking association amici (the South Carolina Bankers Association, the American Bankers Association, the American Financial Services Association and the Consumer Bankers Association which have jointly filed an amicus brief in support of Green Tree, herein “the Bankers”) have suggested – a requirement that parties assume equal and opposite obligations. In contracts that facially impose a unilateral obligation to arbitrate on one of the parties, courts have recognized that the consenting party is not deprived of consideration where the contract as a whole is supported by consideration.In such instances, the consenting party can clearly see that the obligation only runs in one direction and therefore is well-positioned to evaluate his concession (waiver of the right to a jury trial) against the compensation offered by the drafter in other parts of the contract. See Lopez v. Plaza Financial Co., 1996 U.S. Dist. LEXIS 5566 at *16-17 (N.D. Ill., Apr. 26, 1996) (contrasting situation where one party clearly has the duty to arbitrate with contract that presents a mutual agreement to arbitrate).

Where an arbitration clause is written in a form that imposes an arbitration requirement on both parties and subsequently whittles the requirement down with exceptions that effectively relieve the drafting party of its obligation to arbitrate its claims, courts have found that the mutual promises are illusory and that the provision is invalid for want of consideration. Lopez, 1996 U.S. Dist. LEXIS 5566 at *10-11 ("'[A] contract does not lack mutuality merely because its obligations appear unequal or because every obligation or right is not met by an equivalent counter obligation or right in the other party.'. . . However, illusory promises, wherein a party has not obligated itself to do anything, are unenforceable for lack of mutuality.")

In Lopez, the court looked at a clause similar to the one presented here; the clause stated a general requirement, binding both parties to arbitrate claims, but then exempted the lender's claims for default from the general requirement. Lopez, 1996 U.S. Dist. LEXIS 5566 at *2-3. As is the case here, the lender was technically bound to arbitrate claims it might have against the consumers that did not involve collection of debts, but the court found that the lender had "failed to identify any class of legitimate claims . . . which would thus be subject to arbitration" and concluded with "grave doubts as to whether the arbitration agreement requires defendant to arbitrate any claims at all which inure to its own benefit. Therefore . . . the arbitration agreement is not mutual and [the lender] has not obligated itself to submit any of its own claims to arbitration." 1996 U.S. Dist. LEXIS 5566 at *15-16 (emphasis added). Here, Green Tree and the Bankers have cobbled together an unconvincing assortment of potential claims that a lender could imagine raising against borrowers. (Respondent's Brief pp. 17-18; Bankers' Brief p. 10.) Green Tree and the Bankers have side-stepped the glaringly obvious fact that the proposed actions would not be contemplated unless the Munozs slipped into default, at which point enforcing the security agreement or foreclosing on the collateral would be a rational lender's primary and immediate interest.

II. THE NON-MUTUAL ARBITRATION REQUIREMENT AT ISSUE IN THIS CASE IS PARTICULARLY INDEFENSIBLE.

The clause presented here, and the facts surrounding the transaction between the Munozs and Green Tree, fall outside the boundaries that other states have set for acceptable arbitration agreements in the consumer context. The Green Tree clause is more repressive than the non-mutual provisions that have been struck down in other jurisdictions for it not only prevents the Munozs from initiating a claim in court, it also prevents them from raising a counter-claim as defendants in court in the event that Green Tree offensively seeks to enforce the security agreement or foreclose on the collateral underlying the loan. Green Tree and the Bankers suggest that arbitration is the best forum for consumers' claims and that court is the best forum for a lenders' claims without acknowledging the tension between these positions. In fact, the positions cannot be reconciled.

The Green Tree clause vests the arbitrator with powers that shall include "all legal and equitable remedies, including but not limited to, money damages, declaratory relief, and injunctive relief" and provides that "judgment upon the award rendered may be entered in any court having jurisdiction." (R. p. 57.) Under this broad grant of authority, an arbitrator certainly would be as well-equipped as a judge to decide whether or not a default has occurred and to authorize collection of collateral. After touting the competency of arbitrators to hear complex and fact-intensive disputes rising under statutes that animate the state's compelling interests in protecting consumers and regulating commercial practices, Green Tree and the Bankers seem to suggest that arbitrators cannot determine when default has occurred and when foreclosure is possible.

Under the Green Tree provision, the following scenario could unfold: The Munozs cease to make monthly payments on their Green Tree loan because they never saw a dime of the loan proceeds, which were disbursed directly to Green Tree's agent, the building contractor who has proven to be incapable of doing the work promised. Green Tree sues the Munozs in court to enforce the security agreement. The Munozs wish to prevent the loss of their home by asserting counterclaims of fraud, unfair trade practices and violations of the state Consumer Protection Code, but they are barred from raising such counterclaims in court. Effectively gagged in court, the Munozs must appeal to Green Tree for cooperation in selecting an arbitrator and then must initiate arbitration (potentially bearing the expenses associated with arbitration), all while defending themselves - without the benefit of their counter-claims - in court. Parallel proceedings - judicial and arbitral - separately addressing the two sides of the same dispute, would proceed under different rules before different decisionmakers.

The scenario is preposterous, but highly likely. The inefficiency and potential injustice that might result were undoubtedly contemplated by the drafter of this arbitration clause, Green Tree, and should cast serious doubts upon Green Tree's stated commitment to arbitration as an efficient and inexpensive method of dispute resolution.

CONCLUSION

As Green Tree emphasizes, arbitration agreements are generally enforceable and are generally supported by public policy. Despite these facts, however, in recent years more than a dozen federal and state appellate courts have refused to enforce particularly unfair arbitration clauses. Where clauses drafted by large and powerful corporations are imposed upon individual consumers in standard form contracts of adhesion and are one-sided in favor of the drafter, courts have had no trouble holding that those agreements are unconscionable and unenforceable.

According to Green Tree, arbitration is good for its customers, but not good enough for itself. In keeping with the long-standing principle of justice first stated in Goose v. Gander, this Court should reject Green Tree's one-way, one-sided clause. As the West Virginia Supreme Court concluded, this contract is the sort that one would expect between a rabbit and a fox, and is not the sort that this Court should endorse.