Bankruptcy

North Carolina Supreme Court Holds That Arbitration Clauses In Consumer Loan Agreements Are Unconscionable

By Scott Riddle

The Womble Carlyle Construction Industry Blog reports a landmark decision in North Carolina, in which the N.C. Supreme Court held that arbitration clauses in consumer loan agreements are unconscionable and unenforceable.  The case is Tillman et al v. Commercial Credit Loans, Inc. et al, No. 360A06 (January 25, 2008).

From the Womble Blog -

Specifically, the Court was troubled by findings that the provision:

1. Allowed the credit companies to bring certain claims in court while precluding customers from bringing any claims in court;

2. Contained a cost-shifting/loser pays provision that is triggered after the first eight hours of arbitration (because the cost of the second day of an arbitration proceeding could exceed most or all of disputed amount);

3. Effectively precluded the customer from obtaining a lawyer to pursue a claim in arbitration because lawyers would not agree to represent individual customers in an arbitration setting where the amount in controversy is so low (e.g. an average of $4,500); and

4. Precluded consumers joining their claims together for arbitration and precluded class actions.

The Blog also describes the analysis of the Court -

The principal opinion adopted a new approach, contemplating that a party claiming unconscionability must prove both procedural unconscionability, a/k/a “bargaining naughtiness,” and substantive unconscionability, arising from oppressiveness or one-sidedness in the terms. The Court also institutes a new “sliding scale” approach in which the more one-sided the clause is, the less bargaining naughtiness is required to establish unconscionability. The disagreeing Justices criticize this approach because the facts relied upon in the principal opinion to demonstrate “bargaining naughtiness” (e.g. being rushed through the closing process and not specifically discussing the arbitration provision) are not particularly unique. Thus, while superficially appearing to raise the bar, the new analysis in the principal opinion probably lowers the hurdle that plaintiffs must clear to avoid arbitration and bring class actions in court.

 While this opinion does not bind Georgia Courts, it likely does apply to any consumer loan agreements that are governed by North Carolina law. 

Full post as published by Georgia Bankruptcy Blog on February 05, 2008 (boomark / email).