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Horton v. California Credit Corp. Retirement Plan

August 13, 2009

MICHAEL HORTON; CATHIE L. HORTON, PLAINTIFF,
v.
CALIFORNIA CREDIT CORP. RETIREMENT PLAN; FORECLOSURE SPECIALISTS, INC., DBA ZENITH TRUSTEE SERVICES, A CALIFORNIA CORPORATION; DOES 1-10,, DEFENDANT.



The opinion of the court was delivered by: Irma E. Gonzalez, Chief Judge United States District Court

ORDER: (1) DENYING DEFENDANT'S MOTION TO COMPEL ARBITRATION (Doc. No. 21); and (2) GRANTING IN PART AND DENYING IN PART DEFENDANT'S MOTION TO DISMISS THE COMPLAINT (Doc. No. 20.)

Presently before the Court are Defendant California Credit Corp. Retirement Plan's ("CCCRP" or "Defendant") motions to compel arbitration or alternatively to dismiss the complaint pursuant to Fed. R. Civ. P. 12(b)(6). Plaintiffs Michael and Cathie Horton ("Plaintiffs") have filed oppositions to both motions, and Defendant has filed reply briefs in support of both motions. The Court finds the motions suitable for disposition without oral argument pursuant to Local Civil Rule 7.1(d)(1). Having considered the parties' arguments, the Court denies the motion to compel arbitration, and grants the motion to dismiss in part.

BACKGROUND

Plaintiffs are the married owners and occupants of 10272 Rancho Carmel Drive, San Diego, California 92128 ("the Horton Residence" or "the Property"). Defendant CCCRP does business in California and holds a note ("the note") secured by the Horton residence. Defendant Foreclosure Specialists, Inc., dba Zenith Trustee Services ("Zenith") is a California corporation which acts as a trustee during foreclosure proceedings.

On November 10, 2006, Defendant loaned Plaintiffs $70,000, secured by a second deed of trust on the Property. A finance charge applied to the transaction and the transaction carried an interest rate of 12.7%.

During the closing of the transaction, Plaintiffs received and signed numerous transaction documents, including an Alternative Dispute Resolution Agreement (the "Agreement"). Defendant did not sign the Agreement. The Agreement stated, inter alia:

"ARBITRATION OF DISPUTES: CALIFORNIA CREDIT CORP RETIREMENT PLAN ("LENDER"), and Michael W Horton [and Cathie L Horton], ("Borrower") hereby further agree that any dispute or claim in Law or Equity arising between them out of the above referenced loan, that is not settled through mediation, shall be decided by neutral, binding arbitration under the rules of the American Arbitration Association. The arbitrator shall be a retired judge or justice, or an attorney with at least 5 years of residential real estate law experience, unless the parties mutually agree to a different arbitrator, who shall render a written decision in accordance with the California Code of Civil Procedure, Judgment upon the award of the arbitrator may be entered in any court having jurisdiction. The parties shall have the right to discover in accordance with California Code of Civil Procedure §1283.05. The prevailing party shall be entitled to recover their attorneys fees and all costs. However, prior to the decision of the arbitrator, each party shall be responsible for the payment of an equal share of the cost of arbitration. It is expressly provided, however, that neither the obligation to Mediate or to Arbitrate shall apply to the Lender's right to foreclose under the deed of trust securing the above referenced loan in the event of a default by Borrower.

NOTICE: BY SIGNING BELOW, YOU ARE AGREEING TO HAVE ANY DISPUTE ARISING OUT OF THE MATTERS INCLUDED IN THE "ARBITRATION OF DISPUTES" PROVISION DECIDED BY NEUTRAL ARBITRATION AS PROVIDED BY CALIFORNIA LAW AND YOU ARE GIVING UP ANY RIGHTS YOU MIGHT POSSESS TO HAVE THE DISPUTE LITIGATED IN A COURT OR BY A JURY TRIAL, BY SIGNING BELOW YOU ARE GIVING UP YOUR JUDICIAL RIGHTS TO DISCOVERY AND APPEAL, UNLESS THOSE RIGHTS ARE SPECIFICALLY INCLUDED IN THE "ARBITRATION OF DISPUTES" PROVISION. IF YOU REFUSE TO SUBMIT TO ARBITRATION AFTER AGREEING TO THIS PROVISION, YOU MAY BE COMPELLED TO ARBITRATE UNDER THE AUTHORITY OF THE CALIFORNIA CODE OF CIVIL PROCEDURE. YOUR AGREEMENT TO THIS ARBITRATION PROVISION IS VOLUNTARY." [Ex. A to Rady Decl. ISO Motion to Compel Arbitration ("Rady Decl.")]

Plaintiffs allege that in September, 2008 Defendant lost their payment and refused to accept a replacement tender, which Plaintiffs made within twenty-eight days. Defendant caused a notice of default to be recorded in the office of the county recorder and initiated foreclosure proceedings. On November 28, 2008, pursuant to 15 U.S.C. § 1635, Plaintiffs attempted to rescind the transaction by mailing the notice required by TILA. (Ex. B to Compl.)On February 6, 2009, Defendant caused a notice of Trustee's Sale to be recorded in the office of the County Recorder. The sale of the Horton Residence was scheduled for March 4, 2009.

On February 13, 2009, Plaintiffs filed a complaint in this Court, alleging, inter alia, violations of the federal Truth in Lending Act ("TILA") and California's Rosenthal Fair Debt Collection Practices Act ("RFDCPA,"). Shortly thereafter Plaintiffs sought a temporary restraining order ("TRO") and a preliminary injunction to stay the foreclosure proceedings. The Court granted a TRO on March 16, 2009, and granted the preliminary injunction on March 16, 2009. Defendant now seeks to compel arbitration pursuant to the Agreement or alternatively to dismiss the complaint under Fed. R. Civ. P. 12(b)(6).

DISCUSSION

I. Defendant's Motion to Compel Arbitration

A. Applicable Law

The parties both invoke the Federal Arbitration Act ("FAA") in their moving papers. The FAA governs the enforceability of arbitration agreements in contracts involving interstate commerce.*fn1 See 9 U.S.C. § 1 (2009). Section 2 of the FAA provides,

[a] written provision in... a contract evidencing a transaction involving commerce to settle by arbitration a controversy thereafter arising out of such contract or transaction, or the refusal to perform the whole or any part thereof, or an agreement in writing to submit to arbitration an existing controversy arising out of such a contract, transaction, or refusal, shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.

9 U.S.C. § 2 (2009). The FAA represents a "liberal federal policy favoring arbitration agreements, notwithstanding any state substantive or procedural policies to the contrary." Moses H. Cone Mem'l Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 24 (1983). Plaintiffs take issue with whether grounds exist "at law or in equity for the revocation of [the Agreement]."

"In determining the validity of an agreement to arbitrate, federal courts 'should apply ordinary state-law principles that govern the formation of contracts.'" Circuit City Stores v. Adams, 279 F.3d 889, 892 (9th Cir. 2002) (citation omitted). Although a court evaluating the enforceability of an arbitration agreement may not invalidate the agreement under state laws applicable only to arbitration provisions, "general contract defenses such as fraud, duress, or unconscionability, grounded in state contract law, may operate to invalidate [such] agreements." Id. at 892. In the absence of a generally applicable state law rendering an arbitration agreement invalid, "a district court has little discretion to deny an arbitration motion, since the Act is phrased in mandatory terms." Republic of Nicaragua v. Standard Fruit Co., 937 F.2d 469, 475 (9th Cir. 1991).

B. Analysis

Plaintiffs argue the Agreement is unenforceable because it is unconscionable, or alternatively, illusory. Because the unconscionability inquiry is dispositive, the Court does not reach Plaintiffs' alternative argument.

California law places the burden of proving unconscionability on the party challenging the validity of the arbitration clause. Szetela v. Discover Bank, 97 Cal. App. 4th 1094, 1099 (Cal. Ct. App. 2002). Under California law, an arbitration agreement must be both procedurally and substantively unconscionable to be invalid. Armendariz v. Found. Health Psychcare Servs., Inc., 24 Cal. 4th 83, 114 (Cal. 2000). Procedural unconscionability exists when there is oppression or surprise in an agreement because of unequal bargaining power. Id. The substantive unconscionability inquiry turns on whether contract terms are unduly harsh or oppressive. Id. Although both substantive and procedural unconscionability are required to render an agreement unenforceable, they need not be present in the same degree because California courts implement a "sliding scale" analysis. Id. Under this analysis, "the more substantively oppressive the contract term, the less evidence of procedural unconscionability is required to come to the conclusion that the term is unenforceable, and vice versa." Id.

1. Procedural Unconscionability

The procedural unconscionability inquiry centers on the equilibrium of bargaining power between the parties and the extent to which the contract clearly discloses its terms. Adams, 279 F.3d at 892 (citing Stirlen v. Supercuts, Inc., 51 Cal. App. 4th 1519, 1532 (Cal. Ct. App. 1997)). More specifically, courts consider the factors of "oppression" and "surprise" when evaluating the procedural unconscionability of a contract. Circuit City Stores, Inc. v. Mantor, 335 F.3d 1101, 1106 (9th Cir. 2003). Oppression arises "from an inequality of bargaining power [that] results in no real negotiation and an absence of meaningful choice." Id. (citing Stirlen v. Supercuts, Inc., 51 Cal. App. 4th 1519, 1532 (Cal. Ct. App. 1997)). Surprise is defined as "the extent to which the supposedly agreed-upon terms of the bargain are hidden in the prolix printed form drafted by the party seeking to enforce the disputed terms." Id. (citing Stirlen, 51 Cal. App. 4th at 1532).

As a threshold matter, unconscionability analysis "begins with an inquiry into whether the contract is one of adhesion." Armendariz, 24 Cal. 4th at 113. A contract of adhesion is defined as "a standardized contract, imposed upon the subscribing party without an opportunity to negotiate the terms." Flores v. Transamerica HomeFirst, Inc., 93 Cal. App. 4th 846, 853 (Cal. Ct. App. 2001). When a party to an agreement who is in a relatively weaker bargaining position "is presented the clause and told to 'take it or leave it' without the opportunity for meaningful negotiation, oppression, and therefore procedural unconscionability, are present." Szetela, 97 Cal. App. 4th at 100.

Here, Defendant does not dispute that the Agreement is a standard form contract drafted by CCCRP, that CCCRP had superior bargaining power, and that CCCRP presented the clause to Plaintiffs on a "take-it-or-leave-it" basis without the opportunity for meaningful negotiation. (Opp. at 4; Reply at 2-3.) Defendant in fact concedes the Agreement is procedurally unconscionable, but argues the circumstances surrounding the Agreement's formation have established only "a minimal degree of procedural unconscionability." (Reply at 2-3.)

The Court agrees the Agreement is only minimally procedurally unconscionable. Plaintiffs' sole basis for their procedural unconscionability argument is that the Agreement is adhesive. This, in itself establishes only a minimal degree of procedural unconscionability. See Gatton v. T-Mobile USA, Inc., 152 Cal. App. 4th 571, 583 (Cal. Ct. App. 2007) ("[A]bsent unusual circumstances, use of a contract of adhesion establishes a minimal degree of procedural unconscionability notwithstanding the availability of market alternatives.") Moreover, Plaintiffs have not shown "surprise" in the formation of the Agreement. Because only a minimal degree of procedural unconscionability exists, the Agreement is enforceable under California's "sliding scale" inquiry unless it contains a sufficiently high degree of substantive unconscionability.

2. Substantive Unconscionability

Plaintiffs argue the provisions excepting Defendant's foreclosure remedy from the arbitration requirement and providing the parties split arbitration costs render the Agreement substantively unconscionable.*fn2 The Court agrees, and finds that, for the reasons set forth below, there exists a degree of substantial unconscionability substantial ...


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