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In answering a question certified by the Third Circuit, the Pennsylvania Supreme Court held that an exception for foreclosure proceedings in an arbitration agreement between a mortgage lender and homeowner did not create a presumption of unconscionability. Since the Court’s reasoning was based on the unique nature of foreclosure proceedings, this decision should not be misconstrued as an endorsement of any other carve-outs or exceptions.
In Salley v. Option One Mortgage Corp., 925 A.2d 115 (Pa. 2007), Salley, a low-income homeowner, obtained a residential mortgage loan from Option One, a sub-prime lender. As part of the loan transaction, Salley and Option One entered into an arbitration agreement that required arbitration of all disputes except for foreclosure proceedings and the exercise of self-help remedies.
Salley later sued Option One in federal court, alleging fraud, breach of contract, and several statutory causes of action, including a violation of the Truth in Lending Act. Option One filed a motion to compel arbitration. In opposing the motion, Salley argued that the exception for foreclosure proceedings and self-help remedies rendered the arbitration agreement unconscionable and unenforceable.
The district court granted the motion. In support of its ruling, the district court cited Harris v. Green Tree Financial Corp., 183 F.3d 173 (3rd Cir. 1999), in which the Third Circuit, construing Pennsylvania law, held that a lack of mutuality (i.e., an exception for foreclosure proceedings and other creditor remedies) did not render an arbitration agreement unenforceable.
On appeal, the Third Circuit observed that Harris was in conflict with Lytle v. CitiFinancial Services, Inc., 810 A.2d 643 (Pa. Super. Ct. 2002), in which the Pennsylvania Superior Court held that an arbitration agreement reserving judicial relief for the lender was presumptively unconscionable. In light of this conflict, the Third Circuit certified the following question for the Pennsylvania Supreme Court: “[W]hether an arbitration agreement, consummated in connection with a residential mortgage loan, which reserves judicial remedies related to foreclosure is presumptively unconscionable.”
In addressing this question, the Pennsylvania Supreme Court (the Court) relied largely on its sister court’s decision in Delta Funding v. Harris, 912 A.2d 104 (N.J. 2006). In Delta Funding, the New Jersey Supreme Court held that an exception for foreclosure proceedings did not render an arbitration agreement unconscionable because “the foreclosure of mortgages is a uniquely judicial process.”
Citing Delta Funding, the Court found that the foreclosure exception had “a facially apparent business justification” insofar as “there are sound pragmatic and policy reasons why foreclosure proceedings should be pursued in a court of law.” Accordingly, the Court held that the exception did not create a presumption of unconscionability under Pennsylvania law.
In reaching its holding, the Court acknowledged that the foreclosure exception created a “split-forum effect” whereby the borrower could be forced to argue their case in two forums – as a defense to foreclosure in court and as an argument for lender liability at arbitration. The Court found that the split-forum effect was offset by fee-shifting provisions in the consumer protection laws that Salley had invoked.
Since the Court’s holding rested on the premise that mortgage foreclosure “is a uniquely judicial process,” this decision should not be misconstrued as an endorsement of any other carve-outs or exceptions. Parties can avoid litigation over the “business justification” of any other exceptions by agreeing to submit all disputes to arbitration.
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