The New Mexico Supreme Court held that an arbitration agreement incident to a consumer loan contract is not valid and enforceable if it contains a non-mutual provision preserving the drafting party’s right to litigate upon a consumer’s default.
In Cordova v. World Finance Corp. of New Mexico, No. 30,536, 2009 WL 1456347 (N.M. Apr. 29, 2009), Cordova entered into multiple small loan contracts with World Finance. Concurrent with the execution of each contract, Cordova signed a separate arbitration agreement. This agreement required arbitration of a wide range of disputes related to the loans, but preserved World Finance’s ability to litigate any loan dispute if Cordova defaulted on the loan.
Cordova later sued World Finance, alleging that it had engaged in unfair, deceptive, and unconscionable trade practices under the New Mexico Unfair Practices Act ("NMUPA"). N.M. Stat. Ann. §§ 57-12-1 to -24. Specifically, Cordova alleged "unreasonable and tortious debt collection practices," citing World Finance’s attempts to secure repayment on her loans. Cordova alleged this conduct caused her to lose her job and suffer lost wages, lost employment benefits, lost time, an invasion of privacy, and emotional distress.
World Finance moved to compel arbitration, citing the multiple agreements executed at the time the loans were secured. The trial court denied the motion, agreeing with Cordova that the agreement was "so one-sided that it could not be enforced." The intermediate appellate court affirmed, and World Finance was granted certiorari for review from the highest court.
The Court noted the intermediate court’s reliance on two employment-related arbitration cases for the proposition that non-mutual obligations to arbitrate in an agreement between an employer and employee were per se unconscionable. See Piano v. Premier Distrib. Co., 107 P.3d 11 (N.M. 2005) (non-mutual obligations rendered the agreement "illusory" and rendered in void for lack of consideration); Heye v. Am. Golf Co., 80 P.3d 495 (N.M. 2003) (same).
However, the Court noted that the agreements in Piano and Heye were distinguishable from Cordova’s agreements in two important respects. First, the former were employment-related, while the latter were consumer credit transactions. Second, the former reserved the right of the employer to modify the agreement at-will after its initial execution, while the latter did not reserve the unilateral right to modify.
Nevertheless, the Court concluded that Cordova’s agreement with World Finance was unconscionable for lack of mutuality for the same reasons expressed in Piano and Heye. It noted its prior disfavor of "escape hatch clauses" in arbitration agreements, such as allowing the appeal of an award in excess of a minimum amount. Padilla v. State Farm Mut. Auto. Ins. Co., 68 P.3d 901 (N.M. 2003) (holding agreement unconscionable where awards of more than a threshold amount against an insurer were appealable, but awards of less than the amount prayed for by the insured were not appealable).
The Court viewed World Finance’s reservation of the right to litigate upon the consumer’s default to be "even more egregious" than the agreement in Padilla. The Court observed that consumers were not even afforded the initial benefit of arbitration before a non-mutual right of appeal arose; it deprived the consumer of the advantages of arbitration altogether.
Also, the Court noted that the trigger for litigation, consumer default, was the most likely circumstance under which World Finance would pursue arbitration. In contrast, the most likely circumstances under which the consumer would seek remedies explicitly fell within the scope of the agreement, such as the NMUPA claims brought by Cordova.
The Court expressly rejected its prior adoption of the "colorful" standard transplanted from English courts that unconscionability only lay in a contract where "only someone out of his or her senses, or delusional, would enter into" it. See, e.g., Guthmann v. La Vida Llena, 709 P.2d 675, 680 (N.M. 1985). Instead, the Court joined other state courts in declaring non-mutual arbitration agreements void in the consumer financing context. See, e.g., Taylor v. Butler, 142 S.W.3d 277 (Tenn. 2007) (automobile financing); Showmethemoney Check Cashers, Inc. v. Williams, 27 S.W.3d 361 (Ark. 2000) (check cashing service); Arnold v. United Cos. Lending Corp., 511 S.E.2d 854 (W.Va. 1998) (consumer loan).
Accordingly, the Court affirmed the denial of World Finance’s motion to compel and remanded the matter for further litigation.
The agreements between Cordova and World Finance clearly demonstrate the pitfalls of the drafting party’s election to preserve certain causes of action for litigation. By including non-mutual, contingent provisions denying the right to arbitrate, drafting parties take the risk that courts will invalidate entire agreements, denying the benefits of the arbitral forum to all parties.