Pub. 13 2016 Issue 4

O V E R A C E N T U R Y : B U I L D I N G B E T T E R B A N K S - H E L P I N G N E W M E X I C O R E A L I Z E D R E A M S 16 After analyzing the small claims and self- help “carve outs” the trial court agreed with the consumer/borrower, as did the Court of Appeals. The Supreme Court reversed both, however, and held that because the arbitration provision was not unconscionable, it was enforceable as written. COUNSELOR’S CORNER DOUG VADNAIS, A MODRALL SPERLING SHAREHOLDER W hat can lenders take away from the recent decision by the New Mexico Court in Dalton v. Santander Consumer, Inc. ? Take a look at the arbitration provision in your loan documents. Does it treat everyone the same way? If not, you may run afoul of a contract principle known as “mutuality.” Moreover, while Dalton was a consumer lending case, the lessons taught by it are applicable to contracts and agreements across the board, whether they are with customers, with suppliers, with employees, indeed, anyone at all. Good for Goose and Gander: Mutuality Helps Preserve Protections In Dalton , the consumer/borrower purchased two used cars (a Pontiac and a Cadillac) and fi- nanced each separately. Both sets of loan docu- ments contained an identical arbitration clause that required any claim or dispute to “be resolved by neutral, binding arbitration and not by a court ac- tion.” The provision went on to “carve out” two ex- ceptions. First, the arbitration clause allowed both parties to “retain any rights to self-help remedies, such as repossession …” Second, both parties were allowed “to seek remedies in small claims court for disputes or claims within that court’s jurisdiction.” The consumer/borrower failed to make the first payment due on the Pontiac. The lender wasted no time and the car was repossessed without ju- dicial action almost immediately. Shortly after the repossession, the consumer/borrower initiated a state court lawsuit against a number of defendants alleging fraud, unfair trade practices, breach of contract, and a number of other causes of action. These claims related to the consumer/borrower’s purchase and financing of the vehicles, as well as the alleged wrongful repossession of the Pontiac. A little over a year after the state court lawsuit was filed, the lender was added as a party. After being brought into the state court lawsuit, the lender filed a motion to compel arbitration of the con- sumer/borrower’s claims based on the arbitration provisions of the loan documents. The consumer/ borrower objected, relying on several recent New Mexico appellate cases invalidating arbitration provisions because of unconscionability, thereby allowing a party to take its claims to court instead of being forced to arbitrate them. After analyzing the small claims and self-help “carve outs” the trial court agreed with the con- sumer/borrower, as did the Court of Appeals. The Supreme Court reversed both, however, and held that because the arbitration provision was not un- conscionable, it was enforceable as written. What saved the lender was the mutuality of the provisions, and the fact that the “self-help carve out” did not include judicial repossession. With re- spect to the latter concept, NewMexico has codified into law self-help remedies pursuant to which a se- cured creditormay repossess collateral after default “without due process” if the creditor can proceed without a breach of the peace. Section 55-9-609(b) (2) NMSA 1978. The differences between, and the respective pros and cons of, recovering collateral in a purely private manner, as opposed to one in- volving the police, the courts, or any state or feder- al agency, are best saved for another column. The more immediate lesson is to check your contracts to make sure that, if you have an arbitration carve- out, it is limited to self-help remedies and does not include judicial actions or proceedings. With respect to “mutuality” the Dalton court was clearly influenced by the fact that the restric- tions and limitations of the arbitrations provision were equally applicable to both the lender and the consumer/borrower. New Mexico courts can find a contract to be “unconscionable” if its terms are “grossly unfair and one-sided” or if the contract provisions “unreasonably benefit one party over another.” The Supreme Court ruled that the arbi- tration “carve outs” in Dalton were not unconscio- nable, even though they effectively meant that the consumer/borrower could only go to court in small claims court, subject to a $10,000 cap on damages, because the provisions applied to both the lender and the consumer/borrower. The Dalton court not- ed and distinguished prior cases in which it had re- fused to enforce arbitration carve outs. Those cases had a common thread – they were all cases where one side was required to arbitrate any claims while the other side was allowed to choose between arbi- tration or judicial relief. Cases involving arbitration provisions allowing one side a unilateral opt out, or where one side could choose and the other could not, consistently invalidate such provisions. Thus, the Dalton court’s distaste for limiting someone’s right to take a dispute to court instead of arbitration was outweighed by the fact that both sides were subject to the same limitations. So, whenever you have a contract or agreement, check its arbitration provision for mutuality. While “what’s good for the goose is good for the gander” is not a legal maxim, it does have some legal resonance. Making sure that any arbitration “carve-out” provisions apply equally to all parties to the contract may save the enforceability of the provisions, and preserve the protections they are intended to provide. n Doug Vadnais, a Modrall Sperling Shareholder, has more than 30 years’ transaction and litigation experience in di- verse business and real estate matters, and the protection and exercise of creditors’ rights. He has represented clients ranging from individuals to Fortune 500 companies, and brings to each a pragmatic, practical approach to problem solving. Doug may be reached by calling (505) 848-1800 or douglas.vadnais@modrall.com.