Friday, 19th December 2014

Court Faces Choice of Law, Arbitration Issues

Posted on 11. Jan, 2010 by in Winter 2009

Court Faces Choice of Law, Arbitration Issues


With a clear federal policy favoring arbitration, such clauses are becoming fairly common parts of contracts.  Customers, however, are continuing to challenge title lenders when they seek to compel a dispute into arbitration.

A woman, whose first name was Tia, was a fairly typical example of a low-income borrower. She separated from her husband in September 2005 and moved into an apartment in Plymouth Meeting, Penn., with her two children. The town is approximately 30 miles from the border between Pennsylvania and Delaware.

Tia owned a 1994 Buick Park Avenue with 90,000 miles on it that was valued at about $3,000. Her car was her sole means of transportation to her job.

In November 2005, Tia realized she would not have enough money to pay rent for December. She tried to get a loan from a bank but was turned down. She then sought a $500 car title loan from a title loan lender in nearby Delaware.

To get the loan, she was first required to pay a $5 fee to the Department of Motor Vehicles for recording the lien on her car and a $45 fee to a car club for an unknown purpose. The contract provided that the title lender could retain a portion of these fees.

Tia said that she believed the car club fee was for “the purchase of some sort of insurance.” These fees brought the total amount financed to $550.

The lender charged an annual interest rate of 300.01 percent. The finance charge for the $550 borrowed by Tia was $135.62 for the month-long term of the loan, resulting in a total expected payment at the end of the month of $685.62.

Claims Misunderstanding

Tia said that she did not understand that her loan was only for a month, and instead believed that she would have six months of $136 monthly payments (for a total payoff amount of $816).

In fact, the $135.62 was merely what she owed in interest for one month. Her single payment of $685.62 was due on Dec. 23, 2005.

Believing that her total monthly payment was $136, Tia paid as follows: $136 on Dec. 30, 2005; $136 on Jan. 20, 2006; $145 on Feb. 25 (late); $125.50 on March 31 (also made late, and below the payment amount, possibly because she believed it was offset by the prior month); $150 on April 23, and $150 on May 22.

In June 2006, the month after Tia made the sixth payment, she called the lender to learn what her balance was and was told she now owed $783. Thus, Tia had paid the lender a total of $842.50 within six months of borrowing $550 and was far from finished.

Tia refused to pay any more, and she said the title lender began calling her “incessantly, one or more times a day, demanding payment.” Tia also claimed that the lender called her on her cell phone and at work, despite her telling the lender not to do so.

Finally, on Sept. 21, 2006, the title lender repossessed Tia’s car.

Tia received a letter on September 29 stating that she would need to pay $1,415.60 to get her car back; otherwise, it would be sold sometime after October 8.

Tia filed a presumed class action against the lender in Pennsylvania state court, which included a request for a temporary restraining order and a preliminary injunction seeking the return of her car, which she needed to continue working.

The state court granted Tia’s motion for a preliminary injunction and directed the lender to return her car. The title lender then removed the action to the United States District Court for the Eastern District of Pennsylvania under the Class Action Fairness Act of 2005. The District Court granted the lender’s motion to compel arbitration, and later dismissed the case with prejudice.

Tia then appealed the decision to the United States Court of Appeals for the Third Circuit.

Contract’s Details

The Appeals Court noted that the contract Tia signed with the title lender stated that the agreement would be construed, applied, and governed by the laws of the State of Delaware. The unenforceability or invalidity of any portion of the agreement would not render unenforceable or invalid its remaining portions.

The contract’s arbitration clause required both parties to arbitrate any disputes, but there was a significant exception to the requirement to arbitrate. The lender was not required to enter arbitration before seeking repossession of the vehicle through judicial process or self help.

The borrower who sought arbitration had to pay the first $125 of the filing fee, after which the lender agreed to pay the remaining arbitration costs. Additionally, the parties were responsible for their own expenses, including fees for attorneys, experts and witnesses.

Block letters at the bottom of the agreement reiterated that the borrower was waiving all rights to litigate any claim in court and that the borrower was also waiving the right to participate in any class action or class wide arbitration unless the claim had already been certified by the date of the agreement.

Jurisdiction, Standard of Review

The district court had jurisdiction and the title lender met the threshold for jurisdiction under the Class Action Fairness Act.

The Appeals Court first noted that Tia asked the court to confront what has become a vexing issue in our current economy here and elsewhere: the extent to which low-income borrowers may have access to legal remedies that they waived in a desperate attempt to borrow needed cash.

Because many of the lending contracts contain an arbitration provision, said the Appeals Court, there are often issues relating to the permissible scope of the arbitration and the role of the arbitrator. These were the principal issues in the appeal before the court.

The Appeals Court said it must decide the appeal by balancing the rights and legitimate expectations of the parties, but only in terms of deciding whether the arbitration provision should be enforced.

In this case, Tia challenged both the arbitration provision and the contract as a whole. Her challenge to the contract is not one of alleged procedural unconscionability, such as whether the type was too small to be legible. Instead, her claim was one of substantive unconscionability, similar to the one raised in the 2006 decision by the United States Supreme Court in Buckeye Check Cashing, Inc. v. Cardegna, where the borrowers claimed that the contract violated state lending and consumer protection laws and was therefore unenforceable.

In Buckeye, the Supreme Court stated that the crux of the complaint was that the contract as a whole (including its arbitration provision) was invalidated by the usurious finance charge.

The court explained that the plaintiffs’ allegations that the lender charged usurious interest rates and that the agreement violated various Florida lending and consumer protection laws related to the entire contract, rather than specifically to the arbitration provision.

As a result, the Supreme Court held that the challenge was one that must go to the arbitrator. It reiterated that unless the challenge was to the arbitration clause itself, the issue of the contract’s validity was considered by the arbitrator in the first instance.

Which State’s Law?

In making the determination of arbitrability, the Appeals Court said it must first consider whether to apply Pennsylvania law or Delaware law. Tia argued that the contract was unconscionable under Pennsylvania law, a challenge that required the court to conduct a choice of law analysis because Delaware law was specified in the contract.

Applying Pennsylvania’s choice of law rules, the Appeals Court said it must determine whether there was a true conflict between the application of Delaware law and Pennsylvania law. In this case, a true conflict did exist.

Although the Appeals Court said it did not consider the unconscionability of the agreement as a whole, an issue that the Supreme Court in Buckeye teaches is for the arbitrator, it did consider the usury issue as part and parcel of whether the arbitration clause should be enforced. The choice of law analysis, said the Appeals Court, could not be divorced from that issue.

Tia contended that the usury statute embodied a fundamental policy of Pennsylvania because the statute did not allow for waiver, violations were punished under Pennsylvania’s criminal law, and plaintiffs were granted an automatic right to collect punitive damages without any showing of outrageous, wanton, or malicious conduct.

The usury statute also gave a prevailing plaintiff the right to collect attorney’s fees and costs from the defendant.

This last point, said the Appeals Court, was important in connection with the title lender’s arbitration clause, because one of the restrictive covenants the lender was trying to enforce made each party responsible for its own fees and costs.

Given all the circumstances, the Appeals Court said that Pennsylvania had a materially greater interest than Delaware in the determination of whether the arbitration clause was unconscionable. Although the issue was not free from doubt, the Appeals Court concluded that Pennsylvania’s interest in the dispute, particularly its antipathy to high interest rates such as the 300.01 percent interest charged in the contract at issue, represented such a fundamental policy that the court must apply Pennsylvania law.

Arbitration Question

The court noted however, that Pennsylvania law, like federal law, favored the enforcement of arbitration agreements. Both required that arbitration agreements be enforced as written and allowed an arbitration provision to be set aside only for generally recognized contract defenses, such as unconscionability.

In addition to her challenge to the usurious interest rate, Tia argued that the lender’s arbitration clause was unconscionable because:

  • (a) The lender’s the one way arbitration clause prevented borrowers from defending against repossessions.
  • (b) The class action waiver in the lender’s arbitration agreement shielded the lender from prospective injunctive relief so that an arbitrator was powerless to order it to cease engaging in on going illegal conduct.
  • (c) The cost-sharing clause in the lender’s arbitration clause was unconscionable because it denied a plaintiff statutory attorney’s fees, making arbitration too expensive for a plaintiff to pursue.
  • (d) The mandatory $125 filing fee was unconscionable because it was an additional impediment to bringing a small claim against the title lender and did not allow for waiver for a low-income litigant.
  • (e) The provisions were not susceptible to severance because they were included in the arbitration clause as part of a scheme to protect potentially illegal conduct from legal scrutiny.

Looks at Validity Only

The Appeals Court said it, of course, was only deciding the validity of the arbitration clause and would consider Tia’s claims in that context only, just as the arbitrator would.

Suffice it to say that, with one exception, the Appeals Court found for its purposes that those challenges were wanting. The exception was the provision that the parties agreed to be responsible for their own expenses, including fees for attorneys, experts and witnesses. That provision was likely unconscionable. The provision, however, was separable under the agreement.

Therefore, said the Appeals Court, it affirmed the District Court’s order compelling arbitration and rejected Tia’s arguments.

Pawnbrokers who would like a free copy of this case sent electronically should send an E-mail to with “Arbitration-PA” in the subject line.

Pawnbroker Battles City Over Moratorium

Posted on 11. Jan, 2010 by in Winter 2009

Pawnbroker Battles City Over Moratorium


When a pawnbroker wants to open a pawnshop the outcome often hinges on the local zoning codes.  But even when everything appears to have a green light, local governments can throw the broker a curveball.

In June 2007, a pawn company entered into a purchase agreement to acquire property located in the City of St. Louis Park, Minn. The purchase agreement provided the property sale was to close on October 31 and the broker could cancel the agreement if it was unable to obtain final government approvals and licenses by the middle of July.

On the day the company signed the purchase agreement, it applied to the city for a license to operate a pawnshop at the property. Pawnshops were a permitted use at that location. Under the city code, the city limited the number of pawnbroker licenses to two; one license was available at the time of the broker’s application.

The city’s assistant zoning administrator immediately issued a zoning verification letter confirming that the broker’s intended use of the property as a pawn store, secondhand goods store, precious metals dealer and an industrial loan and thrift company complied with the zoning code and other applicable city ordinances, but noted that additional applications might be required.

The broker contacted the city on July 13 to determine the status of its license application. The city’s inspection supervisor responded via e-mail and voicemail that everything looked great for the license, but he could not physically issue the license until the store was ready to be open.

He added that as far as the inspectors were concerned, the paperwork was in order and the license would be issued as soon as the store was ready for business.

Things Turn Sour

In September 2007, citizens who resided near the property heard rumors that a pawnshop would be opening and let the city know their opposition.

On September 24, the city council met and the city manager raised the issue of the broker’s pending application for a license.

The city manager noted that in 2002, the council had amended the pawnshop ordinance to create a number of reporting requirements to help curb the sale of stolen goods and to promote communication between law enforcement and pawnshops and that these processes had been successful thus far.

The city’s legal counsel noted that the property was properly zoned for a pawnshop and that one of the two authorized pawnbroker licenses was still available. But legal counsel also indicated that the council could adopt an interim ordinance or moratorium to permit the council to initiate a zoning study to see if the city should put any “additional conditions or restrictions on pawnshops.”

The next day, the city announced that it would consider the adoption of an interim ordinance at the Oct. 1, 2007, meeting requiring a planning study for zoning and land use controls related to pawnshops.

No new pawnshop licenses would be issued during the study period. Study findings and recommendations were to be presented to the council no later than 12 months from the adoption of the interim ordinance.

On September 26, the broker learned of the council’s intent to adopt an interim ordinance. On October 1, the city council passed a resolution adopting the first reading of the interim ordinance temporarily prohibiting pawnshops and directing the city planning staff to conduct a study to determine how pawnshops should be regulated within the city.

Charter Requirements

The city’s charter required that a proposed ordinance receive two readings at least seven days apart and be published in the local newspaper. An ordinance would become effective 15 days after it was published. Here, although the ordinance had not received final approval, the city forwarded it to the local newspaper on October 3 to be published on October 11, after the second reading, with an effective date of October 26. The city then held another meeting on October 8 for the second reading.

Meanwhile, on October 4, the broker filed a petition with the county district court seeking an order requiring the city to issue a pawnbroker license. The court issued an alternative directive ordering the city to either issue the license or to appear on October 8 and show cause why it had not been issued.

The city did not issue the license and, after a hearing involving both parties on October 8, the court denied the petition. On the same day, the council conducted the second reading and adopted the interim ordinance. As adopted, the interim ordinance prohibited the further consideration and approval of any license applications for new pawnshops, and included a resolution that applications for a business license, building permit, or any other permit for a new pawnshop would not be considered by the city during the interim ordinance period.

Amended Petition

On October 10, the broker filed an amended petition that included a complaint for declaratory and injunctive relief relating to the interim ordinance. The broker also filed a motion for a temporary restraining order. The district court denied the motion for a temporary restraining order on October 22, and the interim ordinance went into effect four days later.

The city completed the zoning study on December 5. The zoning report proposed an ordinance amending the city zoning laws to make pawnshops a conditional, rather than permitted, use.

On Jan. 7, 2008, the broker closed on the property, assigning the obligations of the agreement to an affiliated business.

On February 22, the city formally amended its zoning code to limit the location and operation of pawnshops, making them a conditional use and adding 12 specific conditions for issuing a conditional-use permit.

The district court noted that the effect of these changes was that a pawnshop could not be located at the property.

Both parties then filed motions seeking summary judgment. The broker sought a declaration that the interim ordinance was invalid and an order directing the city to issue the pawnbroker license. The city sought dismissal of all of the broker’s claims on the grounds that the interim and 2008 permanent ordinances do not permit a pawnshop at the property.

Appeals Decision

The district court granted the city’s motion on the basis that the interim ordinance was validly enacted. The broker then appealed to the Minnesota Court of Appeals.

The Appeals Court noted that on an appeal of summary judgment, the reviewing court must view the evidence in a light most favorable to the nonmoving party and determine whether any genuine issues of material fact existed and whether the district court was wrong in applying the law.

A municipal ordinance, said the Appeals Court, is presumed to be valid. The party challenging an ordinance has the burden of demonstrating that it was unreasonable or that the requisite public interest was not involved, and consequently that the ordinance did not come within the police power of the city.

The broker argued that because the city did not initiate its zoning study before the broker submitted its license application, the interim ordinance was invalidity enacted.

The Appeals Court said that the statutory language was not so restrictive. Rather, the terms of the statute expressly permitted a city to adopt an interim ordinance in support of valid public purpose so long as the city was studying the particular zoning issue or had directed such a study.

Here, the city authorized the study process at the same time it adopted the interim ordinance.

Cites Precedent

The pawnbroker next argued that the district court should have followed the holding in the 1992 case of Medical Services, Inc. v. City of Savage. The Appeals Court said it disagreed.

Medical Services had applied for a conditional-use permit seeking to construct an infectious-waste processing facility. Counsel for the City of Savage advised that the proposed use did not fall within any provision of the zoning ordinance, and the city adopted a resolution that terminated Medical Services’ application.

Shortly thereafter, the city council rejected a proposed amendment to the zoning ordinance that would make an infectious-waste facility a conditional use.

Medical Services commenced a declaratory judgment action and the city subsequently enacted a moratorium on the issuance of building and special-use permits in industrial zones. In granting summary judgment for Medical Services, the district court concluded that the facility was a permitted use and that Medical Services’ application was unaffected by the moratorium.

Says Not the Same

This case, said the Appeals Court, presents different circumstances. After learning of the broker’s application, the city immediately enacted an interim ordinance and commenced a study to determine whether additional regulations should be placed on pawnshops located in the city. Review of the council meeting minutes revealed that a number of city residents objected to the broker’s application.

The city council ultimately placed the moratorium not just on the property, but on the entire city, so that a study could be conducted.

The city in this case, unlike the City of Savage, promptly followed through with the study process and ultimately amended its permanent zoning ordinance based on the study’s recommendations. Also, the interim ordinance was limited in duration and only in effect for four months.

Action Not Arbitrary

The city never denied that it enacted the interim ordinance in response to the broker’s license application. But that did not, said the Appeals Court, by itself make the city’s action arbitrary.

Under the circumstances, said the court, it was appropriate at the time for the city to re-examine all of its pawnshop regulations. Because broader public policy concerns existed, the fact that the broker’s application prompted the ordinance did not make it arbitrary or discriminatory.

The broker pointed to the city inspector’s statement that as far as the city was concerned, the paperwork was in order and the license would be issued as soon as the store was ready for business. The broker claimed that it proceeded with the purchase agreement based on that representation.

And because city employees had advised that there were no application deficiencies, the broker contended that the city council’s later adoption of the interim ordinance was discriminatory.

Statement Doesn’t Matter

But the fact that a city employee says “everything looks great,” did not prevent the city council from exercising its police powers to preserve the status quo and conduct a planning study. The court said that the pawnbroker cited no authority for the proposition that statements made by a municipal employee concerning the permitting and licensing processes deprived a municipality of its broad zoning authority.

Because the interim ordinance was properly enacted and placed a valid moratorium on issuing pawnbroker licenses, the district court was not wrong in concluding that the city was not required to issue a pawnbroker license to the broker and therefore the Appeals Court in an unpublished opinion, affirmed the district court’s decision. The Minnesota Supreme Court recently granted the broker a review of the Court of Appeals decision.

Pawnbrokers who would like a free copy of this case sent electronically should send an E-mail to with “Moratorium” in the subject line.