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.

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