MORTGAGE ELECTRONIC REGISTRATION SYSTEMS, INC. , ET AL. VS. ABNER (DONALD WAYNE), ET AL.
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RENDERED: JULY 25, 2008; 10:00 A.M.
TO BE PUBLISHED
Commonwealth of Kentucky
Court of Appeals
NO. 2007-CA-000574-MR
MORTGAGE ELECTRONIC REGISTRATION
SYSTEMS, INC.; AND BANK OF NEW YORK
TRUST COMPANY, AS TRUSTEE FOR
RASC2003KS, SUCCESSOR BY ASSIGNMENT
FROM JPMORGAN CHASE BANK, AS TRUSTEE
FOR RASC2003KS
v.
APPELLANTS
APPEAL FROM MADISON CIRCUIT COURT
HONORABLE JULIA HYLTON ADAMS, JUDGE
ACTION NO. 03-CI-01336
DONALD WAYNE ABNER AND
ROXANNE ABNER
APPELLEES
OPINION
AFFIRMING
** ** ** ** **
BEFORE: ACREE, DIXON, AND TAYLOR, JUDGES.
DIXON, JUDGE: Appellants, Bank of New York Trust Company and Mortgage
Electronic Registration Systems, Inc. (MERS), appeal from an order of the
Madison Circuit Court denying their motion to compel arbitration in this forclosure
matter. As we agree with the trial court’s finding that the arbitration clause is
unconscionable, we affirm.
On September 25, 2002, Appellees, Donald Wayne and Roxanne
Abner, executed a promissory note in the amount of $40,000, plus interest at a rate
of 10.125% per annum as specified in the note. Appellant Bank of New York is
the current holder of the note. In addition, Appellees executed a mortgage with
MERS to secure the note. The note and mortgage relate to real estate located in
Waco, Kentucky. Paragraph 27 of the mortgage contains an arbitration clause,
which provides in relevant part,
The parties agree that the arbitrator shall have all powers
provided by law, this Agreement, and the Loan
Agreements. However, the arbitrator shall have no
power to vary or modify any of the provisions of the
Loan Agreements. . . .
....
IF THE APPOINTED ARBITRATOR SHOULD
AWARD ANY DAMAGES, SUCH DAMAGES
SHALL BE LIMITED TO ACTUAL AND DIRECT
DAMAGES AND SHALL IN NO EVENT INCLUDE
CONSEQUENTIAL, PUNITIVE, EXEMPLARY OR
TREBLE DAMAGES AS TO WHICH THE
BORROWER AND LENDER EXPRESSLY WAIVE
ANY RIGHT TO CLAIM TO THE FULLEST EXTENT
PERMITTED BY LAW.
On December 17, 2003, Appellants filed a foreclosure action against
Appellees for failure to pay the amount due under the terms of the note and
mortgage. Appellees thereafter filed a counterclaim and claim for offset alleging
that the loan at issue was a predatory high cost loan subject to the Home
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Ownership Equity Protection Act, 15 U.S.C. § 1639 (HOEPA). HOEPA, which is
contained within the Truth In Lending Act (TILA), 15 U.S.C. § 1601, affords
consumers defenses and remedies to certain high cost home loans, including
rescission of the note and mortgage, as well as recovery of statutory and enhanced
statutory damages. Appellees claimed that they rescinded the note by letter dated
April 6, 2005, and that such rescission voided the note and mortgage, with the
statutory damages offsetting the entire indebtedness. Appellees further
counterclaimed that Appellants had committed usury and breach of contract,
including the implied covenant of good faith, by assessing Appellees charges and
penalties that were excessive and unauthorized.
In the summer of 2006, the parties became involved in a discovery
dispute that led to Appellees filing a motion to dismiss the foreclosure action. As
part of their response to the motion, Appellants moved the trial court to compel
arbitration. On February 16, 2007, the trial court denied the motion to compel
arbitration, finding the arbitration agreement to be unconscionable. This appeal
ensued1.
Appellants argue to this Court that the trial court erred in finding that
the arbitration clause was unconscionable and unenforceable. Appellants contend
that Kentucky has a policy of favoring arbitration and that prima facie evidence of
an arbitration provision creates a strong presumption of its validity under both the
1
KRS 417.220(1) allows immediate review of the trial court’s order even though it is considered
interlocutory in nature. Valley Construction Company, Inc. v. Perry Host Management
Company, Inc., 796 S.W.2d 365 (Ky. App. 1990).
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Kentucky Uniform Arbitration Act (KUAA) and the Federal Arbitration Act
(FAA). See Valley Construction Company, Inc. v. Perry Host Management
Company, Inc., 796 S.W.2d 365, 368 (Ky. App. 1990). Further, Appellants point
out that state and federal courts have compelled arbitration in cases involving
claims identical to those asserted by Appellees herein. See Green Tree Financial
Corporation-Alabama v. Randolph, 531 U.S. 79, 121 S.Ct. 513, 148 L.Ed.2d 373
(2000); Stout v. J.D. Byrider, 228 F.3d 709 (6th Cir. 2000), cert. denied, 531 U.S.
1148 (2001); Louisville Peterbilt, Inc. v. Cox, 132 S.W.3d 850 (Ky. 2004);
Conseco Finance Servicing Corporation v. Wilder, 47 S.W.3d 335 (Ky. 2001).
Thus, it is Appellants’ position that Appellees are required to submit their claims to
arbitration. We disagree, not with Appellants’ recitation of the law with regard to
arbitration, but with their characterization of relevant issue.
Appellants are correct that Kentucky law favors arbitration
agreements. See Kodak Mining Company v. Carrs Fork Corporation, 669 S.W.2d
917 (Ky. 1984). In fact, in 1984, Kentucky adopted the KUAA, codified at
Kentucky Revised Statutes (KRS) Chapter 417. KRS 417.050 provides that “a
written agreement to submit any existing controversy to arbitration between the
parties is valid, enforceable and irrevocable, save upon such grounds as exist at law
for the revocation of any contract.” However, while “any doubts concerning the
scope of arbitrable issues should be resolved in favor of arbitration,” Moses H.
Cone Memorial Hospital v. Mercury Construction Corporation, 460 U.S. 1, 24-25,
103 S.Ct. 927, 941, 74 L.Ed.2d 765 (1983), the existence of a valid arbitration
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agreement as a threshold matter must first be resolved by the court. First Options
of Chicago, Inc. v. Kaplan, 514 U.S. 938, 115 S.Ct. 1920, 131 L.Ed.2d 985 (1995).
In other words, the court-not an arbitrator-must decide whether the parties have
agreed to arbitrate based on fundamental principles governing contract law. See
also Louisville Peterbilt, Inc., supra.
Appellants cite to numerous cases wherein courts have required
parties to submit claims under HOEPA and TILA to arbitration. In Prima Paint
Corporation v. Flood and Conklin Manufacturing Company, 388 U.S. 395, 403, 87
S.Ct. 1801, 18 L.Ed.2d 1270 (1967), the United States Supreme Court held that
claims alleging fraud were not exempt from arbitration. Similarly, in Louisville
Peterbilt, Inc., supra, our Supreme Court held that an arbitration provision will not
be defeated upon a claim that the larger agreement in which it is contained was
fraudulently induced or unenforceable.
All of the cases cited by Appellants, however, involve the
enforcement of an arbitration provision when a party raises a claim of fraud in the
underlying contract. Here, contrary to Appellants’ argument, Appellees are not
simply claiming that the mortgage contract as a whole is unconscionable, but rather
that the arbitration clause itself is unconscionable and unenforceable. The
Supreme Court in Prima Paint, supra, commented that while claims of fraud are to
be submitted to an arbitrator, claims that specifically attack the arbitration
provision are to be judicially determined. Id. at 403-404; 87 S.Ct. at 1801. And
indeed, the trial court specifically stated that it had considered the arbitration
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clause separately from the remaining contract in reaching its decision to deny
arbitration.
Under the provisions of KRS 417.050, an arbitrable dispute is subject
to the compulsory arbitration provision except where the agreement may be
avoided “upon such grounds as exist at law or in equity for the revocation of any
contract.” One of the equitable grounds upon which an arbitration clause may be
deemed unenforceable is unconscionability. Conseco Finance Servicing
Corporation, supra. The determination whether an arbitration clause is
unconscionable is a question of law subject to our de novo review. Id. at 341.
As noted by a panel of this Court in Conseco Finance Servicing
Corporation, supra,
A fundamental rule of contract law holds that,
absent fraud in the inducement, a written agreement duly
executed by the party to be held, who had an opportunity
to read it, will be enforced according to its terms. [Cline
v. Allis-Chalmers Corporation, 690 S.W.2d 764 (Ky.
App. 1985)]. The doctrine of unconscionability has
developed as a narrow exception to this fundamental rule.
The doctrine is used by the courts to police the excesses
of certain parties who abuse their right to contract freely.
It is directed against one-sided, oppressive and unfairly
surprising contracts, and not against the consequences
per se of uneven bargaining power or even a simple oldfashioned bad bargain. [Louisville Bear Safety Service,
Inc. v. South Central Bell Telephone Company, 571
S.W.2d 438, 440 (Ky. App. 1978)].
An unconscionable contract has been characterized
as “one which no man in his senses, not under delusion,
would make, on one hand, and which no fair and honest
man would accept, on the other.” [Id. at 439 (Quoting
Black’s Law Dictionary, 1694 (4th ed. 1976))].
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Unconscionability determinations being inherently factsensitive, courts must address such claims on a case-bycase basis. [Forsythe v. BancBoston Mortgage
Corporation, 135 F.3d 1069 (6th Cir. 1997)].
Conseco Finance Servicing Corporation, supra, at 341-42.
In Arnold v. United Companies Lending Corporation, 511 S.E.2d 854,
858 (W. Va. 1998), the West Virginia court was presented with an arbitration
clause similar to the herein that provided, in pertinent part:
THE ARBITRATION WILL TAKE THE PLACE OF
ANY COURT PROCEEDING INCLUDING A TRIAL
BEFORE A JUDGE AND JURY[.] DAMAGES
SHALL BE LIMITED TO ACTUAL AND DIRECT
DAMAGES AND SHALL IN NO EVENT INCLUDE
CONSEQUENTIAL, PUNITIVE, EXEMPLARY OR
TREBLE DAMAGES AS TO WHICH BORROWER
AND LENDER EXPRESSLY WAIVE ANY RIGHT TO
CLAIM TO THE FULLEST EXTENT PERMITTED
BY LAW.
The Arnold court, while noting that a bargain is not unconscionable merely
because the parties to it are unequal in bargaining position, held that an arbitration
clause that contains a “substantial waiver of a parties’ rights’ is unenforceable.”
Id. at 861-862. See also Taylor v. Butler, 142 S.W.3d 277 (Tenn. 2004), cert.
denied, 543 U.S. 1147 (2005); Carll v. Terminix International Company, L.P., 793
A.2d 921 (Pa. Super. 2002).
As noted by Appellees herein, not only would a successful rescission
void the mortgage and eliminate all charges and fees, they may be entitled to
statutory damages for any TILA disclosure violation, as well as enhanced statutory
damages for violations of HOEPA. In addition, Appellees have asserted a claim
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for usury, which if proven, may result in remedies including forfeiture of the entire
interest on the note and recovery by the debtor of damages in the amount of twice
the interest paid. Finally, Appellees are seeking punitive damages for unfair and
deceptive practices within the meaning of the Kentucky Consumer Protection Act.
Appellees have asserted valid claims under statutes designed to
protect consumers from high cost predatory lending practices. The merit of such
claims is obviously not at issue in this appeal and we render no judgment or
opinion thereon. However, we conclude that the arbitration provision contained in
Appellees’ contract clearly prevents them from meaningfully pursuing any
statutory claims. Certainly, an arbitrator can resolve claims under TILA and
HOEPA. However, the provision herein explicitly prohibits the arbitrator from
modifying the contract or awarding anything other than actual damages. As such,
Appellees could in no manner recover any statutory damages to which they may be
entitled. Thus, we conclude that because the arbitration clause deprives Appellees
of any substantive remedies, the trial court properly ruled that it is unconscionable
and unenforceable.
The order of the Madison Circuit Court denying the motion to compel
arbitration is affirmed.
ALL CONCUR.
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BRIEF FOR APPELLANT:
Jeffrey W. Kibbey
Louisville, Kentucky
BRIEF FOR APPELLEES:
Addison Parker
Richmond, Kentucky
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