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It is irrefutable that behemoth lending institutions enjoy supreme bargaining positions in residential-loan transactions. The contracts of adhesion that memorialize these deals are indicia of this harsh economic reality. These contracts are tolerated and accepted under the assumption that the consumer understands what he or she is getting into. And of course, no borrower is under any obligation to borrow at all. If one deems the loan papers to be so offensive and one-sided as to be unacceptable, then by all means that intended mortgagor should simply walk away, pride intact. Query as to whether that freedom is little more than a fiction, with the literally dozens of pages of loan documents customarily presented for the very first time at closing. By then, of course, the purchaser or borrower is already heavily invested in the deal, having expended various sums and intimidated by the threat of litigation for failure to consummate. Amongst countless terms and conditions drafted by the mortgagee for its own benefit, there is typically an arbitration provision or agreement inserted by the lender. On their face, these seemingly innocuous provisions offer up the promise of cost-effective and efficient dispute resolution (should a dispute ever arise). And what the unwitting consumer does not realize is that he or she will be contractually forced to arbitrate, whereas the lender has carved out various exceptions for itself. When does that arbitration provision become so one-sided as to become unconscionable? This is precisely the question addressed by the Pennsylvania Supreme Court in the Salley v. Option One case, just decided in May. The essential facts of Option One are not unusual by any means. Will Smalley Jr., a low-income homeowner in Philadelphia County, applied for and received a residential mortgage from Option One Mortgage Corp, a subprime lender. As part of this process, Salley was required to enter into a written agreement for the arbitration of disputes, to be administered by the American Arbitration Association and governed by the Federal Arbitration Act. Essentially, notwithstanding quiet title matters and counterclaims, the agreement barred Salley from litigating future claims. This very same agreement expressly permitted Option One to litigate any judicial or nonjudicial foreclosure proceedings and provisional or ancillary remedies such as injunctive relief, amongst other things. Eventually a dispute not covered by the “exceptions” clause of the arbitration agreement did arise. Salley contended that he had been the victim of a bait and switch as well as predatory lending practices. Chiefly he had been duped into a variable-rate loan under the pretext of debt consolidation and low fixed monthly payments. He commenced litigation in the district court, alleging Truth in Lending, Consumer Protection and Usury law violations. Citing to the arbitration agreement, Option One countered, claiming it was entitled to either outright dismissal or least a stay pending the arbitration. Salley took issue, characterizing the arbitration agreement as both unconscionable and unenforceable. The district court concurred with Option One and tossed out the case in its entirety. The 3rd U.S. Circuit Court of Appeals’ decision in Harris v. Green Tree Financial proved ample ammunition for the court. On similar facts, the 3rd Circuit envisaged that the Pennsylvania Supreme Court would not find a similar clause unconscionable. Notably, however, the holding in Harris conflicts with the subsequently decided Superior Court case of Lytle v. CitiFinancial Services. Lytle submitted that “the reservation of access to the courts for itself to the exclusion of the consumer creates a presumption of unconscionability, which in the absence of �business realities’ that compel inclusion of such a provision, renders the arbitration provision unconscionable and unenforceable under Pennsylvania law.” Salley appealed and the 3rd Circuit certified the following question to the Pennsylvania Supreme Court: Whether the arbitration agreement under consideration in this case, which exempts from binding arbitration certain creditor remedies, while requiring the submission of other claims to arbitration, is unconscionable under Pennsylvania law as suggested by Lytle. In conducting its analysis, the Option One court considered the Federal Arbitration Act, fundamental contract principles as well as amicus curiae briefs submitted by both parties. Taking the briefs first, the positions were polarized the way one might expect. That is, Salley’s amici located the certified issue in a broader framework. Salley’s plight is not a unique one � it is representative of the public policy crisis surrounding predatory lending. Indigent borrowers like Salley are forced to accept inequitable mandatory arbitration provisions due to unequal bargaining positions. To make matters worse, these clauses spawn issues of access due to exorbitant costs and fees and present the insurmountable burden of split forum litigation in the foreclosure setting. Option One, on the other hand, tried to rein the court in, emphasizing the narrowness of the specific legal question presented. The determination before the court has nothing at all to do with the merits of the actual controversy � the enforceability of the arbitration provision is all that is before the court. The U.S. Supreme Court has consistently endorsed arbitration as an efficient and relatively inexpensive mechanism for dispute resolution. Additionally, the Lytle matter was wrongly decided and should be rejected altogether. There the Superior Court overreached, adopting an anti-arbitration stance despite clear law and policy to the contrary. Naturally Option One also argues for freedom of contract; courts should refrain from injecting themselves into that environs. And as for voiding contracts on public policy grounds, precedent demonstrates how egregious the circumstances need to be before a court may take such a drastic measure. Upon considering both positions before it, the Option One court did something that likely surprised even Option One � Justice Cynthia Baldwin raised the issue in a dissenting opinion. Notwithstanding that Salley’s underlying suit was premised upon lending violations, inter alia, the matter before this court was the alleged unconscionability of the arbitration provision/agreement solely. Option One not only acknowledged that fact but even contended that “enforceability of the [instant] arbitration agreement and question framed by the 3rd Circuit do not involve the merits of the parties’ underlying dispute.” Yet the Option One court chose to characterize the challenge to the subject arbitration agreement as being inextricably linked to the underlying lending and consumer claims. Factual issues and ambiguities exist surrounding the question of unconscionability that should properly be resolved by an arbitrator, not the court; the issue may not simply be decided as a matter of law. Nevertheless, the U.S. Supreme Court has concluded that courts may in fact resolve issues of unconscionability where only the arbitration agreement and not the entire contract is at issue. It certainly appears that the Option One court, without stating it directly at least, has implied that Salley is attacking the validity of the entire agreement. Transmuting a simple charge of unconscionability as to one distinct provision into a challenge of the unconscionability of the whole agreement seems to distort Salley’s claim and prolong the inevitable, mainly labeling such lopsided provisions as void. Harper J. Dimmerman represents clients in real estate matters and is the principal of his firm and president of DST Land Transfer, Inc., a title insurance company licensed in Pennsylvania and New Jersey. He may be reached at [email protected] or 215-545-0600. He is co-chairman of the Philadelphia Bar Association’s solo and small firm committee and an executive committee member of the law practice management committee and YLD.

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