Dalton v. Santander Consumer USA, Inc.

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integrity of this document
New Mexico Compilation
Commission, Santa Fe, NM
'00'05- 15:54:22 2016.12.13

IN THE SUPREME COURT OF THE STATE OF NEW MEXICO

Opinion Number: 2016-NMSC-035

Filing Date: September 22, 2016

Docket No. S-1-SC-35101

EILEEN J. DALTON,

Plaintiff-Respondent,

v.

SANTANDER CONSUMER USA, INC.,

Defendant-Petitioner.

ORIGINAL PROCEEDING ON CERTIORARI
Sarah M. Singleton, District Judge

Lewis Roca Rothgerber Christie LLP
Ross L. Crown
Albuquerque, NM

Reed Smith LLP
Terry B. Bates
Kasey J. Curtis
Los Angeles, CA

Grignon Law Firm
Margaret A. Grignon
Long Beach, CA

for Petitioner

Treinen Law Office, P.C.
Rob Treinen
Albuquerque, NM

Humphreys Wallace Humphreys
Lucius James Wallace
Robert David Humphreys

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Tulsa, OK

Public Justice, P.C.
Jennifer Bennett
Oakland, CA

for Respondent

OPINION

CHÁVEZ, Justice.

{1} Eileen Dalton purchased two used cars under separate finance contracts which
contained provisions that retained self-help remedies for both parties, and that allowed either
party to compel arbitration of any claim or dispute arising out of the contracts that exceeded
the jurisdiction of a small claims court, which in New Mexico is $10,000. Dalton contends
that the arbitration clause is substantively unconscionable on its face, and therefore is
unenforceable because the self-help and small claims carve-out provisions are unreasonably
one-sided. We hold that the arbitration provision in this case is not substantively
unconscionable because (1) lawful self-help remedies are extrajudicial remedies, and (2) the
small claims carve-out is facially neutral because either party must sue in small claims court
if its claim is less than $10,000, or arbitrate if its claim exceeds $10,000; as a result, the
small claims carve-out is neither grossly unfair nor unreasonably one-sided on its face.

I. BACKGROUND

{2} In 2010, Dalton entered into several finance contracts to purchase a 2003 Cadillac
CTS (the Cadillac) and a 2010 Pontiac G6 (the Pontiac) from a used car dealer in Santa Fe.
One or more of these contracts were sold to Santander Consumer USA, Inc. (Santander).
The purchase price of the Cadillac was $13,297.93, for which Dalton received financing for
$11,074.93 of the purchase price with a 24.99% annual interest rate and monthly payments
of $325 for sixty months. The purchase price of the Pontiac was $15,965.37, for which she
received $14,305.74 financing at a 25.99% annual interest rate with monthly payments of
$398.36 for seventy-two months.

{3} Each finance contract contained an identical arbitration clause. The arbitration clause
provided that “[a]ny claim or dispute, whether in contract, tort, statute or otherwise” arising
out of or relating to the “credit application, purchase or condition of this vehicle, this
contract or any resulting transaction or relationship” would, at the election of either party,
“be resolved by neutral, binding arbitration and not by a court action.” However, the
arbitration clause also stated that both parties “retain any rights to self-help remedies, such
as repossession,” as well as “the right to seek remedies in small claims court for disputes or
claims within that court’s jurisdiction.” In New Mexico, small claims actions are those in
which the value of the claim does not exceed $10,000, exclusive of interest and costs.

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NMSA 1978, § 35-3-3(A) (2001); NMSA 1978, § 34-8A-3(A)(2) (2001).

{4} Dalton did not make her first payment on the Pontiac contract and the Pontiac was
almost immediately repossessed without judicial action in February 2011. Later that month,
Dalton filed a complaint in district court against a number of defendants alleging fraud,
violations of the New Mexico Uniform Commercial Code, unfair trade practices, conversion,
breach of contract, breach of the covenant of good faith and fair dealing, and breach of
warranty of title. These claims related to the circumstances under which she purchased the
vehicles and signed the finance contracts, as well as the alleged wrongful repossession of the
Pontiac. Her complaint sought equitable, injunctive, and declaratory relief, as well as actual
and punitive damages. She added Santander as a defendant to the suit in July 2012.

{5} In January 2013, Santander filed a motion to compel arbitration of Dalton’s claims
based on the arbitration clause contained in the finance contracts. Dalton opposed this
motion by arguing in part that the arbitration clause was unenforceable because it was
substantively unconscionable under New Mexico law. After analyzing the effect of the
small claims and self-help provisions, the district court agreed with Dalton, as did the Court
of Appeals. Dalton v. Santander Consumer USA, Inc., 2015-NMCA-030, ¶ 2, 345 P.3d
1086, cert. granted, 2015-NMCERT-003. We reverse both the district court and the Court
of Appeals.

II. DISCUSSION

A. The Equitable Defense of Unconscionability

{6} Courts may render a contract or portions of a contract unenforceable under the
equitable doctrine of unconscionability when the terms are “unreasonably favorable to one
party while precluding a meaningful choice of the other party.” Cordova v. World Fin.
Corp. of N.M., 2009-NMSC-021, ¶ 21, 146 N.M. 256, 208 P.3d 901; see also NMSA 1978,
§ 55-2-302(1) (1961) (“If the court as a matter of law finds the contract or any clause of the
contract to have been unconscionable at the time it was made the court may refuse to enforce
the contract, or it may enforce the remainder of the contract without the unconscionable
clause, or it may so limit the application of any unconscionable clause as to avoid any
unconscionable result.”). Unconscionability is a legal question. B & B Inv. Grp., 2014-
NMSC-024, ¶ 12. Accordingly, we review a district court’s determination of
unconscionability de novo. Id.

{7} “[U]nconscionability is an affirmative defense to contract enforcement,” and thus the
party claiming that defense bears the burden of proving that a contract or a portion of a
contract should be voided as unconscionable. Strausberg v. Laurel Healthcare Providers,
LLC, 2013-NMSC-032, ¶¶ 24, 39, 48, 304 P.3d 409. The burden of proving
unconscionability refers only to “the burden of persuasion, i.e., the burden to persuade the
factfinder” and not “the burden of production, i.e., the burden to produce evidence.” Id. ¶
24. A contract can be procedurally or substantively unconscionable. Cordova,

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2009-NMSC-021, ¶ 21.

{8} Only the issue of substantive unconscionability is before us, which requires us to
consider “whether the contract terms are commercially reasonable and fair, the purpose and
effect of the terms, the one-sidedness of the terms, and other similar public policy concerns”
to determine “the legality and fairness of the contract terms themselves.” Id. ¶ 22.
Substantive unconscionability requires courts to examine the terms on the face of the
contract and to consider the practical consequences of those terms. See State ex rel. King
v. B & B Inv. Grp., Inc., 2014-NMSC-024, ¶ 32, 329 P.3d 658 (“[S]ubstantive
unconscionability can be found by examining the contract terms on their face.”). Thus, the
party bearing the burden of proving substantive unconscionability need not make any
particular evidentiary showing and can instead persuade the factfinder that the terms of a
contract are substantively unconscionable by analyzing the contract on its face.

{9} As we explained in Cordova, “[c]ontract provisions that unreasonably benefit one
party over another are substantively unconscionable.” 2009-NMSC-021, ¶ 25. In that case,
a purportedly bilateral arbitration clause between a lender and a borrower contained a
unilateral carve-out provision exempting the lender from mandatory arbitration when it
sought remedies, “including[,] but not limited to, judicial foreclosure or repossession” in the
event of a default by the borrower. Id. ¶¶ 3-4 (internal quotation marks omitted). The
borrower argued that the arbitration clause rendered the finance contract “grossly unfair and
one-sided” because it allowed the lender to require the borrower to arbitrate any of the
borrower’s claims while reserving to the lender “the exclusive option of seeking its preferred
remedies through litigation.” Id. ¶ 20. We agreed and held that the arbitration provision was
“grossly unreasonable and against our public policy under the circumstances” of that case,
id. ¶ 31, and was therefore substantively unconscionable. Id. ¶ 32.

{10} Similarly, in Rivera v. American General Financial Services, Inc., we analyzed an
arbitration provision between a lender and a borrower that required the borrower to arbitrate
any claims against the lender while exempting from mandatory arbitration the lender’s “self-
help or judicial remedies” relating to the property securing the transaction and any claims
that the lender might have “[i]n the event of a default.” 2011-NMSC-033, ¶ 3, 150 N.M.
398, 259 P.3d 803 (internal quotation marks omitted). In Rivera we again concluded that
it was unreasonably one-sided that the lender “retained the right to obtain through the
judicial system the only remedies it was likely to need,” while “forcing [the borrower] to
arbitrate any claim she may have” through an arbitration carve-out applying only to the
lender. Id. ¶ 53. In the circumstances of that case, the arbitration provision was
substantively unconscionable and void under New Mexico law. Id. ¶ 54. Notably, both
Cordova and Rivera involved unilateral carve-outs that explicitly exempted any judicial
remedies a lender was likely to need from mandatory arbitration while providing no such
exemption for the borrower.

{11} With this background in mind, we turn to the arbitration clause in this case and
discuss its carve-outs exempting self-help remedies and small claims actions from mandatory

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arbitration.

B. The Explicit Exclusion of Self-Help Remedies from Mandatory Arbitration Is
Irrelevant to Assessing Unconscionability in this Case

{12} Santander contends that the bilateral self-help carve-out in the arbitration clause
merely “recognizes the existence” of self-help remedies, which “exist outside of the judicial
system.” (Emphasis in original.) We agree. New Mexico has codified the right of a secured
creditor to repossess collateral after default “without judicial process” if the creditor can
proceed without a breach of the peace. NMSA 1978, § 55-9-609(b)(2) (2001). This is self-
help repossession. As we have previously recognized, if this process is carried out in
compliance with relevant statutory provisions and without any involvement by the police,
the courts, or any other state actor, it is a permissible “purely private” remedy. See, e.g.,
Waisner v. Jones, 1988-NMSC-049, ¶ 10, 107 N.M. 260, 755 P.2d 598. However, if the
secured creditor seeks to repossess the collateral after default “pursuant to judicial process”
under Section 55-9-609(b)(1), the creditor has initiated judicial repossession, which is not
a private remedy.

{13} As Santander concedes, judicial repossession is not a self-help remedy, and therefore
it would not be exempted from arbitration by the contracts’ reservation of self-help remedies.
Importantly, this distinguishes the arbitration carve-out here from those discussed in Rivera
and Cordova because in those cases the lender retained the right to pursue judicial
repossession in the event of a default. Rivera, 2011-NMSC-033, ¶ 3; Cordova, 2009-
NMSC-021, ¶ 4. Thus, we disagree with Dalton’s contention that this Court’s opinion in
Rivera held that self-help repossession is a remedy that must be obtained through an arbitral
forum if the parties have agreed to arbitrate all disputes. Instead, Rivera clarified that the
remedy of judicial repossession, although highly regulated by statute, could be granted by
an arbitrator. 2011-NMSC-033, ¶¶ 51-52. In so holding, we noted that “ ‘[b]y agreeing to
arbitrate a statutory claim, a party does not forgo the substantive rights afforded by the
statute; it only submits to their resolution in an arbitral, rather than a judicial, forum.’ ” Id.
¶ 51 (emphasis added) (quoting Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc.,
473 U.S. 614, 628 (1985)). Hence, the exemption of all foreclosure and repossession actions
from mandatory arbitration in Rivera meant that the defendant “retained the right to obtain
through the judicial system the only remedies it was likely to need” while “extinguishing
[the plaintiff’s] right to access the courts for any reason.” Rivera, 2011-NMSC-033, ¶ 53
(emphasis added).

{14} By contrast, the arbitration clause in this case does not specifically retain Santander’s
right to seek judicial repossession through the courts.1 Although parties to a contract could

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If Santander were to pursue a judicial repossession pursuant to the contracts in this
case, whether the value of the vehicle exceeded $10,000 would dictate when Santander must
pursue judicial repossession in small claims court or through arbitration.

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specifically agree to forego any self-help remedies in favor of arbitration, in the absence of
such a provision, self-help remedies are not otherwise subject to mandatory arbitration.
Thus, the contract’s recognition that the parties retained private self-help remedies in this
case does not bear on whether the arbitration clause is one-sided. See Sanchez v. Valencia
Holding Co., LLC, 353 P.3d 741, 756 (Cal. 2015) (“[A]rbitration is intended as an alternative
to litigation, and the unconscionability of an arbitration agreement is viewed in the context
of the rights and remedies that otherwise would have been available to the parties. Self-help
remedies are, by definition, sought outside of litigation . . . .” (citation omitted)).

{15} Dalton cites Preston v. Ferrer, 552 U.S. 346 (2008) to support her assertion that a
valid agreement to arbitrate “waives the right to pursue all other dispute resolution
mechanisms—judicial or not.” In Preston, the United States Supreme Court determined that
an agreement to arbitrate all disputes regarding the terms of a contract required that the
parties’ claims be submitted to an arbitrator rather than the state administrative agency where
such disputes would normally be adjudicated under state law. Id. at 350-53, 355, 363. The
Preston Court specifically disapproved of “the distinction between judicial and
administrative proceedings” adopted by the lower court in that case and clarified that
“[w]hen parties agree to arbitrate all questions arising under a contract, the [Federal
Arbitration Act] supersedes state laws lodging primary jurisdiction in another forum,
whether judicial or administrative.” Id. at 359. However, self-help remedies, which are
private and nonadjudicatory by their very nature, are categorically different from the
administrative and judicial proceedings addressed by Preston. Therefore, we do not interpret
Preston to compel a particular result in this case.

{16} Having established that the carve-out provision’s reservation of self-help remedies
is irrelevant to the question of substantive unconscionability in this case, we next assess the
small claims carve-out.

C. The Arbitration Provision Is Not Unconscionable on Its Face

{17} At the hearing on Santander’s motion to compel arbitration, the district court
acknowledged that the bilateral carve-out provision in this case was neutral on its face. Both
parties provided argument as to the practical effect of the small claims carve-out in the
context of an automobile finance contract. According to Dalton, it was self-evident that
consumers would be most likely to bring claims alleging “[a]uto fraud” or “financing fraud,”
which were “cases that clearly have [a] value over $10,000,” apparently based on the
personal experience of Dalton’s attorney in bringing such cases in the past.

{18} The district court concluded that the small claims provision was one-sided “if
common sense is employed and practical realities are considered” because consumers would
most likely have to arbitrate consumer fraud claims, claims for unfair practices, or other auto
fraud or financing fraud claims, while Santander’s most likely remedies were related to
repossession after a default on the loan and could be pursued through self-help or in small
claims court rather than arbitration. On that basis, the district court determined that the

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bilateral language in the carve-outs was “subterfuge” and that the exemptions actually
operated in an unfairly one-sided manner. We disagree.

{19} No New Mexico appellate decision has determined that a bilateral small claims
carve-out was unreasonably one-sided or grossly unfair. Indeed, in Figueroa v. THI of New
Mexico at Casa Arena Blanca, LLC, the Court of Appeals assumed that an exemption from
mandatory arbitration for claims under $2,500 granted “some judicial rights” to nursing
home residents. 2013-NMCA-077, ¶ 29, 306 P.3d 480. Other jurisdictions have similarly
determined that a small claims carve-out is not unfairly one-sided in favor of the lender. See
Mansfield v. Vanderbilt Mortg. & Fin., Inc., 29 F. Supp. 3d 645, 656 (E.D.N.C. 2014)
(assuming that a bilateral small claims exception to a mandatory arbitration agreement was
not unreasonably one-sided in favor of either party); Sanchez, 353 P.3d at 756 (assuming that
a small claims carve-out in an automobile finance contract likely favored the consumer). In
fact, Dalton’s counsel conceded at oral argument that the bilateral small claims provision
would be insufficient on its own to establish substantive unconscionability.

{20} In recent cases where this Court has voided an arbitration provision for substantive
unconscionability, there was little ambiguity as to the one-sided operation of the examined
provision or the exclusive benefits that inured only to the drafting party. In Cordova, the
lender explicitly reserved for itself judicial remedies in all instances of default by the
borrower, while leaving the borrower with no ability to go to court “for any reason
whatsoever.” 2009-NMSC-021, ¶¶ 26-27 (emphasis added). Thus, the arbitration provision
was unreasonably beneficial to the lender because it was “highly unlikely” that the lender
would ever be prevented from bringing any of its claims in its chosen forum, whether
through arbitration or litigation, while as a practical matter, the borrower would never have
that option. See id. ¶ 27; see also Padilla v. State Farm Mut. Auto. Ins. Co.,
2003-NMSC-011, ¶ 10, 133 N.M. 661, 68 P.3d 901 (determining that a provision was
substantively unconscionable because it granted appeal rights in situations where only an
insurer would logically appeal, and it provided no appeal rights whatsoever in situations
where only an insured would logically appeal). Further, in Rivera, an arbitration provision
was unreasonably beneficial to the lender where the lender had the option of choosing its
forum in all cases where it sought to enforce its rights to the collateral securing the loan,
while the borrower did not have this option with respect to “any claim she may have [had].”
2011-NMSC-033, ¶ 53 (emphasis added). In this case, the arbitration provision and its
carve-outs do not unambiguously benefit the drafting party alone, unlike the clauses
discussed in Padilla, Cordova, and Rivera.

{21} Gross unfairness is a bedrock principle of our unconscionability analysis. See
Rivera, 2011-NMSC-033, ¶¶ 48-49. We are not persuaded that allowing both parties in this
case complete access to small claims proceedings, even if one party is substantially more
likely to bring small claims actions, is at all unfair. Santander points out that there are
“legitimate, neutral reasons” for the parties to exclude small claims actions from arbitration,
including streamlined pretrial and discovery rules, compare, e.g., Rule 1-026 NMRA (setting
forth detailed rules for discovery procedures in district court), with Rule 2-501 NMRA

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(setting forth simplified discovery procedures for actions in magistrate court), and the cost-
effectiveness of small claims actions compared to arbitration. See Licitra v. Gateway, Inc.,
734 N.Y.S.2d 389, 394-97 (N.Y. Civ. Ct. 2001), order aff’d as modified (Oct. 9, 2002)
(refusing to compel arbitration of a consumer claim brought in small claims court, despite
a mandatory arbitration clause, due to the greater expense and inconvenience of arbitration
procedures for resolving small claims). Moreover, private arbitration organizations also
recognize the importance of bilateral small claims carve-outs in consumer contracts as a
matter of basic fairness. It is one of the guiding due process principles of the American
Arbitration Association (AAA) that arbitration agreements should “make it clear that all
parties retain the right to seek relief in a small claims court for disputes or claims within the
scope of its jurisdiction.” AAA National Consumer Disputes Advisory Committee,
Consumer Due Process Protocol Statement of Principles, Principle 5 at 2,
https://adr.org/aaa/ShowPDF?doc=ADRSTG_005014 (April 17, 1998) (last accessed August
25, 2016). Likewise, Judicial Arbitration and Mediation Services, Inc. (JAMS) requires as
a minimum standard of procedural fairness that “no party shall be precluded from seeking
remedies in small claims court for disputes or claims within the scope of its jurisdiction.”
JAMS Policy on Consumer Arbitrations Pursuant to Pre-Dispute Clauses Minimum
Standards of Procedural Fairness, Minimum Standard 1(b) at 3 (July 15, 2009),
https://www.jamsadr.com/files/Uploads/Documents/JAMS-Rules/JAMS_Consumer
_Min_Stds-2009.pdf (last accessed August 25, 2016).

{22} New Mexico public policy is also relevant to our analysis of a claim of substantive
unconscionability and counsels against an unconscionability determination in this case. See
Strausberg, 2013-NMSC-032, ¶ 33. New Mexico public policy favors economical and
efficient judicial proceedings. For example, our procedural rules must be “construed and
administered to secure the just, speedy and inexpensive determination of every action.” Rule
1-001(A) NMRA. The Uniform Arbitration Act likewise recognizes that a “ ‘disabling civil
dispute clause’ ” includes a clause requiring a consumer to “assert a claim . . . in a forum that
is less convenient, more costly or more dilatory than a judicial forum established in this state
for resolution of the dispute.” NMSA 1978, § 44-7A-1(b)(4)(a) (2001). The Uniform
Arbitration Act provides that such clauses in arbitration agreements are “unenforceable
against and voidable by [a] consumer, borrower, tenant or employee.” NMSA 1978, § 44-
7A-5 (2001). Both parties benefit from the economy and efficiency of a small claims court
when either party has a claim worth less than $10,000. When a claim exceeds $10,000, the
additional expense of an arbitration may be justified. We are hesitant to adopt a holding that
might discourage bilateral small claims carve-outs, and thereby curtail the availability of
small claims proceedings to New Mexico consumers or otherwise frustrate New Mexico’s
broad public policy favoring economy and efficiency in dispute resolution.

{23} As we have discussed, both the Court of Appeals and the district court erred as a
matter of law by concluding that the arbitration provision in this case was substantively
unconscionable on its face. However, we note that the district court’s order in this case
relied solely on substantive unconscionability without addressing Dalton’s other affirmative
defenses that the Pontiac contract is unenforceable because it was procured by coercion or

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duress and that judicial estoppel bars Santander from enforcing the arbitration provision in
the Pontiac contract. We express no conclusions regarding those defenses.

III. CONCLUSION

{24} The self-help and small claims carve-out provisions in the arbitration clause of the
finance contracts are not substantively unconscionable. Therefore, Dalton did not satisfy her
burden of proving a facial challenge to the arbitration clause. We reverse the Court of
Appeals and remand to the district court for proceedings consistent with this opinion.

{25} IT IS SO ORDERED.

____________________________________
EDWARD L. CHÁVEZ, Justice

WE CONCUR:

____________________________________
CHARLES W. DANIELS, Chief Justice

____________________________________
PETRA JIMENEZ MAES, Justice

____________________________________
BARBARA J. VIGIL, Justice

____________________________________
JUDITH K. NAKAMURA, Justice

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