Clay v. New Mexico Title Loans, Inc.

I attest to the accuracy and
integrity of this document
New Mexico Compilation
Commission, Santa Fe, NM
'00'04- 14:19:23 2012.11.01
Certiorari Denied, September 20, 2012, No. 33,765

IN THE COURT OF APPEALS OF THE STATE OF NEW MEXICO

Opinion Number: 2012-NMCA-102

Filing Date: July 19, 2012

Docket No. 31,356

HARRY CLAY, individually and as
natural father of BRE CLAY and
AUSTIN CLAY, minor children,

Plaintiffs-Appellees,

v.

NEW MEXICO TITLE LOANS, INC.,

Defendant-Appellant.

APPEAL FROM THE DISTRICT COURT OF SANTA FE COUNTY
Raymond Z. Ortiz, District Judge

Fine Law Firm
Mark Fine
Albuquerque, NM

for Appellees

Butt Thornton & Baehr PC
Emily A. Franke
Jane A. Laflin
Raúl P. Sedillo
Albuquerque, NM

for Appellant

OPINION

BUSTAMANTE, Judge.

{1} New Mexico Title Loans, Inc. (Lender) appeals from the district court’s denial of its

1
motion to compel arbitration. The district court ruled that (1) the arbitration clause is
substantively unconscionable because it is against public policy and because the appeals
clause unfairly benefits Lender over borrowers, and (2) the arbitration provision is
ambiguous as to whether Chris “Harry” Clay’s (Borrower) tort claims are subject to
arbitration, and the provision is, therefore, unenforceable. We conclude that Borrower’s tort
claims are not within the scope of the arbitration provision and that the appeals clause is
substantively unconscionable and, therefore, unenforceable. We affirm in part, reverse in
part, and remand for further proceedings consistent with this Opinion.

I. BACKGROUND

A. Factual Background

{2} On March 5, 2010, Borrower signed a loan agreement (Agreement) with Lender in
which he agreed to pay $3,177.84 for a loan of $2400. He agreed to use his 1999 Dodge
Ram truck as collateral to secure the loan. The Agreement included an arbitration provision
purporting to apply to “any claim, dispute or controversy between you and us that in any way
arises from or relates to this Agreement or the Motor Vehicle . . . securing this Agreement.”
Borrower did not pay back the loan when it was due on April 5, 2010. On the evening of
May 21, 2010, two employees of Certified Adjusters attempted to repossess the truck on
behalf of Lender. The parties dispute the details of the encounter but not the two essential
facts: (1) Borrower resisted Certified Adjusters’ attempts to take the vehicle; and (2) one
of Certified Adjusters’ employees, Ryan Browning, shot Borrower while Borrower’s
daughter watched. As a result, Borrower is unable to walk.

B. Procedural Background

{3} Borrower filed a twelve-count complaint against Lender, Certified Adjusters, and
Ryan Browning, alleging tort claims including negligence per se, negligent hiring and
retention, breach of duty during ultra-hazardous activity, loss of consortium, negligent
infliction of emotional distress, and breach of non-delegable duty. He also alleged breach
of contract by Lender. After providing written notice of intent to compel arbitration, Lender
filed a motion and memorandum to stay litigation and compel arbitration in district court.
The district court found that the arbitration provision in the Agreement was substantively
unconscionable, “both as a matter of public policy and due to an impermissible ‘escape
hatch’ clause” and, therefore, unenforceable. It also found, in the alternative, that the
applicability of the arbitration provision to Borrower’s claims was ambiguous. Since it was
ambiguous, the district court “[c]onstru[ed], as it must, this ambiguity against the drafter of
the contract, [Lender, and found] that [Borrower’s] allegations do not fall within the scope
of the arbitration provision.”

II. DISCUSSION

{4} Borrower argues that the arbitration provision in the Agreement is both substantively

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and procedurally unconscionable because the terms are unreasonably unfair, there was fraud
in the inducement, and there was a gross disparity in bargaining power between Borrower
and Lender. He asserts further that, even if it were not unconscionable, his claims do not fall
within the scope of the arbitration provision. Lender contends that the arbitration provision
is not unconscionable because it is not “illegal, contrary to any public policy, or
unreasonably favorable to [Lender].” Lender also argues that the plain language of the
provision encompasses all of Borrower’s theories of recovery and, therefore, the district
court erred in finding ambiguity.

A. Standard of Review

{5} “We apply a de novo standard of review to a district court’s denial of a motion to
compel arbitration.” Cordova v. World Fin. Corp. of N.M., 2009-NMSC-021, ¶ 11, 146
N.M. 256, 208 P.3d 901. “As contracts, [w]e consider [arbitration agreements] as a whole
to determine how they should be interpreted.” Medina v. Holguin, 2008-NMCA-161, ¶ 8,
145 N.M. 303, 197 P.3d 1085 (alterations in original) (internal quotation marks and citation
omitted). “[I]t is established law that our appellate courts will affirm a district court’s
decision if it is right for any reason, so long as the circumstances do not make it unfair to the
appellant to affirm.” Cordova, 2009-NMSC-021, ¶ 18.

B. Analysis

{6} Arbitration is a “highly favored” form of dispute resolution. Santa Fe Techs., Inc.
v. Argus Networks, Inc., 2002-NMCA-030, ¶ 51, 131 N.M. 772, 42 P.3d 1221; see 9 U.S.C.
§ 2 (1947); NMSA 1978, §§ 44-7A-1 to -32 (2001) (Uniform Arbitration Act). “It promotes
both judicial efficiency and conservation of resources by all parties.” Santa Fe Techs., Inc.,
2002-NMCA-030, ¶ 51; see Cordova, 2009-NMSC-021, ¶ 30.

{7} The purpose of the Federal Arbitration Act (FAA), 9 U.S.C. §§ 1-6 (2006), was to
combat “widespread judicial hostility to arbitration agreements.” AT & T Mobility LLC v.
Concepcion, ___ U.S. ___, ___, 131 S. Ct. 1740, 1745 (2011). Section 2 of the FAA
provides that

[a] written provision in any maritime transaction or a contract evidencing a
transaction involving commerce to settle by arbitration a controversy
thereafter arising out of such contract or transaction, . . . shall be valid,
irrevocable, and enforceable, save upon such grounds as exist at law or in
equity for the revocation of any contract.

9 U.S.C. § 2. Section 2 creates a presumption favoring arbitration. “[Q]uestions of
arbitrability must be addressed with a healthy regard for the federal policy favoring
arbitration.” Moses H. Cone Mem’l Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 24 (1983).
Under the FAA, “any doubts concerning the scope of arbitrable issues should be resolved
in favor of arbitration, whether the problem at hand is the construction of the contract

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language itself or an allegation of waiver, delay, or a like defense to arbitrability.” Id. at 24-
25. A dispute as to whether there is a binding arbitration agreement, however, obviates that
presumption. DeArmond v. Halliburton Energy Servs., Inc., 2003-NMCA-148, ¶ 8, 134
N.M. 630, 81 P.3d 573.

{8} In spite of these presumptions, construction of arbitration provisions proceeds along
typical contract interpretation avenues. “We have described [Section 2] as reflecting both
a liberal federal policy favoring arbitration, and the fundamental principle that arbitration
is a matter of contract. In line with these principles, courts must place arbitration agreements
on an equal footing with other contracts, and enforce them according to their terms[.]”
Concepcion, ___ U.S. at ___, 131 S. Ct. at 1745 (internal quotation marks and citations
omitted). “Equal footing” means that, Section 2 of the FAA notwithstanding, arbitration
provisions are not given any special deference or treatment not accorded other contract
terms. See Fiser v. Dell Computer Corp., 2008-NMSC-046, ¶ 23, 144 N.M. 464, 188 P.3d
1215. State law limitations specific to arbitration provisions are preempted by the FAA. See
Doctor’s Assocs., Inc. v. Casarotto, 517 U.S. 681, 688 (1996) (stating that “Montana’s law
plac[ing] arbitration agreements in a class apart from any contract, and singularly limit[ing]
their validity” conflicts with the Act and is, therefore, preempted (internal quotation marks
omitted)). Arbitration provisions are, however, subject to state law “if that law arose to
govern issues concerning the validity, revocability, and enforceability of contracts generally.
Thus, generally applicable contract defenses . . . may be applied to invalidate arbitration
agreements without contravening [Section] 2.” Id. at 686-87 (internal quotation marks and
citations omitted).

{9} The questions before us are whether the arbitration provision or any part thereof is
substantively or procedurally unconscionable and whether Borrower’s claims fall within the
scope of the provision. Because we think the latter issue is potentially dispositive, we
address it first.

1. Scope of the Arbitration Provision

a. Arbitrability

{10} We start with a basic preliminary question: Who decides whether an issue is
arbitrable under the agreement? Generally, questions of arbitrability are within the purview
of a court. Howsam v. Dean Witter Reynolds, Inc., 537 U.S. 79, 84 (2002); see § 44-7A-7(b)
(“The court shall decide whether an agreement to arbitrate exists or a controversy is subject
to an agreement to arbitrate.”). If the parties have “clearly and unmistakably” agreed that
this issue is subject to arbitration, however, the reviewing court must enforce that agreement
without further inquiry. AT & T Techs., Inc. v. Commc’ns Workers of Am., 475 U.S. 643,
649 (1986); see Felts v. CLK Mgmt., Inc., 2011-NMCA-062, ¶ 18, 149 N.M. 681, 254 P.3d
124 (stating that an agreement to arbitrate the issue of arbitrability is “an additional,
antecedent agreement . . . and the FAA operates on this additional arbitration agreement just
as it does on any other.” (internal quotation marks and citation omitted)), cert. granted,

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2011-NMCERT-006, 150 N.M. 764, 266 P.3d 633. The Court uses “ordinary state-law
principles that govern the formation of contracts” to determine whether the parties clearly
and unmistakably agreed to arbitrate an issue, including arbitrability. Felts, 2011-NMCA-
062, ¶ 18 (internal quotation marks and citation omitted).

{11} When there is an agreement to arbitrate arbitrability, also called a “delegation
provision,” “a party must specifically challenge the delegation provision in order for a court
to consider the challenge rather than referring the matter to an arbitrator.” Id. ¶ 20. The
challenge need not be made in a specific document, such as the complaint; rather, “[w]hat
matters is the substantive basis of the challenge.” Id. ¶ 29 (internal quotation marks and
citation omitted). Our inquiry, then, turns on two questions: (1) was there a clear and
unmistakable agreement to arbitrate arbitrability? and (2) did Borrower mount a “specific
challenge” to that agreement? If the answer to both of these questions is yes, the court,
rather than an arbitrator, may determine whether the parties agreed to arbitrate the issue at
hand.
{12} In this case, the arbitration provision states:

(b) What Claims Are Covered: “Claim” means any claim, dispute or
controversy between you and us that in any way arises from or relates to this
Agreement or the Motor Vehicle . . . securing this Agreement. . . . it also
includes disputes about the validity, enforceability, arbitrability or scope of
this Arbitration Provision or this Agreement.

(Emphasis added.) In Felts, the Court held that an arbitration clause that covered “any and
all claims . . . arising out of [the] agreement, including disputes as to the matters subject to
arbitration” was clear and unmistakable evidence of the parties’ intent to “have an arbitrator
decide threshold issues of arbitrability.” Id. ¶¶ 21, 23 (alteration and internal quotation
marks omitted). The language in the arbitration clause in this case is even more clear than
in Felts, since it specifies disputes about the “validity, enforceability, arbitrability or scope”
of the clause.

{13} Borrower sufficiently challenged the delegation provision in the Agreement. He
argues that there was fraud in the inducement based on alleged misrepresentation by Lender
of the neutrality of the two organizations identified to administer the arbitration proceedings
and the fact that both organizations, the National Arbitration Forum (NAF) and the
American Arbitration Association (AAA), had stopped administering arbitration of
collections. Borrower maintains that he relied on that representation of neutrality and his
reliance was justifiable. In Felts, the plaintiff made a similar argument: she argued, inter
alia, that the delegation clause was “rendered impossible . . . because the NAF had ceased
its consumer arbitration business.” Id. ¶ 30. There, the Court held that this was a “specific
challenge to the delegation clause” and, therefore, the plaintiff had met her burden to
challenge the threshold issue. Id. In keeping with Felts, we conclude that Borrower has
challenged the delegation provision.

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b. Borrower’s Tort Claims Are Not Within the Scope of the Agreement

{14} We turn now to whether Borrower’s claims fall within the scope of the arbitration
agreement. We start with the framework used to determine the scope of such an agreement.
The general rule was set out in the 1960s by the United States Supreme Court in the
Steelworkers Trilogy: United Steelworkers of Am. v. Am. Mfg. Co., 363 U.S. 564 (1960);
United Steelworkers of Am. v. Warrior & Gulf Navigation Co., 363 U.S. 574 (1960); United
Steelworkers v. Enter. Wheel & Car Corp., 363 U.S. 593 (1960). That rule is that
“arbitration is a matter of contract and a party cannot be required to submit to arbitration any
dispute which he has not agreed so to submit.” AT & T Techs., Inc., 475 U.S. at 648
(internal quotation marks and citation omitted). Under contract law, the scope of an
arbitration provision—whether the parties intended to submit to arbitration—is determined
by “apply[ing] the plain meaning of the contract language.” Santa Fe Techs., Inc., 2002-
NMCA-030, ¶ 52. The terms of the agreement itself “define the scope of . . . the matters to
be arbitrated.” Christmas v. Cimarron Realty Co., 98 N.M. 330, 332, 648 P.2d 788, 790
(1982). More specifically, although “[a]rbitration clauses . . . drafted with broad strokes .
. . require broad interpretation, . . . the scope of the clause itself is limited to the subject
matter of the underlying contract.” Santa Fe Techs., Inc., 2002-NMCA-030, ¶ 55. In order
to fall within the scope of the arbitration clause, the claims at issue must bear a “reasonable
relationship” to the contract in which the arbitration clause is found. See id. ¶ 52 (“When
a reasonable relationship between the subject matter of the dispute and the underlying
agreement exists, the dispute is within the arbitration provision and should be arbitrated.”).

{15} The gist of Borrower’s allegations is that Lender “intentionally or recklessly hired
[the] co-defendants to enforce their security interest[s]” without appropriate oversight or
review of their licensure or expertise. The complaint focuses on the conduct of Certified
Adjusters on May 21, 2010, when they attempted to repossess Borrower’s truck and on
Lender’s hiring and oversight of Certified Adjusters. Borrower maintains that Lender is
vicariously liable under several theories for the consequences of the shooting because
Certified Adjusters was working on Lender’s behalf. There are no claims in the complaint
pertaining to the loan itself, payments, fees, or other matters addressed in the Agreement.

{16} The “Loan Agreement, Promissory Note and Security Agreement” signed by
Borrower and Lender has thirteen clauses. The preamble to these clauses indicates the
names of the lender and borrower, the amount borrowed, the finance charges, annual
percentage rate, total payments, fees, the vehicle offered as collateral, and payment schedule.
Clauses one through twelve address the parties’ responsibilities with respect to payments,
interest rates, finance charges, renewals, warranties, notices, governing law, the collateral,
and New Mexico Small Loan Act disclosures. See NMSA 1978, § 58-15-14.1 (2007).
Viewed more broadly, the overall purpose of the Agreement is to formalize the arrangements
to provide funds to Borrower and to earn interest and fees for Lender in exchange for the
loan. See Nathalie Martin & Ozymandias Adams, Grand Theft Auto Loans: Repossession
and Demographic Realities in Title Lending, 77 Mo. L. Rev. 41, 58 (2012); see generally

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New Mexico Title Loans, http://www.clamex.com.

{17} Clause thirteen is titled “ARBITRATION PROVISION.” The provision states, in
relevant part:

“Claim” means any claim, dispute or controversy between you and us that in
any way arises from or relates to this Agreement or the Motor Vehicle . . .
securing this Agreement (“Vehicle”). “Claim” has the broadest possible
meaning, and includes initial claims, counterclaims, cross-claims and third-
party claims. It includes disputes based upon contract, tort, consumer rights,
fraud and other intentional torts, constitution, statute, regulation, ordinance,
common law and equity (including any claim for injunctive or declaratory
relief). Subject to [a clause regarding class action claims], it also includes
disputes about the validity, enforceability, arbitrability or scope of this
Arbitration Provision or this Agreement. However, “Claim” does not
include: (I) our right to enforce our security interest and to obtain possession
of the Collateral by seeking a replevin judgment or by using self-help,
provided such an action seeks only possession of the Collateral and not a
personal monetary judgment against you, or (ii) any individual action in court
by one party that is limited to preventing the other party from using a self-
help remedy and that does not involve a request for damages or monetary
relief of any kind.

(Emphasis added.)

{18} We note that, although Lender argues that the arbitration provision is broad and
applies to “any claim,” in fact the scope of the provision is limited in several ways. (1) The
provision applies only to matters that “aris[e] from or relat[e] to” the Agreement or the
collateral. See Santa Fe Techs., Inc., 2002-NMCA-030, ¶ 57 (“We deem it of utmost
importance that the parties’ [a]greement does not state in an unlimited manner, . . . that any
disputes that may arise between the parties in the future shall be subject to arbitration.
Instead, and more narrowly, it covers only those disputes arising out of or relating to the
[a]greement.”). (2) Lender specifically excluded its “right to enforce [its] security interest
and to obtain possession of the Collateral by seeking a replevin judgment or by using self-
help.” (3) The “Arbitration Provision is not applicable to ‘small claims’ meaning those
claims that either party is entitled to file and maintain in an appropriate small claims court,
or your State’s equivalent.” Thus, by its plain terms, the provision does not apply to any and
all claims that might arise between Lender and Borrower.

{19} Lender urges us to conclude from the emphasized language in the arbitration
provision that “[t]he terms [of the provision] encompass ‘any claim’ whether sounding in tort
or contract.” Lender argues that, since this language is “clear and unambiguous” and not
“contrary to public policy or unreasonably unfair,” the district court should have applied the
Moses H. Cone presumption and resolved the matter in favor of arbitration. See 460 U.S.

7
at 24-25. We are not persuaded for two reasons. First, the presumption applicable in Moses
H. Cone does not apply when the parties dispute the existence of an arbitration agreement.
See DeArmond, 2003-NMCA-148, ¶ 8. Furthermore, “[t]he presumption in favor of
arbitration cannot operate to compel arbitration of a particular claim in the absence of an
agreement to arbitrate a particular claim.” Heimann v. Kinder-Morgan CO2 Co., L.P., 2006-
NMCA-127, ¶ 25, 140 N.M. 552, 144 P.3d 111.

{20} Second, as discussed, the agreement to arbitrate an issue depends on the intent of the
parties. See AT & T Techs., Inc., 475 U.S. at 648. A party may be assumed to have intended
to arbitrate issues that are closely related to those governed by the agreement itself, but not
those that are unrelated to the agreement, out of the context of the agreement, or outrageous
and unforeseeable. A review of cases in this and other jurisdictions illustrates this principle.

{21} In Santa Fe Tech., Inc., Argus Networks and Santa Fe Technologies planned to
compete for a federal contract opportunity together and entered into an agreement to merge
once the contract was won. 2002-NMCA-030, ¶ 4. After Argus Networks replaced Santa
Fe Technologies with a different subcontractor on the bidding team and, ultimately, won the
contract, Santa Fe Technologies filed a complaint alleging “interference with prospective
contractual relations, usurpation of business opportunity, fraud, and conspiracy to commit
the aforementioned torts, among other claims.” Santa Fe Techs., Inc., 2002-NMCA-030, ¶¶
8-11. Argus Networks claimed that the merger agreement between the two parties mandated
arbitration of these claims because the merger was predicated on winning the contract and,
therefore, the merger agreement was “related to” the federal contract. Id. ¶ 54. The Court
disagreed, stating that “[w]hen we hold [Santa Fe Technologies’] claims up against the
[a]greement, we do not see overlap.” Id. ¶ 55. In that case, the agreement pertained solely
to the merger of the two companies, not to the federal contract opportunity for which the
parties had agreed to collaborate. Id. ¶¶ 4-10, 55. The Court stated that Santa Fe
Technologies “claims neither relate to the mechanics of the merger . . . nor arise from the
performance or failure to perform the merger” and that a “closer connection” was required
in order to compel arbitration. Id. ¶¶ 55-56; see Campos v. Homes By Joe Boyden, L.L.C.,
2006-NMCA-086, ¶ 13, 140 N.M. 122, 140 P.3d 543 (stating claims of misrepresentation
regarding open space behind a house were not subject to arbitration pursuant to an arbitration
clause in the warranty agreement provided by the seller/builder because the claims arose in
a different context than the warranty); Coors Brewing Co. v. Molson Breweries, 51 F.3d
1511, 1516 (10th Cir. 1995) (holding that it would be “absurd” to require arbitration of
claims not “touching specified provisions” of the underlying contract and that the existence
of a contract between the parties was not sufficient to compel arbitration).

{22} We find the reasoning in Aiken v. World Fin. Corp. of South Carolina, 644 S.E.2d
705 (S.C. 2007), most persuasive. The plaintiff, Mr. Aiken, obtained several loans from
World Finance Corporation. Id. at 707. In his loan applications, he provided private
information, including his social security number and date of birth. Id. Two years after Mr.
Aiken paid off the last loan, employees at World Finance Corporation used his personal
information to “obtain sham loans and embezzle the proceeds for the employees’ personal

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benefit.” Id. Each loan agreement signed by Mr. Aiken contained a broad arbitration clause:

All disputes, controversies or claims of any kind and nature between lender
and borrower arising out of or in connection with the loan agreement, or
arising out of any transaction or relationship between lender and borrower or
arising out of any prior or future dealings between lender and borrower, shall
be submitted to arbitration and settled by arbitration.

Id. at 707 (emphasis omitted); see id. at 708 n.2 (characterizing this clause as “broad”).
World Finance Corporation sought to compel arbitration of Mr. Aiken’s claims for “outrage
and emotional distress, negligence, negligent hiring/supervision, and unfair trade practices”
on grounds that they were within the scope of the arbitration agreement because the loan
agreements “gave the conspirators access to Aiken’s information in order to carry out their
crimes.” Id. at 707-08. The South Carolina Supreme Court rejected this argument, stating,
“[a]pplying what amounts to a ‘but-for’ causation standard essentially includes every dispute
imaginable between the parties, which greatly oversimplifies the parties’ agreement to
arbitrate claims between them. Such a result is illogical and unconscionable.” Id. at 708.
The court went on to hold that “[t]he mere fact that the dispute would not have arisen but for
the existence of the contract . . . is insufficient by itself to transform a dispute into one
arising out of or relating to the agreement.” Id. (internal quotation marks and citation
omitted). Most significantly, the South Carolina Supreme Court announced a “definitive
rule” that “[b]ecause even the most broadly-worded arbitration agreements still have limits
founded in general principles of contract law, this Court will refuse to interpret any
arbitration agreement as applying to outrageous torts that are unforeseeable to a reasonable
consumer in the context of normal business dealings.” Id. at 709. Applying these principles,
the court held that Mr. Aiken’s claims were not subject to the arbitration clause because, by
signing the loan agreement, he “could not possibly have been agreeing to provide an
alternative forum for settling claims arising from this wholly unexpected tortious conduct.”
Id.

{23} The court was careful to clarify that it “[did] not seek to exclude all intentional torts
from the scope of arbitration.” Id. Rather, tort claims that alleged a breach of the underlying
contract would fall within the scope of an arbitration agreement because they fall “within the
contemplation of the parties in agreeing to arbitrate.” Id. It limited its ruling to “those
outrageous torts, which although factually related to the performance of the contract, are
legally distinct from the contractual relationship between the parties.” Id.

{24} Here, Borrower signed an affidavit stating that he did not intend to agree to arbitrate
claims such as those arising from the shooting during repossession of his truck. We do not
need to rely on Borrower’s affidavit, however, to conclude that he did not intend for these
claims to be arbitrable. Rather, as in Santa Fe Techs., Inc., Campos, and Aiken, the terms
of the Agreement provide the context in which the arbitration provision will be interpreted.
The plain language of the Agreement reflects a business arrangement between Borrower and
Lender for the loan of funds in exchange for fees and interest. It is reasonable that Borrower

9
understood the arbitration provision to apply to matters related to fees, finance charges,
payments, renewals, warranties, notices, and so on. Even if Borrower intended to submit to
arbitration disputes related to the collateral (clause 4) or default (clauses 7 and 8), it is not
reasonable to conclude that he intended to give up his right to a jury trial if he was shot
during the repossession. See Rogers-Dabbs Chevrolet-Hummer, Inc. v. Blakeney, 05-IA-
00125-SCT, 950 So.2d 170, 176 (Miss. 2007) (agreeing with the plaintiff’s argument that
“no consumer in an arms-length negotiation, absent duress, would contract away his
constitutional rights to judicial redress and a jury trial when making a purchase if he believed
it gave the merchant the green light to commit fraud, forgery, and identity theft, while at the
same time precluding the consumer from having his day in court”).

{25} The only underlying fact common to both the Agreement and most of the claims at
issue is the existence of the contract including provisions for repossession of the vehicle on
default. With the exception of Borrower’s claim of breach of contract, addressed below,
none of his claims address other terms of the Agreement. The fact that the Agreement
provided for repossession does not bring Borrower’s claims within the arbitration provision.
As stated in Coors and Aiken, the mere existence of a contract between the parties is
insufficient to subject these claims to the arbitration provision. Here, the facts are similar
to those in Aiken. In that case, Mr. Aiken agreed voluntarily to provide personal information
as part of the loan process; the court held that the illegal use of that information was outside
of the scope of the arbitration provision. Aiken, 644 S.E.2d at 707, 709. Similarly, Borrower
agreed voluntarily that repossession was a valid remedy for Lender in the Agreement. Illegal
or negligent conduct during repossession, however, is outside the scope of this agreement
and, therefore, the arbitration provision as well.

{26} Count V of Borrower’s complaint alleges that Lender breached the contract because
the Agreement provided for repossession of the collateral “according to law,” and Lender
failed to conduct or ensure that Certified Adjusters conducted the repossession of his truck
in accordance with NMSA 1978, Section 55-9-609(b)(2) (2001) (repossession attempt must
not breach the peace) and NMSA 1978, Section 61-18A-5(B) (1993) (a valid license is
required to attempt repossession). We agree with the Aiken reasoning that a claim that is
dependent on the underlying contract itself is within the scope of the arbitration provision.
644 S.E.2d at 709; accord Chelsea Family Pharmacy, PLLC v. Medco Health Solutions,
Inc., 567 F.3d 1191, 1198 (10th Cir. 2009) (stating that in assessing whether a matter is
arbitrable, “we evaluate the factual underpinnings of the complaint rather than merely
considering the labels attached to each of the causes of action it contains”).

{27} Finally, we note that the district court ruled that the arbitration provision was
ambiguous as to whether it addressed Borrower’s claims and, construing that ambiguity
against the drafter of the Agreement, denied the motion to compel arbitration. See Pub. Serv.
Co. of N.M. v. Diamond D Constr. Co., 2001-NMCA-082, ¶ 19, 131 N.M. 100, 33 P.3d 651
(“[W]e strictly construe a contract against the party who drafted the contract in order to
protect the rights of the party who did not draft it.”). As discussed, we conclude that the
scope of the provision is not ambiguous.

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{28} In conclusion, we hold that claims based on conduct that is unforeseeable to the
parties at the time of entering into an agreement including an arbitration provision are not
within the scope of the provision as a matter of contract law. With the exception of his
breach of contract claim, Borrower’s claims are not subject to the arbitration provision.

2. Substantive Unconscionability

{29} We turn next to whether the arbitration provision or a portion thereof is substantively
unconscionable. Because we agree with the district court that the appeals clause is
substantively unconscionable, but disagree that the entire provision is unenforceable, we
examine the issue in detail and affirm in part and reverse in part.

{30} Borrower also asserts that the arbitration provision is procedurally unconscionable
and the result of fraud in the inducement. Because we determine that Borrower’s claims are
outside the scope of the Agreement and that the appeals clause of the arbitration provision
is substantively unconscionable, and because Borrower provides no serious support for these
arguments, we see no need to address them.

{31} “Unconscionability is an equitable doctrine, rooted in public policy, which allows
courts to render unenforceable an agreement that is unreasonably favorable to one party
while precluding a meaningful choice of the other party.” Cordova, 2009-NMSC-021, ¶ 21.
Unconscionability can be found through both procedural and substantive analyses. Id. The
former “examines the particular factual circumstances surrounding the formation of the
contract,” whereas the latter is concerned with “the legality and fairness of the contract terms
themselves.” Id. ¶¶ 22-23. An agreement may be unconscionable, and therefore
unenforceable, based on one or both of these analyses. Id. ¶ 24.

{32} Borrower argues that the arbitration provision is substantively unconscionable,
because “the ‘escape hatch’ appeal clause is grossly unfair.” The district court found that
the “impermissible escape hatch” clause rendered the provision unconscionable, and that the
provision was unconscionable “as a matter of public policy.”

{33} “Contract provisions that unreasonably benefit one party over another are
substantively unconscionable.” Id. ¶ 25. To assess unconscionability, we examine 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.” Id. ¶ 22. An
“escape hatch” clause is one that allows a party to avoid arbitration or an arbitration decision
because it provides for appeal of a final arbitrated decision, reserves rights to judicial
remedies for certain claims for one party, or allows alteration of the arbitration provision
retroactively by one party. See Padilla v. State Farm Mut. Auto. Ins. Co., 2003-NMSC-011,
¶ 2, 133 N.M. 661, 68 P.3d 901; Cordova, 2009-NMSC-021, ¶ 25; Carey v. 24 Hour Fitness,
USA, Inc., 669 F.3d 202, 206 (5th Cir. 2012). Escape hatch clauses may be acceptable if
“truly equal in their effect on the parties.” Padilla, 2003-NMSC-011, ¶ 10. Borrower
contends that the escape hatch clause in Lender’s arbitration provision unfairly benefits

11
Lender over him because it provides for appeals only when the amount of a claim exceeds
$100,000 or grants or denies any claim for injunctive relief. We start by assessing whether
the clause unfairly benefits one party over the other. See Cordova, 2009-NMSC-021, ¶ 21.
We determine that it does.

{34} The clause in question reads as follows:

The arbitrator’s decision is final and binding, except for any right of appeal
provided by the FAA. However, if the amount of the Claim exceeds
$100,000 or grants or denies any claim for injunctive relief, any party can
appeal the award to a three-arbitrator panel administered by the
Administrator which shall reconsider any aspect of the initial award
requested by the appealing party.

Borrower contends that the clause is unfairly one-sided because, although it allows for
appeals of claims over $100,000 by both parties, Lender is more likely to appeal a claim that
meets this threshold. He contends that Padilla is controlling here. In Padilla, the Court held
that a clause that provided for appeal of an arbitration decision only when the claim
exceeded the minimum liability coverage required by the Mandatory Financial
Responsibility Act (MFRA), NMSA 1978, §§ 66-5-201 to -239 (1978, as amended through
2001), was unconscionable. See Padilla, 2003-NMSC-011, ¶ 2. The Court held that
“[a]lthough facially equal, such escape hatch clauses are not truly equal . . . because both
parties are bound by a low award, when an insurance company is unlikely to appeal, and not
bound when there is a high award, when an insurance company is more likely to appeal.”
Id. ¶ 10. The Court was concerned that the provision would have a “chilling effect” on an
insured’s rights under the MFRA, the purpose of which was to “plac[e] the insured in the
same position for the recovery of damages as he or she would have been in had the tortfeasor
carried liability insurance.” Id. ¶¶ 11-12. Thus, the Court’s decision rested on both
unfairness and public policy grounds. See id. ¶¶ 10, 13.

{35} We agree with Borrower that the clause in question here is analogous to that in
Padilla. There, as here, the arbitration provision reserves the right of appeal to claims above
a certain amount at which the drafter of the provision is more likely to appeal than the
consumer. The benefit to the drafter is apparent: small claims, over which it is unlikely to
initiate proceedings anyway, are required to be arbitrated, whereas it is free to litigate large
claims in any way it chooses. Although the consumer also has this option, the consumer’s
claims are more likely to fall below the threshold and, therefore, be subject to arbitration
only. The arbitration provision’s “escape hatch” clause is unfair because it benefits the
lender more than the borrower.

{36} Lender argues that Padilla is not controlling because Borrower had the option to
reject arbitration entirely within fifteen days of the date of signing the Agreement and
because the decision was based on policy grounds not present here. The arbitration
provision included a “right to reject” clause through which Borrower had the option to reject

12
the arbitration provision in its entirety by “mailing [Lender] a written rejection notice . . .
within fifteen (15) days after the date of [the] Agreement.” Lender argues that this “right to
reject” prevented the unfairness found in Padilla. Borrower counters that the “right to
reject” clause does not overcome the unfairness in the terms because (1) a borrower is
unlikely to exercise this right, or (2) it is illusory. We agree with Borrower that, in the
context of a title loan agreement arbitration provision, a borrower prepared to pay 360%
annual percentage rate and over $700 in fees for a $2400 loan is unlikely to exercise the
“right to reject,” particularly when it cannot be done as an option within the Agreement itself
but instead must be done in a separate writing. (We note that the Agreement included an
“optional” fee of $17. It is not clear how a borrower would exercise the apparent ability to
opt out of this fee, but the fact that it is noted as “optional” on the form itself demonstrates
that Lender, at least theoretically, was aware of ways to allow borrowers to exercise a “right
to reject” at the time of signing.).

{37} These arguments by the parties, however, miss the point. Although the relative
unlikelihood of Borrower exercising the right to reject (in fact, he did not reject it) is
important to an assessment of the fairness of the arbitration provision overall, in the context
of the “escape hatch” clause analysis it is insignificant. This is because it is the clause itself
that limits Borrower’s choices. The clause that formed the basis for the district court’s
decision is focused on the choices available to the parties on appeal. It is precisely because
the clause limits Borrower’s options while not limiting those of Lender to the same degree
that the clause is unconscionable.

{38} To the extent that Lender argues that Padilla is not controlling because its holding
was based on policy arguments specific to the MFRA, we disagree. The Padilla Court noted
that it was the essential unfairness of the terms that was contrary to public policy behind the
MFRA. See Padilla, 2003-NMSC-011, ¶ 10. Therefore, Padilla is not distinguishable from
this case on grounds that it is limited to motor vehicle insurance cases. Furthermore, in
Cordova, the Court applied the Padilla holding in the loan agreement context to conclude
that the defendant’s “one-sided arbitration provisions” were unconscionable because they
were “so unfairly and unreasonably one-sided that [they are] substantively unconscionable.”
Cordova, 2009-NMSC-021, ¶ 32.

{39} We note that the Agreement bears another resemblance to that in Cordova. In
Cordova, the contract term on which the case turned was a paragraph not included in the
arbitration provision. Id. ¶¶ 3-4. In addition to the “broadly stated” arbitration provision,
that paragraph provided for the lender’s remedies in case of default by the borrower. Id.
Under that clause, the lender reserved its “remedies in an action at law or in equity, including
but not limited to, judicial foreclosure or repossession. [The l]ender may also exercise its
other remedies provided by law (such as, . . . the right of self-help repossession under Article
9 of the Uniform Commercial Code.)” Id. ¶ 4 (internal quotation marks omitted). Under this
clause, in spite of the arbitration provision, “the lender alone had the exclusive and unlimited
alternative to seek any judicial remedies it might otherwise have available to it in law or in
equity.” Id. Although neither Borrower nor Lender raise this issue, the Agreement contains

13
an arbitration provision similar to that in Cordova. Under the clause, in the event of default,
Lender may “foreclose upon its lien and liquidate any [c]ollateral . . . according to law,
including by using self-help repossession [and] exercise all other rights, powers and
remedies given by law.” This clause is not as broadly worded as the clause in Cordova, nor
as specific regarding the judicial remedies reserved. See id. Nevertheless, this clause
reinforces Lender’s exclusion of repossession from the definition of a “claim” and appears
to reserve to it rights not available to Borrower.

{40} Finally, the parties disagree as to the appropriate remedy for unconscionability of the
appeal clause. Lender argues that we must follow Padilla, where the unconscionable clause
was severable, leaving the remainder of the provision intact. Borrower argues that the entire
arbitration provision must be struck under Cordova. When a term is unconscionable, a court
“may refuse to enforce the contract, or may enforce the remainder of the contract without
the unconscionable term, or may so limit the application of any unconscionable term as to
avoid any unconscionable result.” Padilla, 2003-NMSC-011, ¶ 15 (internal quotation marks
and citation omitted). The critical determination is whether a term is “central to the
arbitration scheme and cannot be severed without substantially altering the method of
dispute resolution contractually agreed on by the parties.” Rivera v. Am. Gen. Fin. Servs.,
Inc., 2011-NMSC-033, ¶ 56, 150 N.M. 398, 259 P.3d 803. In Padilla, the Court held that
an appeal provision was severable because it governed “only a post-award proceeding, not
the general conduct of the arbitration itself.” 2003-NMSC-011, ¶ 18 (internal quotation
marks and citation omitted). In contrast, in Cordova, the Court held that the default clause
was not severable because the “invalidity . . . involves the arbitration scheme itself, not just
the procedures for appeal.” 2009-NMSC-021, ¶ 40.

{41} We agree with Lender that the “escape hatch” clause at issue here is severable
because it addresses post-arbitration rights, not the conduct of arbitration itself. We hold,
therefore, that the appeal clause is severable, unconscionable, and unenforceable. The
remainder of the arbitration provision is unchanged. Because the appeal clause is severable,
we reverse the district court’s ruling that the entirety of the arbitration clause is
unconscionable and unenforceable.

3. Order in Which Claims Should Proceed

{42} Having concluded that the arbitration provision is unchanged except for the appeals
clause, we turn now to address the order in which claims should proceed. When some claims
are arbitrable and others not, as here, the question is whether and in what order the claims
should proceed. Chelsea Family Pharmacy, 567 F.3d at 1200. Federal and state policies
favoring arbitration require that we “rigorously enforce agreements to arbitrate, even if the
result is ‘piecemeal’ litigation[.]” Dean Witter Reynolds, Inc. v. Byrd, 470 U.S. 213, 221
(1985). Assuming under this rule that the breach of contract claim is required to be
arbitrated, there remains a question as to whether the nonarbitrable claims must be stayed
pending resolution of that claim. Chelsea Family Pharmacy, 567 F.3d at 1200. “Stay of the
entire proceeding is appropriate when resolution of the arbitrable claim will have a

14
preclusive effect on the nonarbitrable claim or when the arbitrable claims predominate the
lawsuit and the nonarbitrable claims are of questionable merit.” Id. (internal quotation marks
and citation omitted); see Rex, Inc. v. Manufactured Hous. Comm. of N.M., 119 N.M. 500,
505, 892 P.2d 947, 952 (1995) (holding that collateral estoppel applies to arbitration
decisions when the arbitration proceedings allowed “presentation of evidence and argument
substantially similar in form and scope to judicial proceedings” (internal quotation marks
and citation omitted)).

{43} In evaluating on appeal the question of whether nonarbitrable claims should be
stayed pending resolution of arbitrable claims, courts have taken two paths. In some cases,
the appellate court made a determination as to which claims should be stayed. See Chelsea
Family Pharmacy, 567 F.3d at 1200 (“Because the two claims in this case are distinct and
unrelated, [the plaintiff’s] arbitrable . . . claim cannot have a preclusive effect on the
nonarbitrable . . . claim; one does not ‘predominate’ over the other. [I]t would be
inappropriate to stay the [nonarbitrable] claim pending resolution of the [arbitrable] claim.”).
In other cases, the appellate court remanded to the district court for “determination of
whether a resolution of [the] arbitrable claims will have a preclusive effect on the
nonarbitrable claims that remain subject to litigation.” Riley Mfg. Co. v. Anchor Glass
Container Corp., 157 F.3d 775, 785 (10th Cir. 1998).

{44} Here, the arbitrable claim does not predominate the lawsuit; it is only one of twelve
claims. Whether the breach of contract claim may have a preclusive effect on the other
claims, however, is not as clear-cut. Applicability of collateral estoppel requires factual
findings that “(1) the party against whom collateral estoppel is asserted must have been a
party in . . . the original action; and (2) the two cases must have concerned the same ultimate
issue or fact, which was (a) actually litigated, and (b) necessarily determined in the first
suit.” DeLisle v. Avallone, 117 N.M. 602, 605, 874 P.2d 1266, 1269 (Ct. App. 1994).
Furthermore, because arbitration proceedings often have limited “procedural safeguards, the
court should be particularly vigilant in examining whether the arbitration proceeding
provided the parties with a full and fair opportunity to litigate the issues.” Rex, 119 N.M.
at 505, 892 P.2d at 952. The district court is in the best position to hear argument and make
factual findings on these issues. See Wood v. Millers Nat’l Ins. Co., 96 N.M. 525, 529, 632
P.2d 1163, 1167 (1981) (discussing the district court’s balancing of judicial economy and
the rights of the parties with respect to a stay). Therefore, we remand to the district court for
determination of whether nonarbitrable claims should be stayed pending resolution of
arbitrable claims.

III. CONCLUSION

{45} We affirm in part, reverse in part, and remand for further proceedings consistent with
this Opinion. The district court’s ruling as to the scope of the arbitration provision is
affirmed as to all claims except the breach of contract claim. With the exception of his
breach of contract claim, Borrower’s claims are not subject to the arbitration provision of
the Agreement because they are not within the scope of issues contemplated by the parties

15
when they agreed to arbitrate disputes related to the Agreement and because it is against
public policy to require claims so extraneous to the purpose of the Agreement to be subject
to its requirements. The district court’s ruling as to the unconscionability of the “escape
hatch” clause is affirmed, but we reverse the decision to strike the entirety of the arbitration
provision. Instead, that clause alone is struck and the remainder of the arbitration provision
is unchanged. We remand to the district court for determination of whether the nonarbitrable
claims should be stayed pending resolution of the breach of contract claim.

{46} IT IS SO ORDERED.

MICHAEL D. BUSTAMANTE, Judge

WE CONCUR:

RODERICK T. KENNEDY, Judge

LINDA M. VANZI, Judge

Topic Index for Clay v. N.M. Title Loans, Inc., No. 31,356

APPEAL AND ERROR
Standard of Review

CIVIL PROCEDURE
Arbitration

COMMERCIAL LAW
Uniform Arbitration Act

CONTRACTS
Ambiguous Contract
Breach
Unconscionable

NEGLIGENCE
Breach of Duty
Negligence
Negligence Per Se

16
Negligent Hiring

REMEDIES
Arbitration

TORTS
Emotional Distress, Infliction of
Intentional Torts
Loss of Consortium
Negligence
Negligent Hiring

17