Arbitration Clause in Reverse Mortgage Agreement Is Unconscionable

A California Appeals Court denies a petition to compel arbitration in a suit over a reverse mortgage loan agreement, finding the arbitration clauses in the agreement to be unconscionable and unenforceable. Flores v. Transamerica HomeFirst (Cal. Ct. App., 1 Dist., No. A093409, Nov. 7, 2001).

In February 1997, Donald and Helen Flores, then ages 80 and 76, obtained a reverse mortgage on their home from Transamerica HomeFirst, Inc. When the couple sold their home two years later, the Floreses were shocked to discover that they owed not only the $72,018 in principal they had borrowed plus interest on the principal but also another $75,000 in "contingent interest," which represented 50 percent of the market value appreciation over the two-year loan period. The couple paid under protest and then filed suit claiming unfair business practices, violations of the Consumer Legal Remedies Act, unconscionability, fraud, unlawful prepayment penalties, and bad faith.

HomeFirst petitioned to compel arbitration based on provisions in the loan document requiring the Floreses to arbitrate. The same document gave HomeFirst the right to proceed by judicial or non-judicial foreclosure, by self-help remedies such as set-off, and by injunctive relief to obtain appointment of a receiver, even while arbitration was in process. In effect, the mandatory arbitration provisions applied to claims of the borrower against HomeFirst but not vice-versa. The trial court ruled that the arbitration provisions were unconscionable pursuant to the decision of the California Supreme Court in Armendariz v. Foundation Health PsychCare Services, Inc. (2000) 24 Cal.4th 83.

The California Court of Appeal, First District, affirms. The court rules that the contract is one of adhesion and thus procedurally unconscionable and that the unilateral obligation to arbitrate is so one-sided as to be substantively unconscionable. The court also rejects HomeFirst's claim that the Federal Arbitration Act precludes a determination under California law that the arbitration agreement is unenforceable. Finally, the court declines to simply sever the provisions that reserve from arbitration the remedies of foreclosure, set-off, and appointment of a receiver, finding that "no single provision can be stricken to remove the unconscionable taint."

For the full text of this decision, go to: https://caselaw.findlaw.com/ca-court-of-appeal/1300024.html

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