SYLLABUS

(This syllabus is not part of the opinion of the Court. It has been prepared by the Office of the Clerk for the convenience of the reader. It has been neither reviewed nor approved by the Supreme Court. Please note that, in the interests of brevity, portions of any opinion may not have been summarized).

Delta Funding Corp. v. Harris (A-44-05)

[NOTE: This is a companion case to Muhammad v. County Bank of Rehoboth Beach, also decided today.]

Argued February 14, 2006 -- Decided August 9, 2006

LaVECCHIA, J., writing for a majority of the Court.

This matter requires the Supreme Court to consider a question of law certified by the United States Court of Appeals for the Third Circuit: whether an arbitration agreement found in a consumer loan contract is unconscionable, in whole or in part, under New Jersey contract law. To answer that question, the Court begins with the facts as presented by the federal court. The Court does not resolve the factual differences that exist between the parties in this dispute.

Delta Funding Corp. entered into a mortgage loan contract with Alberta Harris, a 78-year-old woman with a sixth grade education and little financial sophistication, whose sole source of income was social security payments. Delta later assigned the loan to Wells Fargo. The $37,700 loan had an annual percentage rate of 14% and was secured by a mortgage on Harris’s home. At the time of the loan, Harris owned her home outright and had lived in it for more than 30 years.

An arbitration agreement contained in the loan contract allows either party to elect binding arbitration as the forum to resolve certain claims; actions for foreclosure and similar actions were excluded from arbitration. The arbitration agreement provides that no claims shall be arbitrated “on a class action or class-wide basis.” In respect of costs, the agreement provides that that “the arbitrator will decide who will ultimately be responsible for paying the filing, administrative and/or hearing fees in connection with the arbitration”; that “unless inconsistent with applicable law,” each party shall be responsible for it own fees for attorneys, experts and witnesses regardless of which party prevails; and that the costs of any appeal will be the responsibility of the appealing party regardless of the outcome of the appeal. The agreement also states that if any portion of the agreement is deemed invalid or unenforceable, the remaining portions of the agreement shall remain enforceable.

When Harris was unable to make the loan payments, Wells Fargo instituted a foreclosure action in New Jersey Superior Court. Harris filed an answer and counterclaim, as well as a third-party complaint against Delta that alleged violations of the Truth in Lending Act (TILA), the Real Estate Settlement Procedures Act (RESPA), and the New Jersey Consumer Fraud Act (CFA). Delta filed a petition in federal district court seeking to compel arbitration of Harris’s claims against Delta. Harris responded by filing a motion for summary judgment contending that the arbitration agreement was unconscionable and unenforceable. The federal district court denied Harris’s motion for summary judgment and granted Delta’s motion to compel arbitration. The state court then dismissed Harris’s third-party complaint against Delta.

Harris appealed to the United States Court of Appeals for the Third Circuit. The Third Circuit issued a certification order to this Court pursuant to Rule 2:12A-3. The Supreme Court granted certification of the following question: “Is the arbitration agreement at issue, or any provision thereof, unconscionable under New Jersey law, and, if so, should such provision or provisions be severed?”

In support of Harris, amici curiae briefs were received by Legal Services of New Jersey, the Attorney General on behalf of the New Jersey Division of Consumer Affairs, the American Civil Liberties Union of New Jersey, the New Jersey Institute for Social Justice, New Jersey Citizen Action, the New Jersey Public Policy Research Institute, the National Association of Consumer Advocates, AARP, the Center for Responsible Lending, and Seton Hall School of Law Center for Social Justice. In support of Delta, amici briefs were filed by the United States Chamber of Commerce, the New Jersey Business and Industry Association, and the American Financial Services Association.

HELD: The ambiguous provisions of the arbitration agreement contained in this mortgage loan contract may be unconscionable and unenforceable if they are interpreted and applied by an arbitrator in a manner that is unfavorable to the consumer, as described in the Court’s opinion.

1. In answering the question of state law presented, the Court’s inquiry is limited. It is the role of an arbitrator -- not the courts -- to interpret ambiguous provisions of an arbitration agreement. Thus, to the extent that the unconscionability of an ambiguous provision depends on how the arbitrator interprets the provision, the Court cannot determine whether the provision is actually unconscionable. For purposes of answering the certified question, the Court addresses how the ambiguous provisions, if interpreted and applied in a manner detrimental to Harris, could be unconscionable. (pp. 7-8)

2. Based on state law principles that apply to contracts generally, a court can refuse to enforce an arbitration agreement if it is found to be unconscionable. Pursuant to Rudbart v. North Jersey District Water Supply Commission, 127 N.J. 344 (1992), that determination requires a case-by-case, fact-sensitive examination into (1) the subject matter of the contract, (2) the parties’ relative bargaining positions, (3) the degree of economic compulsion motivating the “adhering” party, and (4) the public interests affected by the contract. The procedural unconscionability of a consumer contract of adhesion is taken into account when the court considers the public interests affected by the contract. (pp. 9-11)

3. A term in a contract of adhesion that could be interpreted by an arbitrator to force a consumer to pay all the costs of mandatory arbitration is unconscionable, if interpreted and applied in that manner, because it would effectively deter the vindication of the statutory rights of the consumer and others who are similarly situated. (pp. 12-16)

4. The CFA and TILA mandate an award of attorneys’ fees and costs to prevailing parties; such fees and costs plainly are recoverable by Harris under the arbitration agreement. The clause that requires the parties to bear their own fees and costs, no matter who prevails, “[u]nless inconsistent with applicable law,” suggests that the arbitrator may not have the power to award fees when that statutory remedy is merely discretionary. To the extent that this provision is interpreted to prevent Harris from recovering the discretionary fees and costs available under RESPA, it is unconscionable. (pp. 16-17)

5. The clause in the arbitration agreement that provides that the appealing party will bear the costs of the appeal, “regardless of the outcome of the appeal,” also is unconscionable to the extent that it would bar Harris from being awarded costs if she prevailed on her appeal. Even if Harris did not prevail on an appeal, this provision would be unconscionable if she were required to incur the entire appeals cost. The Court reaches this conclusion for the same reasons it finds that a provision forcing a consumer to pay all the hearing-level costs of arbitration would be unconscionable. (pp. 17-18)

6. If an arbitrator were to interpret the disputed provisions in a manner that would render them unconscionable, the remainder of the arbitration agreement can be enforced after severing the unconscionable provisions. (pp. 18-19)

7. Class arbitration waivers are not unconscionable per se. Harris is not even seeking to bring a class claim. Because of the substantial damages involved, including statutory attorneys’ fees and costs if she prevails, Harris has adequate incentive to bring her claim as an individual action. The class-arbitration waiver in this case is enforceable. (pp. 20-21)

8. Harris must arbitrate her third-party claims against Delta even though they are similar to defenses she has raised against Wells Fargo in the state court foreclosure proceeding. Although arguing similar claims in two forums may be burdensome, it is not unconscionable. The burden is alleviated by the fact that attorneys’ fees and costs are available to Harris under the CFA if she successfully asserts a CFA-based defense in the foreclosure action. (pp. 21-24)

9. Harris’s argument that other clauses of the arbitration agreement are unconscionable, such as the provisions related to discovery and confidentiality, are a challenge to arbitration generally and as such are not persuasive. (pp.24-25)

JUSTICE ZAZZALI, concurring in part and dissenting in part, agrees that certain provisions in the arbitration agreement are unconscionable. However, he would additionally hold that the provisions creating a bifurcated claims structure (requiring certain claims to be brought in arbitration while others must be brought in court) and the class-action waiver are unconscionable. Even if he were to accept the majority’s view, he would find that the objectionable provisions cannot be severed and, as a whole, the arbitration agreement is unconscionable.

JUSTICE RIVERA-SOTO, dissenting, would dismiss the certification of the question of law presented as improvidently granted, as the issue of unconscionability is one that depends on the specific facts of the case.

CHIEF JUSITCE PORITZ and JUSTICES LONG and WALLACE join in JUSTICE LaVECCHIA’s opinion. JUSTICE ZAZZALI filed a separate opinion concurring in part and dissenting in part. JUSTICE RIVERA-SOTO filed a separate, dissenting opinion. JUSTICE ALBIN did not participate.

SUPREME COURT OF NEW JERSEY

A- 44 September Term 2005

DELTA FUNDING CORPORATION,

Plaintiff-Respondent,

v.

ALBERTA HARRIS,

Defendant-Appellant.

Argued February 14, 2006 – Decided August 9, 2006

On certification of a Question of Law to United States Circuit Court of Appeals for the Third Circuit.

Madeline L. Houston argued the cause for appellant (Houston & Totaro, attorneys).

Martin C. Bryce, Jr. argued the cause for respondent (Ballard Spahr Andrews & Ingersoll, attorneys).

Baher Z. Azmy argued the cause for amici curiae American Civil Liberties Union of New Jersey, The New Jersey Institute for Social Justice, New Jersey Citizen Action, The New Jersey Public Policy Research Institute, The National Association of Consumer Advocates, AARP, The Center for Responsible Lending, and Seton Hall School of Law Center for Social Justice (Mr. Azmy, Seton Hall University School of Law Center for Social Justice Civil Litigation Clinic, attorney; Mr. Azmy and Jessica Yager, Joseph Faulkner and Melissa Kelly, on the brief).

Henry P. Wolfe argued the cause for amicus curiae Legal Services of New Jersey (Melville D. Miller, Jr., President, attorney; Mr. Wolfe, Mr. Miller, David G. McMillin, Marcia E. Suarez, Marcie B. Harrison, Kristin A. Mateo, Carrie Ferraro and Dawn K. Miller, on the brief).

Jeffrey C. Burstein, Assistant Attorney General, argued the cause for amici curiae Attorney General of New Jersey and The New Jersey Division of Consumer Affairs (Zulima V. Farber, Attorney General, attorney; Mr. Burstein and Carol G. Jacobson, on the brief).

David M. Gossett, a member of the Illinois and District of Columbia bars, argued the cause for amicus curiae Chamber of Commerce of the United States of America (Drinker Biddle & Reath, attorneys; Mr. Gossett, Evan M. Tager, a member of the New York and District of Columbia bars, Robin S. Conrad, a member of the District of Columbia bar, Amar D. Sarwal, a member of the District of Columbia bar, of counsel; Andrew B. Joseph, on the brief).

Mark L. Rienzi, Christopher Lipsett, a member of District of Columbia and New York bars, Eric J. Mogilnicki, a member of District of Columbia and Massachusetts bars and Kelly Thompson Cochran, a member of the District of Columbia and Virginia bars, submitted a brief on behalf of amicus curiae American Financial Services Association (Mr. Rienzi, attorney).

Marvin J. Brauth and Jeffrey J. Brookner submitted a brief on behalf of amicus curiae New Jersey Business and Industry Association (Wilentz, Goldman & Spitzer, attorneys; Mr. Brauth, of counsel; Mr. Brauth and Mr. Brookner, on the brief).

JUSTICE LaVECCHIA delivered the opinion of the

Court.

This matter presents a question of law certified and submitted by the United States Court of Appeals for the Third Circuit pursuant to the procedures set forth in Rule 2:12A. We have been asked whether an arbitration agreement found in a consumer loan contract is unconscionable, in whole or in part, under New Jersey contract law. Because many of the agreement’s provisions are ambiguous, interpretation of the contract by an arbitrator is necessary before there can be a final resolution of this dispute. However, to the extent that the procedural posture of this matter permits, we hold that several parts of the arbitration agreement may be unenforceable based on unconscionability doctrine if interpreted by an arbitrator unfavorably to the consumer as described herein.

I.

We begin with the facts as presented by the federal court, although we acknowledge the presence of factual disputes between the parties. R. 2:12A-4. The purpose of the certification process is to answer the question of law submitted pursuant to Rule 2:12A, not to resolve those factual differences. See R. 2:12A-1.

Plaintiff Delta Funding Corp. (Delta) is a New York mortgage lender that extends loans primarily to borrowers in the sub-prime lending market. In December 1999, Delta entered into a mortgage loan contract with defendant Alberta Harris, a seventy-eight-year-old woman with only a sixth-grade education and little financial sophistication. The $37,700 loan was secured by a mortgage on Harris’s home in Newark.1 The loan had an annual percentage rate of fourteen percent. At the time, Harris owned her home outright and had lived in it for more than thirty years. Delta subsequently assigned the loan to Wells Fargo as trustee.

The loan contains an arbitration agreement that allows either party to elect binding arbitration as the forum to resolve covered claims. The agreement excludes from arbitration “any action to effect a judicial or non-judicial foreclosure or to establish a deficiency judgment,” as well as a number of similar actions. The agreement provides that “[t]here shall be no right or authority for any Claims to be arbitrated on a class action or class-wide basis.” In respect of costs, the agreement further provides that

[a]t your written request, we will consider in good faith making a temporary advance of all or part of the filing, administrative and/or hearing fees in connection with any Claim you initiate as to which you or we seek arbitration. At the conclusion of the arbitration, the arbitrator will decide who will ultimately be responsible for paying the filing, administrative and/or hearing fees in connection with the arbitration. Unless inconsistent with applicable law, each party shall bear the expense of that party’s attorneys’, experts’ and witness fees, regardless of which party prevails in the arbitration.

The agreement also provides for an appeal procedure within arbitration and states that “[t]he costs of . . . [any such] appeal will be borne by the appealing party regardless of the outcome of the appeal.”

Under the agreement, Harris is permitted to select the American Arbitration Association (AAA), J.A.M.S./Endispute (JAMS), or the National Arbitration Forum (NAF) as the forum for any claim. The agreement also contains a severability clause, which states that “[i]f any portion of this Agreement is deemed invalid or unenforceable under any law or statute consistent with the [Federal Arbitration Act], it shall not invalidate the remaining portions of this Agreement or the Credit Transaction, each of which shall be enforceable regardless of such invalidity.”

When Harris, whose only source of income was Social Security payments, was unable to make the required loan payments, Wells Fargo instituted a mortgage foreclosure action in New Jersey Superior Court. Harris responded with an answer and counterclaim, as well as a third-party complaint against Delta, alleging violations of the Truth in Lending Act (TILA), 15 U.S.C. §§ 1601 to -67, the Real Estate Settlement Procedures Act (RESPA), 12 U.S.C. §§ 2601 to -17, and the New Jersey Consumer Fraud Act (CFA), N.J.S.A. 56:8-1 to -135. Thereafter, Delta filed a petition in federal district court seeking to compel arbitration of Harris’s affirmative claims against Delta. Harris filed a motion for summary judgment contending that the arbitration agreement was unconscionable and unenforceable. In March 2004, the district court denied that motion for summary judgment and granted Delta’s motion to compel arbitration. Delta Funding Corp. v. Harris, 396 F. Supp.2d 512 (D.N.J. 2004). The state court presiding over the foreclosure action then dismissed Harris’s third-party complaint against Delta, which had been held in abeyance.

Harris appealed to the United States Court of Appeals for the Third Circuit. A three-judge panel of the Third Circuit issued a petition order to this Court pursuant to Rule 2:12A-3, in which the panel certified the question: “Is the arbitration clause at issue in this case, or any provision thereof, unconscionable under New Jersey law, N.J. Stat. Ann. § 12A:2-302, and if so, should such provision or provisions be severed.” Delta Funding Corp. v. Harris, No. 04-1951, 2 005 U.S. App. LEXIS 24531 (3d Cir. July 27, 2005). Harris submitted a brief urging that we grant certification, but asking that we remove the reference to N.J.S.A. 12A:2-302 because her unconscionability claim is based on the common law. See R. 2:12A-2.

We granted certification, reformulating the question as follows: “Is the arbitration agreement at issue, or any provision thereof, unconscionable under New Jersey law, and, if so, should such provision or provisions be severed?” 185 N.J. 255 (2005). Briefs were received from the parties; in addition, numerous groups filed submissions as friends of the court. In support of Harris, amici briefs were received from Legal Services of New Jersey, the Attorney General on behalf of the New Jersey Division of Consumer Affairs, the American Civil Liberties Union of New Jersey, the New Jersey Institute for Social Justice, New Jersey Citizen Action, the New Jersey Public Policy Research Institute, the National Association of Consumer Advocates, AARP, the Center For Responsible Lending, and Seton Hall School of Law Center for Social Justice. The United States Chamber of Commerce, the New Jersey Business and Industry Association, and the American Financial Services Association filed amicus briefs in support of Delta.

II.

We address first the procedural posture of this matter. Because we have been asked by the Third Circuit to answer a discrete question of state law, our inquiry is limited. Under federal arbitration law, it is ordinarily the role of an arbitrator and not the courts to interpret ambiguous provisions of an arbitration agreement. Green Tree Fin. Corp. v. Bazzle, 539 U.S. 444, 451-53, 123 S. Ct. 2402, 2407, 156 L. Ed.2d 414, 422-23 (2003) (plurality opinion); PacifiCare Health Sys., Inc. v. Book, 538 U.S. 401, 406-07, 123 S. Ct. 1531, 1535-36, 155 L. Ed.2d 578, 584 (2003). That general rule is especially applicable where the arbitration agreement contains “sweeping language concerning the scope of the questions committed to arbitration.” Bazzle, supra, 539 U.S. at 453, 123 S. Ct. at 2407, 156 L. Ed. 2d at 4223. Most of the disputed provisions in the instant arbitration agreement are, to some degree, ambiguous. To the extent that the unconscionability of those provisions ultimately turns on how the arbitrator resolves the ambiguities, we are unable to determine whether the provisions are, in fact, unconscionable.2 For purposes of answering the question of state law posed by the Third Circuit, we address how the ambiguous provisions, if interpreted and applied in a manner detrimental to Harris, could be unconscionable. In doing so, we identify general principles of New Jersey contract law that the Third Circuit and the arbitrator can then apply to the agreement.

III.

In today’s companion decision, Muhammad v. County Bank of Rehoboth Beach, ___ N.J. ___ (2006) (slip op. at ___), we recognized the basic premise that when a party to an arbitration agreement argues that the agreement is unconscionable and unenforceable, that claim is decided based on the same state law principles that apply to contracts generally. The Federal Arbitration Act (FAA), 9 U.S.C. §§ 1 to -16, expresses a “liberal federal policy favoring arbitration agreements.” Moses H. Cone Mem’l Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 24, 103 S. Ct. 927, 941, 74 L. Ed.2d 765, 785 (1983). New Jersey’s public policy similarly favors enforcement of valid agreements to arbitrate. See Martindale v. Sandvik, Inc., 173 N.J. 76, 83-86 (2002) (citing New Jersey’s Arbitration Act, N.J.S.A. 2A:24-1 to -11). The FAA, however, permits courts to refuse enforcement of an arbitration agreement to the extent “such grounds . . . exist at law or in equity for the revocation of any contract.” 9 U.S.C. § 2. Generally recognized contract defenses, such as duress, fraud, and unconscionability, can justify judicial refusal to enforce an arbitration agreement. Doctor’s Assocs., Inc. v. Casarotto, 517 U.S. 681, 686-87, 116 S. Ct. 1652, 1656, 134 L. Ed.2d 902, 908-09 (1996); Muhammad, supra, ___ N.J. at ___ (slip op. at ___); Martindale, supra, 173 N.J. at 85-86.

The defense of unconscionability, specifically, calls for a fact-sensitive analysis in each case, even when a contract of adhesion is involved. Muhammad, supra, ___ N.J. at ___ (slip op. at ___). This Court has recognized that contracts of adhesion necessarily involve indicia of procedural unconscionability. Id. at ___ (slip op. at ___). We have identified, therefore, four factors as deserving of attention when a court is asked to declare a contract of adhesion unenforceable. Rudbart v. N. Jersey Dist. Water Supply Comm’n, 127 N.J. 344, 356, cert. denied, 506 U.S. 871, 113 S. Ct. 203, 121 L. Ed.2d 145 (1992).

[I]n determining whether to enforce the terms of a contract of adhesion, [we] look[] not only to the take-it-or-leave-it nature or the standardized form of the document but also to [(1)] the subject matter of the contract, [(2)] the parties’ relative bargaining positions, [(3)] the degree of economic compulsion motivating the “adhering” party, and [(4)] the public interests affected by the contract.

[Ibid.]

The Rudbart factors focus on the procedural and substantive aspects of a contract of adhesion in order to determine whether the contract is so oppressive, Martindale, supra, 173 N.J. at 90, or inconsistent with the vindication of public policy, Muhammad, supra, ___ N.J. at ___ (slip op. at ___), that it would be unconscionable to permit its enforcement. Courts generally have applied a sliding-scale approach to determine overall unconscionability, considering the relative levels of both procedural and substantive unconscionability. See Sitogum Holdings, Inc. v. Ropes, 352 N.J. Super. 555, 565-66 (Ch. Div. 2002); see also Muhammad, supra, ___ N.J. at ___ n.2 (slip op. at 13 n.2) (noting appropriateness of sliding-scale analysis for contracts of adhesion).

In this matter, Harris alleges certain facts surrounding her signing of the contract that suggest a high level of procedural unconscionability. We do not resolve those disputed facts, nor do we rely on them in deciding the unconscionability question before us. It is sufficient to note that the arbitration agreement is in a consumer contract of adhesion where Delta, as a financial institution, possessed superior bargaining power and was the more sophisticated party in the transaction. Delta Funding Corp., supra, 396 F. Supp. 2d at 516. Although that level of procedural unconscionability does not, by itself, render the arbitration agreement unenforceable, it must be taken into account as we turn to the “public interests affected by the contract.” Rudbart, supra, 127 N.J. at 356.

IV.

In addition to Harris’s broad assertion that the arbitration agreement as a whole is unconscionable and unenforceable, an argument that we find unpersuasive for reasons explained infra, several discrete provisions of the agreement are alleged to raise unconscionability concerns because they have the effect of limiting the substantive statutory rights and remedies available to a consumer. Related to that assertion is the claim that it is unconscionable for an arbitration agreement to include a “cost-shifting” provision that allows an arbitrator unfettered discretion to allocate the entire cost of arbitration to a consumer. Because we find that the provisions relevant to those claims can be applied in a manner that is unconscionable and unenforceable under New Jersey law, we address them first in responding to the Third Circuit’s inquiry.

A. Hearing-level costs

The arbitration agreement states that “[a]t the conclusion of the arbitration, the arbitrator will decide who will ultimately be responsible for paying the filing, administrative and/or hearing fees in connection with the arbitration.” It is beyond dispute that Harris would be entitled to costs if she prevailed on her CFA or TILA claims. An award of attorney’s fees and costs to prevailing plaintiffs is mandatory under both statutes. N.J.S.A. 56:8-19; 15 U.S.C. § 1640(a)(3). If, however, Harris did not prevail in arbitration (or if she prevailed only on her RESPA claim and the arbitrator declined to make a discretionary award of costs as allowed under RESPA, 12 U.S.C. § 2607(d)(5)), then Harris could be forced to bear the entire cost of the arbitration.3

It is well understood that fee-shifting provisions can deter a litigant from pursuing a claim. See Dare v. Freefall Adventures, Inc., 349 N.J. Super. 205, 221-24 (App. Div.) (refusing to enforce mandatory fee-shifting provision against a recreational sports participant), certif. denied, 174 N.J. 43 (2002); N.J. Coal. of Health Care Prof’ls, Inc. v. N.J. Dep’t of Banking and Ins., Div. of Ins., 323 N.J. Super. 207, 263 (App. Div.) (noting that “imposing counsel fees in favor of an insurance company may chill resort to the dispute resolution process”), certif. denied, 162 N.J. 485 (1999). The prospect of having to shoulder all the costs of arbitration could chill Harris and similarly situated consumers from pursuing their statutory claims through mandatory arbitration.4 Other courts that have analyzed the allocation of arbitration costs under federal law, have taken into consideration the possible “‘chilling effect’” that certain cost provisions can have both on an individual claimant and on similarly situated litigants. Morrison v. Circuit City Stores, Inc., 317 F.3d 646, 657-67 (6th Cir. 2003) (finding cost-splitting provision unenforceable); see also Scovill v. WSYX/ABC, Sinclair Broad. Group, Inc., 425 F.3d 1012, 1019-21 (6th Cir. 2005) (finding cost-shifting provision unenforceable under Morrison).

Although the public policy of our State would permit an arbitration agreement to shift costs and attorney’s fees to a consumer who brings “frivolous” or “bad faith” claims, see N.J.S.A. 2A:15-59.1 (recognizing public policy against frivolous and bad faith litigation and establishing penalties for same), no such limitation is evident in the cost-shifting provision applicable to Harris. Delta claims that arbitrators rarely, if ever, shift costs to a consumer. However, contract unconscionability must be decided based on the contract as written because the language of the agreement is what consumers must consider when assessing whether to pursue a statutory-rights claim against Delta.5 Delta drafted the arbitration agreement giving the arbitrator unfettered discretion to shift the entire cost of arbitration to Harris. The agreement as written, and as yet uninterpreted by an arbitrator, could force Harris to bear the risk that she will be required to pay all arbitration costs. That risk is unconscionable in that it is a deterrent to the vindication of her statutory rights.

The fact that, under the agreement’s terms, Delta will consider, in “good faith,” advancing any costs to Harris does not alter our analysis. Even if Delta elected to advance the costs of the arbitration to Harris, the advance is merely a loan. Harris ultimately could still be saddled with the entire cost of arbitration. That creates a substantial and unreasonable deterrent to the vindication of the statutory rights of Harris and others who are similarly situated. A contract of adhesion that contains such a term, which effectively would deter the vindication of a consumer’s statutory rights, would be unconscionable and unenforceable if interpreted and applied in the manner described above.

B. Attorney’s fees

Harris’s arbitration agreement states that “[u]nless inconsistent with applicable law, each party shall bear the expense of that party’s attorneys’, experts’ and witness fees, regardless of which party prevails in the arbitration.” “‘[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.’” Martindale, supra, 173 N.J. at 93 (quoting Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614, 628, 105 S. Ct. 3346, 3354, 87 L. Ed.2d 444, 456 (1985)). Although this requirement has its genesis in federal arbitration law, it is equally applicable in determining unconscionability under New Jersey law. Just as defendants may not enforce exculpatory waivers that seek a release from a statutorily imposed duty, McCarthy v. NASCAR, Inc., 48 N.J. 539, 543 (1967), defendants may not limit a consumer’s ability to pursue the statutory remedy of attorney’s fees and costs when it is available to prevailing parties. See Muhammad, supra, ___ N.J. at ___ (slip op. at ___) (finding class-arbitration bar that effectively acts as exculpatory waiver unconscionable).

The CFA and TILA provide mandatory attorney’s fees and costs to prevailing parties. Plainly, those remedies are recoverable under Harris’s arbitration agreement. On the other hand, under RESPA whether a prevailing party will be awarded attorney’s fees and costs is discretionary. The arbitration agreement’s clause that requires parties to bear their own fees and costs, no matter who prevails, “[u]nless inconsistent with applicable law,” suggests that the arbitrator may not have the power to award attorney’s fees when that statutory remedy is merely discretionary.6 The possibility of an award of fees to a prevailing party serves to encourage pursuit of RESPA’s protections. To the extent that this provision in Harris’s consumer contract would prevent her from recovering discretionary attorney’s fees and costs under RESPA, it is unconscionable.

C. Appeal costs

The arbitration agreement states that

if the amount in controversy exceeds $50,000, any party can appeal the award to a three-arbitrator panel administered by the same arbitration administrator which shall reconsider de novo any aspect of the initial award requested by the appealing party. . . . The costs of such an appeal will be borne by the appealing party regardless of the outcome of the appeal.

[(Emphasis added).]

Like the attorney’s fees provision discussed above, the appeals provision is unconscionable to the extent that it would bar Harris from being awarded costs if she prevailed on her appeal.7 If Harris appeals and loses, she has no statutory entitlement to the remedy of costs. As such, the fact that the appeals provision requires her to bear her costs in that circumstance does not abridge Harris’s substantive statutory remedies. To the extent that Harris would be required to incur the entire costs of taking an appeal, however, the appeals provision would be unconscionable. The same conclusion in respect of the unconscionability of the hearing-level costs provision applies to the allocation of costs related to appeals available within the arbitral forum.

D. Post-interpretation by arbitrator

As noted, the arbitration provisions are subject to interpretation, but only by an arbitrator. Once that occurs, if the agreement is held to permit the shifting of arbitration costs to Harris, then the unconscionable cost-shifting provision must be severed from the agreement. In that eventuality, Delta, which previously offered to pay all of Harris’s arbitration costs, would be responsible for the entire costs of arbitration. Cf. Jones v. Household Realty Corp., No. C-3-03-280, 2 003 U.S. Dist. LEXIS 25882 (S.D. Ohio Dec. 17, 2003) (slip op. at *16-18) (finding cost-splitting provision to be unconscionable and severing offending provision). In Jones, the court similarly ordered the defendant to pay “the entire cost of arbitration” based, in part, on the defendant’s stipulated offer to pay such costs. Id. at *17. Because a severance of the potentially cost-shifting provision from Harris’s agreement will not result in a cost-splitting arrangement, we need not address whether a cost-splitting arrangement would be unconscionable. We do, however, note the concerns that courts have expressed over cost-splitting arrangements. See Morrison, supra, 317 F. 3d at 657-67.

That said, if an arbitrator were to interpret all of the disputed provisions in a manner that would render them unconscionable, we have no doubt that those provisions could be severed and that the remainder of the arbitration agreement would be capable of enforcement. The arbitration agreement’s broad severability clause supports that result.

V.

Harris advances several other arguments in support of her claim of unconscionability. We dispense with those arguments, beginning with her criticism of the class-arbitration waiver, and then addressing her broad-based challenges that are, in our view, essentially attacks on the general nature of arbitration.

A.

In respect of the arbitration agreement’s class-arbitration waiver, we note initially that Harris is not even seeking to bring a class claim. Furthermore, under New Jersey law, the class-arbitration waiver in her arbitration agreement is not unconscionable per se. In Muhammad, supra, we found a class-arbitration waiver unconscionable in the context of low-value consumer claims. ___ N.J. at ___ (slip op. at ). Muhammad is distinguishable from the instant case, as Harris is seeking more than $100,000 in damages, and it is unclear whether that includes application of statutory multipliers. The plaintiff’s potential damages in Muhammad, supra, including statutory damage multipliers, totaled less than $600 in a complicated matter. ___ N.J. at ___ (slip op. at ___). Harris’s claim is not the type of low-value suit that would not be litigated absent the availability of a class proceeding. Harris has adequate incentive to bring her claim as an individual action. Not only are her damages substantial, but the fact that her home is at stake in the foreclosure proceeding makes it likely that she would contact an attorney. The same cannot be said of low-value claims where individuals have little, if any, incentive to seek out an attorney. Moreover, all of the statutes under which Harris seeks relief provide for attorney’s fees and costs to prevailing plaintiffs. Those remedies, in combination with the substantial damages that Harris seeks, render the class-arbitration waiver enforceable in the context of this litigation. See Muhammad, supra, ___ N.J. at ___ n.5 (slip op. at ___) (directing courts to consider the availability of attorney’s fees when “substantial damages” are at stake).

B.

The arbitration agreement excludes any foreclosure actions that may be brought against Harris. Thus, foreclosure must proceed in court pursuant to the arbitration agreement. Indeed, that is hardly surprising in that the foreclosure of mortgages is a uniquely judicial process. “The broad statutory framework set forth in N.J.S.A. 2A:50-1 to -68, establishes the basis for foreclosure of mortgages.” Highland Lakes Country Club & Cmty. Ass’n v. Franzino, 186 N.J. 99, 106 n.2 (2006); see also R. 4:64-1 to -8 (establishing rules specific to foreclosure proceedings including R. 4:64-5’s limitation on joinder of claims in foreclosure). Although Harris is able to raise potential defenses against Wells Fargo, the foreclosing party, in the foreclosure proceeding, as a result of the arbitration agreement she is forced to bring her third-party counterclaims against Delta in arbitration. Harris’s defenses to the foreclosure action track her affirmative claims against Delta; thus, she is forced to litigate those substantively similar claims in two different forums. That result is burdensome; however, it is not unconscionable.8

Other courts that have found similar provisions not unconscionable have noted the unique nature of the judicial remedies of foreclosure and similar actions. See Walther v. Sovereign Bank, 872 A.2d 735, 749 (Md. 2005) (stating that “foreclosure proceedings . . . do not act solely to protect the interests of the mortgage lender against a defaulting debtor but instead provide protections for both sides.”); see also Conseco Fin. Servicing Corp. v. Wilder, 47 S.W.3d 335, 343 (Ky. Ct. App. 2001) (stating that claims involving security interests “have come to be heavily regulated by statute, allowing for streamlined procedures and effective protections for both sides.”) (footnote omitted); Lackey v. Green Tree Fin. Corp., 498 S.E.2d 898, 905 (S.C. Ct. App. 1998) (stating that “[j]udicial remedies for the recovery of property, such as the replevin action, and the foreclosure action, provide specific procedures for protection of collateral and the parties during the pendency of the proceedings. These protections relate to both parties, and are facilitated by the enforcement procedures specified in the law.”) (footnote omitted). We acknowledge that contrary determinations have been reached by other courts. See, e.g., Taylor v. Butler, 142 S.W.3d 277, 284-87 (Tenn. 2004), cert. denied, 543 U.S. 1147, 125 S. Ct. 1304, 161 L. Ed.2d 108 (2005); Wis. Auto Title Loans, Inc. v. Jones, 714 N.W.2d 155, 171-74 (Wis. 2006).

Harris’s burden of having to litigate in two forums is alleviated by the fact that attorney’s fees and costs are available to Harris under the CFA if she successfully asserts CFA-based defenses in the foreclosure action. As the district court observed, the Appellate Division has stated that “for the purposes of eligibility for payment of reasonable attorneys’ fees and costs, the [CFA] makes no distinction between a person who raises the Act’s provisions in an affirmative claim and one who pleads it as a defense,” BJM Insulation & Constr., Inc., 287 N.J. Super. 513, 516 (App. Div. 1996). Although we do not address whether attorney’s fees and costs would be available in all contexts where the CFA is raised as a defense, we find the Appellate Division’s analysis relevant here. Because of the arbitration clause, Harris is compelled to litigate essentially identical CFA claims in court and in arbitration. In that circumstance, Harris should, under N.J.S.A. 56:8-19, be eligible for attorney’s fees and costs related to the foreclosure proceeding if she successfully asserts defenses based on the CFA in that proceeding.

C.

Finally, we note Harris’s argument that other clauses of the arbitration agreement are unconscionable, specifically the discovery and confidentiality provisions. She also contends that it is unconscionable for an arbitration agreement not to require a record of the proceedings or a reasoned and publicly available award. These claims are, at their core, a form of generalized attack on arbitration as a method of dispute resolution. As such, they are not persuasive.

Briefly, it is noteworthy that neither the arbitration agreement,9 nor the rules of the potential arbitration administrators, prevent Harris from obtaining a record of the proceeding or a reasoned award. Both a written award and a record of the proceedings may be obtained upon request of one of the parties. Under the rules of the various administrators, the party seeking the written award or record may be required to pay for such request. Under our approach to costs outlined above, a question may arise as to the continued viability of the cost provisions related to written-award or record requests as applied against litigants such as Harris. Because it is unclear how the arbitrator will ultimately interpret the broad cost allocation provisions of the arbitration agreement, we need not address any specific cost provisions set out in the rules of various arbitration administrators at this time.

Finally, there is nothing in either the arbitration clause or the rules of the three arbitration administrators requiring that arbitration awards be kept confidential. It is not unconscionable to require that the proceedings before the arbitrator be kept confidential when the arbitrator’s written award is not required to be kept confidential.

In conclusion, we add that to the extent that Harris advances other specific arguments in support of her claim of unconscionability, we reject those arguments, including her argument that the arbitration clause should be declared cumulatively unconscionable.

VI.

In describing the arbitration provisions, the Court does not express a view on how an arbitrator will interpret the provisions. We intend only to answer the certified question of law before us based on the limited record presented. Our assumptions as to possible interpretations of the disputed contract terms were necessary in order to address the unconscionability issues presented by the certified question.

CHIEF JUSTICE PORITZ and JUSTICES LONG, and WALLACE join in JUSTICE LaVECCHIA’s opinion. JUSTICE ZAZZALI filed a separate opinion concurring in part and dissenting in part. JUSTICE RIVERA-SOTO filed a separate dissenting opinion. JUSTICE ALBIN did not participate.

SUPREME COURT OF NEW JERSEY

A- 44 September Term 2005

DELTA FUNDING CORPORATION,

Plaintiff-Respondent,

v.

ALBERTA HARRIS,

Defendant-Appellant.

JUSTICE ZAZZALI, concurring in part and dissenting in part.

To the extent that the majority opinion strikes down certain provisions of the arbitration agreement as unconscionable, I concur. However, I disagree with the majority’s conclusions regarding certain other provisions and would find them unconscionable. Additionally, even if I were to accept the majority’s conclusions regarding the individual provisions, I nonetheless believe that the objectionable provisions cannot be severed from the agreement and that the agreement as a whole should be held cumulatively unconscionable. For those reasons, I respectfully dissent.

I.

As Justice LaVecchia notes, this matter comes before the Court on a narrow question: “Is the arbitration agreement at issue, or any provision thereof, unconscionable under New Jersey law, and, if so, should such provision or provisions be severed?” 185 N.J. 255 (2005). Because of our limited inquiry, the facts of the matter are neither controlling nor essential to my analysis. Nonetheless, they provide a context for the discussion, and therefore I will briefly recite them.

According to the certification of defendant Alberta Harris, at the time of the events in this matter, Harris was a seventy-eight year old widow living alone in her home in Newark. She has lived in that home for over thirty years and did not have a mortgage until she entered into the transaction that is the subject of this matter. Harris was educated only until the sixth grade, at which time she began working in Georgia cotton fields. Eventually, she moved north and worked in laundries pressing clothes and as a home health aide. She now lives on her monthly social security checks in the amount of $988. Out of that monthly payment, Harris must pay for heat, electricity, food, water, telephone service, life insurance, and any necessary house repairs. Harris only has one relative living in the State, in Toms River.

Based on its 2005 annual Form 10-K, plaintiff Delta Funding Corporation (Delta) “is a national specialty consumer finance company that originates, securitizes and sells . . . non-conforming mortgage loans.” According to the 10-K, Delta’s

loans primarily are secured by first mortgages on one- to four-family
residential properties. Throughout our 24-year operating history, we have
focused on lending to individuals who generally do not satisfy the credit,
documentation or other underwriting standards set by more traditional sources
of mortgage credit, including those entities that make loans in compliance with
the conforming lending guidelines of Fannie Mae and Freddie Mac. We make
mortgage loans to these borrowers for purposes such as debt consolidation,
refinancing, education and home improvements.

[Emphasis added.]

Delta states that, during 2005, its weighted average interest rate was eight percent. Delta has enjoyed considerable success and growth in the industry. Its 10-K reports that, “[f]or the year ended December 31, 2005, we originated $3.8 billion of loans, an increase of $1.2 billion, or 46.9%, over the $2.6 billion of loans originated in the year ended December 31, 2004.”

The issue in this matter arises out of a loan entered into by Harris and Delta in 1999. According to her answer, counterclaim and third-party complaint, in December 1999, Kim Stewart of The Lending Source, Ltd. (Lending Source) contacted Harris and asked her if she needed money. Harris answered yes and explained that her income consisted of her monthly social security check and that, due to her financial situation, she only could afford a limited amount each month in payments. Stewart then arranged for a representative of Universal Window Products, Inc. (Universal) to come to Harris’s house. Once at the house, the representative had Harris sign a contract to install fifteen windows and a door. That contract did not stipulate a price for the work.

After Harris signed the contract, a representative from Advanced Title Agency, Inc., apparently acting on behalf of Delta, came to her home at approximately 10 p.m. to have Harris sign loan papers to cover the cost of the windows and door. Harris was sick in bed but was told by the representative that the loan papers had to be signed at that time. Harris also alleges that she was rushed when signing the papers because the representative was “running late.” The loan entered into by Harris was in the amount of $37,700 with an annual interest rate of around fourteen percent and was secured by a mortgage on Harris’s home. According to Harris’s complaint, at least $11,000 of the loan went to Universal and $4,000 went to points, fees, and closing costs. Of that $4,000, Harris avers that almost $2,000 went to Lending Source. As a result of the loan, Harris became responsible for a $444.44 monthly payment to Delta.

Delta subsequently assigned the loan to Wells Fargo Bank (Wells Fargo) as trustee and, when Harris was unable to make the necessary payments, Wells Fargo initiated foreclosure proceedings on her home by filing a complaint in the Superior Court. In response, Harris filed an answer, counterclaim, and third-party complaint, naming, among others, Delta, Lending Source, Universal, and Advanced Title Agency. Harris raised three affirmative defenses and seven counterclaims, essentially arguing that the loan was unconscionable and unenforceable because it was made with the knowledge that Harris could not repay it and with the intent of allowing the lender to obtain her house. As per the terms of the arbitration agreement, Delta filed a petition in federal district court seeking to compel arbitration of the counterclaims. Harris then moved for summary judgment dismissing Delta’s petition, and Delta cross-moved to compel arbitration. The district court granted Delta’s motion, concluding that the arbitration agreement was not unconscionable. On appeal, the Third Circuit Court of Appeals asked this Court to resolve the instant question of law. 185 N.J. 255 (2005).

II.

As a general matter, the arbitration agreement at issue in this case has three major components. First, the agreement sets the terms of arbitration through the “Resolution of Claims,” “Hearing Location and Arbitration Costs,” and “Federal Arbitration Act and Appeals” provisions. Second, through the “Excluded Claims” clause and accompanying definitions, the agreement explains that certain claims arising out of the transaction must be brought in arbitration while others must be brought in court, thereby creating a bifurcated claims structure. Third, the “No Class Actions, Etc.” provision prohibits the arbitration of claims on a class action or class-wide basis. Apart from the definitions section, the only remaining provisions of the agreement are the severability clause, explaining that if one provision of the agreement is deemed unenforceable the other provisions continue in effect, and the “Important Additional Disclosures” provision, which explains that arbitration decisions are final.

In reaching its decision, the majority concludes that certain clauses of the “Hearing Location and Arbitration Costs” and “Federal Arbitration Act and Appeals” provisions are unconscionable; that the agreement’s creation of a bifurcated structure for litigating claims arising out of the same transaction -- although “burdensome” on borrowers, ante at ___ (slip op. at 22) -- is not in and of itself unconscionable; that although class action waivers can be unconscionabl