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Fourth Circuit Throws Out Arbitration Provision With Multiple Unfair Terms

Fourth Circuit Throws Out Arbitration Provision With Multiple Unfair Terms

Refuses to “Sanitize” Contract by Letting Bank Agree After the Fact Not to Enforce It

By Karla Gilbride
Staff Attorney

Public Justice’s mission is to fight for ordinary people who are facing economic or social injustice. Often this means fighting against corporations when they engage in predatory conduct, including the abuse of forced arbitration provisions to further tilt the playing field to their own advantage and take away people’s fundamental rights.

In representing Latricia Goodwin against Branch Banking & Trust Co. (BB&T), we had the chance to put all of these principles into action. Ms. Goodwin and her husband, Daniel, had lived in the same house in Princeton, West Virginia since 1992. But after Daniel died over 20 years later, Latricia began falling behind on the mortgage payments, and BB&T initiated foreclosure proceedings against her in 2015. This was harsh, but legal.

But BB&T didn’t stop there: it also threatened to make Latricia pay for its lawyers’ time associated with the foreclosure, which is against the law in West Virginia. Latricia consulted a lawyer, who learned that BB&T was sending the same sorts of illegal and threatening letters to hundreds of other West Virginia homeowners in the midst of foreclosure proceedings. So Latricia decided to file a class action lawsuit to get BB&T to stop its bullying behavior.

That’s when BB&T pulled out what it thought was its trump card: a forced arbitration provision hidden in the mortgage documents she’d signed (the arbitration provision appeared two pages after the page with her and her husband’s signatures). The arbitration provision said that borrowers like Latricia couldn’t join with others in a dispute with the bank; instead, each person would have to file a separate claim in arbitration. And that wasn’t all. The clause also said that if the borrower lost in arbitration, they’d have to pay all of the costs of the arbitration, as well as BB&T’s attorneys’ fees. And as if this weren’t enough, the clause also included what’s called a statute of limitations-shortening provision, saying that borrowers who believed BB&T broke the law in a way that harmed them had to file their arbitration claim within one year of when the alleged wrongdoing occurred, even if the law provided a longer window of time in which to sue.

But BB&T did not hold itself to the same rules. If BB&T wanted to foreclose on a borrower or file a collection action for money due under the mortgage, it could do so anytime within three years of the last missed payment—and could either go to arbitration or to court, whichever it preferred.

District Court Judge Irene Berge wasn’t having it. She declared the arbitration clause to be unconscionable, meaning that it was so unfair and one-sided that it could not be enforced.

BB&T appealed her decision to the Fourth Circuit. The bank argued that even if some of the terms in its arbitration clause were unconscionable, those unfair terms should have been severed, or removed, so that the rest of the arbitration clause could remain in effect. BB&T said that if the court wouldn’t sever the worst parts of its arbitration clause, like the provision putting borrowers like Latricia on the hook for BB&T’s attorneys’ fees and all arbitration costs if they went to arbitration and lost, it would voluntarily refrain from enforcing that provision against her.

Unfortunately several appeals courts have accepted these defenses to charges of unconscionability recently. Last year the Ninth Circuit said in a case called Mohamed v. Uber that Uber could erase any unconscionability problems by agreeing after the fact to pay the costs of arbitration , even though the clause presented to applicants when they sign up to drive with Uber  said that drivers had to pay half the costs, and the Eleventh Circuit earlier this year in Johnson v. KeyBank found a secrecy provision in the arbitration clause unconscionable, but decided to sever that provision and enforce the remainder of the clause.

But as Public Justice pointed out in a brief filed with the Fourth Circuit, severing the multiple unconscionable provisions from BB&T’s arbitration clause, or allowing BB&T to agree after the fact not to enforce them, would send exactly the wrong message. It would allow corporations to draft arbitration clauses that give them every advantage and deter the vast majority of people who learn about the clauses from ever initiating a dispute, confident that in the one or two instances when someone is brave, or angry, enough to challenge their conduct, the worst thing that will happen is that a court will trim away the excesses of their unfair contract (and maybe that won’t even happen if the corporation agrees not to enforce those parts of the contract against a particular person, leaving them free to enforce them later against someone else).

In a brief opinion released last Tuesday, the Fourth Circuit agreed. The appeals court quoted an earlier west Virginia court opinion that had said that “a court doing equity should not endeavor to sanitize any aspect of the unconscionable contractual attempt.” Following this admonition, the Fourth Circuit affirmed the district court and refused to sever the unconscionable provisions from BB&T’s arbitration clause. This means that BB&T may not enforce the clause against Latricia Goodwin and her class action lawsuit can go forward in court.

We are grateful to Latricia Goodwin for allowing us to represent her in the Fourth Circuit and to her trial counsel, Jed Nolan of Hamilton, Burgess, Young & Pollard, P.C. for working with us on this case. It’s always rewarding to push back against corporate overreach on behalf of Americans who are struggling; it’s especially rewarding when we can take on those fights and win.