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Plaintiff Fails to Establish that Arbitration Agreement is Unenforceable as Unconscionable

Brooks v. Prestige Financial Services, Inc., et al.
Case No. 11-cv-02370-AW (U.S. District Court for the District of Maryland, December 8, 2011)

by Eric M. Leppo, Associate
Semmes, Bowen & Semmes (

In this recently issued opinion authored by Judge Alexander Williams, Jr. of the United District Court for the District of Maryland, the Court found the arbitration agreement within a Retail Installment Contract for the purchase of a new vehicle was valid and enforceable. Further, the Court determined that Prestige did not waive its right to enforce the provision.

In June 2008, Plaintiff Naureen Brooks purchased a 2005 Honda Accord from a Honda dealership. Her purchase was financed by the Defendant Prestige Financial Services, Inc. (“Prestige”). The Plaintiff executed the Retail Installment Sales Contract at the time of purchase with the dealership, but the agreement was immediately assigned to Prestige under their established arrangement.

In June 2011, the Plaintiff was in default on her payments under the agreement. Around this time she also filed a Chapter 13 bankruptcy. Separately, the Plaintiff filed this case against Prestige in the Circuit Court of Maryland for Calvert County alleging violations of the Maryland Consumer Protection Act and common law claims related to Defendant’s collection activities. The case was removed to the Federal District Court by Defendant Prestige. After Prestige filed unsuccessful Motions to Stay the case (based on Ms. Brooks’ bankruptcy) and to Dismiss, Prestige filed this Motion to Compel Arbitration based on a provision in the installment sale contract.

Ms. Brooks argued that the arbitration agreement was invalid as it was both procedurally and substantively unconscionable. The Court referenced that Maryland law recognizes both procedural and substantive unconscionability. “Substantive unconscionability involves those one-sided terms of a contract from which a party seeks relief ... while procedural unconscionability deals with the process of making a contract . . . procedural unconscionability looks much like fraud or duress in contract formation, and substantive unconscionability reminds us of contracts or clauses contrary to public policy or illegal.” Brooks at *4-5 (citing Carlson v. Gen. Motors Corp., 883 F.2d 287, 296 n.12 (4th Cir. 1989).

The Plaintiff argued that the arbitration agreement was procedurally unconscionable as it was a contract of adhesion which she had to sign at the time of purchase. She claimed that if she did not sign the agreement she could not have taken possession of the vehicle. Moreover, she argued the clause was hidden on the back of a second page within a form contract and not tailored to her particular situation. The Court admitted that the contract may have been one of adhesion based on it being drafted by Defendant, the take-it or leave-it nature, and the lack of equal bargaining power. However, the Court noted that a contract of adhesion is not automatically deemed to be unconscionable. The agreement was not procedurally unconscionable as the provision was not buried within the document, and Plaintiff was not rushed or forced to sign the agreement. In fact, she made no showing that she could not have negotiated the terms or that she made any effort to do so.

The Court then held that the arbitration agreement did not meet the test for substantive unconscionability. Plaintiff based this claim on the fact that arbitration involved excessive expenses she could not afford in light of her current bankruptcy. However, the Court noted that Plaintiff’s portion of the fees for use of an American Arbitration Association arbitrator would be only $375, and that attorneys’ fees and expert costs would be no more expensive than in litigation. Therefore, the Court was unpersuaded that any substantive unconscionability existed.

Finally, Plaintiff claimed that Prestige had waived its right to arbitrating the matter by removing the case and filing a dispositive motion prior to raising the arbitration issue. In these circumstances, a default or waiver occurs where “the party seeking arbitration ‘so substantially utiliz[es] the litigation machinery that to subsequently permit arbitration would prejudice the party opposing the stay.” Patten Grading & Paving, Inc. v. Skanska USA Bldg., Inc., 380 F.3d 200, 204 (4th Cir. 2004). The Court held that Prestige’s Motion to Dismiss was not on the case’s merits, but raised only the issue of standing in light of Plaintiff’s bankruptcy. Moreover, the Motion to Compel Arbitration came just two (2) weeks after the Scheduling Order was entered. The Court found the Plaintiff failed to meet the high burden for showing waiver of the contractual right to arbitration.