Supreme Court Of Pennsylvania Determines That Arbitration Clause Favoring Lender Is Not Presumptively Unconscionable

by Mark Bauman | Mar 17, 2023 | Commercial Litigation & Corporate Law, Legal News

The Supreme Court of Pennsylvania decided on May 31, 2007 that an arbitration agreement which reserved judicial remedies in favor of a sub-prime lender was not presumptively unconscionable. A residential mortgagor instituted a lawsuit against a sub-prime lender in the U.S. District Court for the Eastern District of Pennsylvania. The mortgagor was a low-income homeowner and applied for a residential mortgage loan with a sub-prime lender. The mortgage application required that the parties enter into a written agreement for arbitration of any disputes. However, the sub-prime lender excepted certain disputes from arbitration and reserved the right to pursue judicial remedies. These included foreclosure proceedings, self-help remedies (e.g. repossession), and several other legal remedies (e.g. attachment, garnishment, assignment of income). The mortgagor complained that this constituted a predatory lending practice and sought rescission of the contract. He argued that the arbitration agreement was unconscionable and therefore unenforceable.

The case was dismissed by the Federal District Court and the mortgagor appealed to the U.S. Court of Appeals for the Third Circuit. The Third Circuit certified a question to the Supreme Court of Pennsylvania. The mortgagor was relying on a Pennsylvania Superior Court case which held that when a financial institution reserved for itself access to the courts, at the exclusion of the consumer, a presumption of unconscionability was created. Lytle v. CitiFinancial Services, Inc., 810 A.2d 643 (Pa.Super. 2002). Lytle was in conflict with a prior decision by the Third Circuit, which to the contrary stated that such reservations did not make an arbitration agreement unenforceable. Harris v. Green Tree Financial Corporation, 183 F.3d 173 (3d Cir. 1999). Federal policy strongly favors arbitration agreements. It also permits consideration of state contract law defenses such as fraud, duress, or unconscionability. Generally, unconscionability exists when one party lacks meaningful choice in accepting a contract or term (procedural unconscionability) and the contract or term unreasonably favors another party who is asserting it (substantive unconscionabilty). The burden of proving unconscionability rests with the challenging party. Accordingly, the question before the Supreme Court of Pennsylvania was whether or not Lytle accurately reflected the law in Pennsylvania. If so, the mortgagor could prove his case merely by showing the existence of a reservations clause.

The question before the Supreme Court of Pennsylvania was relatively narrow. However, the question was considered in conjunction with several overarching policy issues such as predatory lending practices. Accordingly, numerous amicus curiae briefs were written in favor of both sides. The Supreme Court of Pennsylvania acknowledged that arbitration clauses could be employed by the sub-prime lending industry with predatory effect. However, an arbitrator must determine whether a predatory effect actually resulted. The Supreme Court of Pennsylvania conceded that arbitration clauses, as involved in this case, often resulted in a “split-forum effect” which placed additional burden on the borrower but federal and state consumer protection laws served as mitigating factors. The U.S. Supreme Court has clearly stated that parties may agree to arbitrate some claims while reserving the right to litigate others. Moreover, the Supreme Court of Pennsylvania reasoned that there were appropriate business justifications and sound practical and pragmatic reasons favoring pursuit of foreclosure proceedings in a court of law.

Thus, the Supreme Court of Pennsylvania overturned Lytle, indicating that it “swept too broadly” and there was no presumption of unconscionability. Rather, a party asserting unconscionability is required to prove it in cases involving arbitration agreements, such as the one at issue here, or otherwise. Specifically, under Pennsylvania law, the reservation of judicial remedies within the context of an arbitration agreement consummated in conjunction with a residential mortgage loan is not presumptively unconscionable.

Superior Court Interprets Standard Language Contained In Inspection Contingency Of Agreement Of Sale

by Mark Bauman | Mar 16, 2023 | Commercial Litigation & Corporate Law, Legal News

The Superior Court of Pennsylvania recently interpreted the standard inspection contingency language as contained in the Standard Agreement for the Sale of Real Estate endorsed by the Pennsylvania Association of Realtors (“Agreement”). Such an Agreement was executed by the parties in Welteroth v. Harvey, 912 A.2d 863 (Pa. Super. 2006). The buyers agreed to purchase a six acre residential property on a wooded rural lot. They later alleged that the sellers of the property breached the Agreement by harvesting thirty (30) large trees for timber. The buyers sought specific performance and damages for devaluation of the property, damage to the grounds, and the expense of removing stumps that were left behind.

The sellers of the parcel filed preliminary objections to the Complaint, asserting that the buyers failed to state a cause of action. In support of this assertion, the sellers relied upon the inspection contingency language contained in the Agreement. This standard language gave the buyers fifteen (15) days to inspect the property and raise objections to the conditions thereon. In the event that objectionable conditions were discovered and properly placed in issue, the seller had the options to repair, offer a credit, or do nothing. If the seller chose to do nothing the onus was upon the buyer, within five (5) days, to accept the property as is or terminate the Agreement. The sellers in Welteroth asserted that the timbering operation was underway and obvious when the buyers inspected the property. Accordingly, the sellers argued that the Agreement provided exclusive remedies (i.e. reject or accept as is), which were not exercised by the buyers. The trial court, refused to order specific performance, and declined to consider claims for breach of contract and conversion of timber.

The Superior Court of Pennsylvania reversed the trial court’s order and remanded for further proceedings. The Superior Court stated that the remedies provision of the Agreement would only be triggered if the sellers refused to repair or offer a credit after the fifteen (15) day inspection contingency was exercised. The Superior Court also pointed out that other language contained in the Agreement imposed on the seller a duty to maintain the property in its present condition and opined that this duty did not terminate after the window for inspection closed. The inspection contingency provided buyers the ability to unilaterally terminate the Agreement within a specified window of time (or quickly modify the Agreement with consent of the sellers). Thereafter, the buyers lost the ability to terminate as a matter of course but could seek traditional remedies of damages and specific performance. The Superior Court cautioned that the manner in which the trial court exclusively construed the inspection contingency language contained in the Agreement could yield absurd and inequitable results.

In addition to finding that the trial court misinterpreted the Agreement, the Superior Court found that it was error for the trial court to determine that the buyers knew of the timbering operation before the inspection window closed. Whether and when the buyers learned of the timbering was a crucial factual determination bearing on the applicability of the remedies provision contained in the Agreement and the range and extent of remedies available to the buyers.

Purely Public Purpose Exemptions from Liens

by Mark Bauman | Mar 14, 2023 | Commercial Litigation & Corporate Law, Legal News

Recently, in Carter-Jones Lumber Co. v. Northwestern PA Humane Society, 913 A.2d 1002 (Pa.Cmwlth. 2006), the Court found that an animal shelter served a purely public purpose and thus rendered it exempt from mechanics’ liens under Section 1303(b) of the PA Mechanics’ Lien Law of 1963 (49 P.S. §1101, et seq.). In rendering its decision, the Court reviewed case law and determined that Courts have evaluated four factors in considering whether the purely public purpose exception applies. Those four factors are: (1) the public’s access to the services provided by the entity; (2) whether the entity’s function with respect to the property is a governmental function or a propriety function, (3) whether the entity operates with the possibility or motive of profit, and (4) whether allowing execution upon the liens would disrupt an essential public service.

However, the Court failed to address how, if at all, the “substitute remedy” provision of the PA Public Works Contractors’ Bond Law of 1967 (8 P.S. §191, et seq.) interplays with this purely public purpose exemption. Specifically, the Public Works Contractors’ Bond Law was designed to, among other things, provide substitute remedies for subcontractors who are excluded from the protections afforded by Mechanics’ Lien Law of 1963. However, the Bond law only applies in certain circumstances and has specific definitions. It is unlikely that a nonprofit or its property will fall within the applicable definitions. Thus, given the decision in Carter-Jones, in a purely public purpose project, the subcontractors are left without the mechanics lien remedy or the substitute remedies.