Wisconsin Auto Title Loans, Inc. v. Jones
714 NW 2d 155, 2006 WI 53, 290 Wis. 2d 514 (2006)
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Rule of Law:
A contract provision is unconscionable, and therefore unenforceable, if it is both procedurally and substantively unconscionable. The court will apply a sliding scale, where a greater degree of one form of unconscionability may require a lesser degree of the other.
Facts:
- On December 6, 2001, Kenneth Jones obtained an $800 loan from Wisconsin Auto Title Loans, securing the loan with the title to his 1992 Infiniti.
- The loan agreement was a pre-printed, standardized form contract provided by Wisconsin Auto Title Loans.
- To receive the loan, Jones was required to purchase a $150 membership in a car club and pay a $4 filing fee.
- The agreement stipulated a single repayment of $1,197.08 within one month, which represented an Annual Percentage Rate (APR) of 300%.
- The agreement contained an arbitration provision that required all of Jones's disputes, controversies, or claims to be decided by binding arbitration.
- This arbitration provision included a "save and except" clause that allowed Wisconsin Auto Title Loans to use judicial processes, including repossession, to enforce Jones's payment obligations in the event of default.
- Jones made several partial payments on the loan beginning in January 2002.
- On April 22, 2002, Wisconsin Auto Title Loans served Jones with a notice of default on the loan.
Procedural Posture:
- Wisconsin Auto Title Loans filed a small claims replevin action against Kenneth Jones in a Wisconsin court of first instance to repossess his vehicle.
- Jones filed an answer and counterclaims, alleging the loan agreement was unconscionable and demanding a jury trial, which caused the case to be transferred to the Milwaukee County Circuit Court.
- Wisconsin Auto Title Loans filed a motion to compel arbitration of Jones's counterclaims and to stay judicial proceedings on those claims.
- The circuit court denied the motion, ruling that the arbitration provision was unconscionable.
- Wisconsin Auto Title Loans, as appellant, appealed the non-final order to the Wisconsin Court of Appeals.
- The court of appeals, an intermediate appellate court, affirmed the circuit court's order.
- Wisconsin Auto Title Loans, as petitioner, sought review from the Wisconsin Supreme Court, which granted the petition.
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Issue:
Is an arbitration provision in a consumer loan agreement unconscionable and therefore unenforceable when it is part of an adhesion contract between parties of unequal bargaining power and requires the borrower to arbitrate all claims while reserving the lender's right to use the courts for its most likely claims?
Opinions:
Majority - Abrahamson, C.J.
Yes, the arbitration provision is unconscionable and unenforceable. A contract provision is invalid if it is both procedurally and substantively unconscionable. The provision was procedurally unconscionable because it was an adhesion contract presented on a 'take-it-or-leave-it' basis by an experienced lender to an indigent borrower, creating a significant disparity in bargaining power. The provision was substantively unconscionable primarily due to its one-sided nature; the 'save and except' clause allowed the lender full access to the courts for all its likely claims (such as replevin and deficiency judgments), while relegating all of the borrower's potential claims to arbitration. This imbalance, combined with other factors like the burden of dual forums and a required arbitration filing fee, rendered the clause oppressive and commercially unreasonable.
Dissenting - Roggensack, J.
No, the arbitration provision should be enforced because the borrower failed to prove procedural unconscionability. While the provision is substantively unconscionable, a finding of procedural unconscionability must be based on facts in the record. The circuit court failed to hold an evidentiary hearing and instead made factual findings based on inferences from pleadings and attorney arguments, which is improper. Without an evidentiary record establishing facts about the contract's formation—such as Jones's age, education, business experience, or whether the terms were explained to him—there is insufficient evidence to conclude the process was procedurally unconscionable. Therefore, the borrower did not meet his burden of proof.
Concurring - Butler, Jr., J.
Yes, the provision is unconscionable. The majority opinion is correct, but it must also be stated that the underlying practice of charging 300% interest for a short-term loan to financially vulnerable individuals is itself 'ridiculous, unreasonable, and unconscionable.' Such predatory lending practices exploit debt-strapped consumers by design, setting them up to fail. The legislature should act to protect citizens by capping the annual percentage rates on auto title loans.
Analysis:
This decision solidifies Wisconsin's use of the sliding scale approach to the unconscionability doctrine, clarifying that a strong showing of substantive unconscionability can compensate for a lesser showing of procedural unconscionability. It establishes a significant precedent for challenging one-sided arbitration clauses in consumer adhesion contracts, particularly those that reserve judicial remedies for the drafting party while mandating arbitration for the weaker party. The ruling empowers consumers by affirming that courts can find procedural unconscionability based on the nature of the transaction and reasonable inferences from the record, even without a formal evidentiary hearing on the specifics of the contract negotiation.
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