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Court of Appeal, First District, Division 2, California.

Geneva BELL et al., Plaintiffs and Respondents, v. CONGRESS MORTGAGE COMPANY, INC., et al., Defendants and Appellants.

No. A061946.

Decided: May 17, 1994

Thomas A. Jenkins, Daniel J. Mulligan, Jenkins & Mulligan, San Francisco, for plaintiffs and respondents. Samuel L. Holmes, Jay D. Pimentel, Mark J. Hancock, Holmes & Lea, A Professional Corp., Robert M. Smith, Bruce Wm. Plebuch, Law Offices of Robert M. Smith, San Francisco, for defendants and appellants.

Appellants appeal from the trial court's denial of their motion to compel arbitration.


Respondents are individual homeowners who refinanced their homes, executing promissory notes, deeds of trusts, and other documents.   Appellants include the lender Congress Mortgage Company and two wholly-owned subsidiaries, several loan officers employed by Congress Mortgage Company, and various assignees of the promissory notes and deeds of trusts.   Respondents have been unable to repay their loans and have either lost or are likely to lose their properties through foreclosure.

The dispute which is sought to be arbitrated arises from respondents' superior court complaint alleging 28 causes of action, claiming, among other things, that appellants engaged “in a widespread and pervasive pattern of unlawful, unfair and fraudulent business practices ․ [including] the failure to disclose actual amounts of charges and fees that borrowers must pay, the imposition of fees and charges that bear no reasonable relation to costs actually incurred by Congress Mortgage, the retention of loan funds that were to have been disbursed to borrowers and third parties, the inflation of the income reported by prospective borrowers, [and] the improvident providing of loans to persons who cannot possibly repay the loans or refinance the obligations when they mature․”   The complaint seeks equitable relief and compensatory and punitive damages.

Appellants rely upon a provision of a document entitled “Consent and Compliance Agreement” which provides in part that “All disputes as to this agreement and accompanying loan documents or remedies of default herein shall be settled by arbitration in accordance with the rules of the American Arbitration Association․”   The Consent and Compliance Agreement was, in each instance, contained in a packet of documents which included a promissory note and a deed of trust.   The arbitration clause is an unhighlighted paragraph in the middle of the page.

Appended to various motions before the trial court 1 were numerous declarations from respondents and other borrowers from Congress Mortgage alleging variously that they were required to sign documents in blank;  the documents signed in blank were later returned with terms and provisions included which had never been discussed or agreed upon;  that none of the loan officers discussed or explained the compelled arbitration provisions contained in the Consent and Compliance Agreements;  and that in many instances, the Consent and Compliance Agreement provisions had not been read before execution.   The declarations establish that the borrowers were inexperienced in business matters and were in financial difficulty at the time.


 The issue presented is whether the trial court properly found the arbitration clause to be an unenforceable provision of an adhesion contract.

 Here, the parties agree that the contract is one of adhesion.2  Adhesion contracts are not necessarily unenforceable.   In Graham v. Scissor–Tail, Inc. (1981) 28 Cal.3d 807, 171 Cal.Rptr. 604, 623 P.2d 165 (hereafter Scissor–Tail ), the Supreme Court noted:  “Generally speaking, there are two judicially imposed limitations on the enforcement of adhesion contracts or provisions thereof.   The first is that such a contract or provision which does not fall within the reasonable expectations of the weaker or ‘adhering’ party will not be enforced against him.  [Citations omitted.]   The second—a principle of equity applicable to all contracts generally—is that a contract or provision, even if consistent with the reasonable expectations of the parties, will be denied enforcement if, considered in its context, it is unduly oppressive or ‘unconscionable.’  [Citations omitted.]”  (28 Cal.3d at p. 820, 171 Cal.Rptr. 604, 623 P.2d 165;  see also Keating v. Superior Court (1982) 31 Cal.3d 584, 183 Cal.Rptr. 360, 645 P.2d 1192.)

The Scissor–Tail case involved a compelled arbitration provision contained in the standard form contract of the American Federation of Musicians (AFM) which was executed between musician Leon Russell and concert promoter Bill Graham.   The challenged provision required the submission of any contract dispute for conclusive and binding determination “by the International Executive Board of the Federation or a similar board of an appropriate local thereof.”  (Id. 28 Cal.3d at p. 813, 171 Cal.Rptr. 604, 623 P.2d 165.)

Notwithstanding that Graham was a prominent, successful, and sophisticated concert promoter, “the record ․ fairly establishes that he, for all his asserted stature in the industry, was here reduced to the humble role of ‘adherent.’ ”  (Scissor–Tail, supra, 28 Cal.3d at p. 818, 171 Cal.Rptr. 604, 623 P.2d 165.)

In Scissor–Tail, the court determined that Graham's vast experience in the music industry including his execution of “literally thousands of A.F. of M. contracts containing a similar provision” provided him “an abiding awareness” of the arbitration requirement and precluded any assertion that it was inconsistent with his “reasonable expectations upon entering into the contract.”  (28 Cal.3d at p. 821, 171 Cal.Rptr. 604, 623 P.2d 165.)

The Scissor–Tail court denied enforceability of the arbitration clause on unconscionability grounds holding that the “ ‘minimum levels of integrity’ which are requisite to a contractual arrangement for the nonjudicial resolution of disputes are not achieved by an arrangement which designates the union of one of the parties as the arbitrator of disputes arising out of employment—especially when, as here, the arrangement is the product of circumstances indicative of adhesion.”  (28Cal.3datp.827,171Cal.Rptr.604,623P.2d165.)

In the instant case, the trial court applied Scissor–Tail's two-pronged limitation on the enforcement of adhesion contracts in reaching its decision.   The court found that although this arbitration clause was not oppressive or unconscionable, it did not fall within the reasonable expectations of the borrowers.

Appellants articulate the issue for appeal in terms of whether the provisions pertaining to arbitration were “sufficiently conspicuous” to be within the reasonable expectation of the borrowers.   We decline the invitation to limit our inquiry to the four corners of the Consent and Compliance Agreement.   Just as the Supreme Court considered Graham's level of sophistication and experience in the negotiation of contracts in deciding this issue, we consider the borrowers' level of sophistication and experience, and the circumstances attendant to the signing of the agreement as well as whether the provision was sufficiently conspicuous.

 Thus, extrinsic evidence pertaining to the relative bargaining strengths of the parties, the nature and the extent of the negotiations, the specific representations made or withheld during those negotiations, and a myriad of other circumstances providing a commercial context for the execution of the contract are relevant to this inquiry.  (A & M Produce Co. v. FMC Corp. (1982) 135 Cal.App.3d 473, 489, 186 Cal.Rptr. 114.)

 The trial court record is replete with evidence that appellants engaged in practices which were both unlawful and designed to deceive unsophisticated and inexperienced borrowers as to their essential contractual rights.   We recognize that the allegations are not yet proven in the crucible of trial, but they establish a nexus of facts consistent with the trial court's finding of unenforceability.   The trial court is “the ultimate authority on contested facts” and as a reviewing court, we must accept as true those evidentiary declarations in the record which support its determinations.   (Madden v. Kaiser Foundation Hospitals (1976) 17 Cal.3d 699, 716, 131 Cal.Rptr. 882, 552 P.2d 1178.)   A sampling of those declarations reveals allegations that borrowers were required to sign promissory notes and deeds of trusts in blank which would later be filled out by appellants;  that appellants made no mention of the arbitration provisions;  that loan documents were modified after their execution;  that arbitration provisions were not read by the borrowers;  and that no neutral party such as an escrow officer was present.3

 Moreover, the borrowers are generally elderly, unsophisticated and financially distressed individuals who relied upon the good graces of skilled sales persons from a substantial corporate lender.   The declarations submitted by respondents provide an abundance of evidence from which to conclude that inclusion of the arbitration provision in the Consent and Compliance Agreement was beyond the reasonable expectations of these borrowers.

We consider also the placement of the provision in the context of the entire packet of documents executed.   We look, therefore, to the volume of documents,4 the context in which the challenged provision is placed, the technical nature of the text, the existence of a check off or other method of highlighting the provision, the verbal instructions provided, and the nature of any rights surrendered.   Here, the compelled arbitration clause was placed in a paragraph in the middle of one of the documents.   It was in no way highlighted or otherwise set apart.   More importantly, it was contained in a document whose every other significant provision was a recitation of rights guaranteed the borrower.   In that context, the potential for misapprehension is substantial.

 Finally, we scrutinize the nature of the right abrogated by the challenged provision.   Acceding to arbitration necessarily entails a waiver of the right to a jury trial secured by article I, section 16 of the California Constitution.5

 We recognize that the failure of a non-adhesive contract to expressly negative jury trials does not preclude enforceability of an arbitration provision.6  We conclude, however, that an adhesion contract must elicit a clear and informed waiver of that constitutional right.   In considering the minimum conditions for enforceability of such a waiver, we are guided by Titan Group, Inc. v. Sonoma Valley County Sanitation Dist. (1985) 164 Cal.App.3d 1122, 211 Cal.Rptr. 62:  “In light of the importance of the jury trial in our system of jurisprudence, any waiver thereof should appear in clear and unmistakable form․   We cannot elevate judicial expediency over access to the courts and the right to jury trial in the absence of a clear waiver.”  (Id. at p. 1129, 211 Cal.Rptr. 62, emphasis added.) 7

The necessity for an informed waiver of a fundamental right is underscored by Moncharsh v. Heily & Blase (1992) 3 Cal.4th 1, 10 Cal.Rptr.2d 183, 832 P.2d 899.   Emphasizing the “strong public policy in favor of arbitration” as enunciated in Code of Civil Procedure section 1280 et seq., the court outlined the statutory and judicial history of private arbitration in California from 1852 to the present, concluding that an arbitrator's “error of law apparent on the face of the award that causes substantial injustice does not provide grounds for judicial review.”  (Moncharsh, supra, 3 Cal.4th at p. 33, 10 Cal.Rptr.2d 183, 832 P.2d 899.)   As the dissenting opinion notes, the conclusion of the majority is that “parties who agree to arbitration thereby agree also to be bound by an award that on its face is manifestly erroneous and results in substantial injustice.”  (Id. at p. 35, 10 Cal.Rptr.2d 183, 832 P.2d 899.)

Thus, the reasonable expectations of the borrowers must be viewed in terms of the substantial consequences which result from a reference to arbitration.   In essence, the adherent surrenders his constitutional right to a trial by jury, as well as virtually all of the protections commonly associated with judicial review.   At least in the context of these manifestly adhesive contracts, we are unwilling to permit the parties to relinquish so casually these fundamental rights.

We agree with Justice Kennard that it is “virtually inconceivable” that contracting parties would expressly agree “that the arbitration award would be binding even if substantially unjust.”  (Moncharsh, supra, 3 Cal.4th at p. 35, 10 Cal.Rptr.2d 183, 832 P.2d 899.)   While, post-Moncharsh, parties of substantially equal bargaining power may be expected to accede to arbitration provisions with a full appreciation of the consequences, no such assumption is appropriate for adhesion agreements.   Even the most reasonable of adherents could not expect the judiciary “to endorse decisions known to be substantially unjust.”  (Id. at p. 34, 10 Cal.Rptr.2d 183, 832 P.2d 899.)

 The circumstances attendant to the execution of the Congress Mortgage agreements provide a compelling basis for upholding the decision of the trial court.   Further, we conclude that the enforceability of a compelled arbitration provision in a contract of adhesion requires that the provision appear in clear and unmistakable form by highlighting, bold type, or with an opportunity for specific acknowledgment by initialing.   Enforceability requires a clear recitation that the parties knowingly waive their right to a jury trial.8

The judgment is affirmed.



HODGE, Associate Justice.* FN* Assigned by the Chairperson of the Judicial Council.

KLINE, P.J., and SMITH, J., concur.