ERNESTO KHO v. CAMBRIDGE MANAGEMENT GROUP LLC JAMES GIORDANO RAUL SLOEZEN (2010)

Defendants Cambridge Management Group, LLC, James Giordano and Raul Sloezen (CMG) appeal from an interlocutory order of the Superior Court denying their motion to compel arbitration and dismiss plaintiff Ernesto V. Kho's complaint without prejudice.   We granted leave to appeal and now reverse and remand.

The relevant facts are simply stated and are not in significant dispute.   In October 2004, plaintiff was seriously injured in an automobile accident.   Thereafter, he brought suit to recover damages for his injuries in the Law Division.   While the action was pending, plaintiff asked his then-attorney for a loan against any future settlement.   Counsel referred plaintiff to CMG, a company engaged in advancing funds against future settlements, which is then secured by a lien against the proceeds of the final financial resolution of the litigation.   CMG describes itself as “the only option available to plaintiffs ․ to relieve the pressure ‘to accept a settlement offer not in the client's best interests simply in order to survive financially.’ ”   In contrast, plaintiff characterized CMG as “offer[ing] small personal loans to people with pending personal injury lawsuits, to be repaid with exorbitant interest upon settlement of their cases.”

After reviewing defendants' proposed terms with counsel, plaintiff signed a contract on October 19, 2005, which granted CMG a lien against the proceeds of any potential settlement in exchange for a $7,500 advance payment.   The contract provided plaintiff would owe the sum of $10,748.13 if CMG received payment before April 17, 2006, and $10,748.13 “plus 4.99% of $10,748.13 per month, compounded monthly, for each and every thirty day period following 4/17/2006.”   Plaintiff was provided a schedule showing the total amount due for each successive month of non-payment, up to $25,822.33 if payment was not made within two years.

The agreement included the following provision:

(b) Plaintiff acknowledges and agrees that any and all disputes that arise concerning the terms, conditions, interpretation or enforcement of this Agreement shall be determined through arbitration pursuant to the Rules and methods outlined by the American Arbitration Association in New Jersey, or in a Court of competent jurisdiction, at the election of CMG. Plaintiff agrees that the laws of the State of New Jersey shall control the interpretation of the Agreement.

(c) It is also understood, acknowledge [sic] and agreed that the Plaintiff will indemnify CMG against any and all losses, liability, set back and expenses, including but not limited to, attorney fees resulting from or arising out of the enforcement of this and all attached Agreements.

Approximately six months later, plaintiff sought another loan from his attorney, who again referred him to CMG. On April 27, 2006, plaintiff executed a second contract with CMG, receiving a $3,000 advance.   This agreement contained identical fee and arbitration provisions as in the October 2005 contract.   In July 2006, plaintiff sought an additional $5,000 advance through counsel, but CMG refused to make the advance.

Plaintiff's lawsuit settled for $75,000.   The parties agree that CMG ultimately received $30,000 but disputed the methodology for arriving at that number.   According to defendants, CMG agreed to accept $30,000 as a “reduced amount” after negotiations following a dispute over fees;  plaintiff claims defendants initially received $35,939.20 but unilaterally sent his attorney a check for $5,939.20 to “adjust[ ] for [a] miscalculation of the interest․”  Plaintiff's counsel received $24,717.33, together with costs and expenses of $1,943.85, and plaintiff received $12,399.62.

In July 2008, plaintiff retained present counsel and filed a complaint in the Law Division alleging violations of the New Jersey Licensed Lenders Act (LLA), N.J.S.A. 17:11C-1 to -50;  Criminal Usury Law (CUL), N.J.S.A. 2C:21-19 ¹ ;  Consumer Fraud Act (CFA), N.J.S.A. 56:8-1 to 184;  and Truth in Consumer Contract, Warranty and Notice Act (TCCWNA), N.J.S.A. 56:12-14 to -18.   Defendants subsequently filed a “Demand for Arbitration” with the American Arbitration Association (AAA).

On December 13, 2008, defendants requested the arbitration be held in abeyance, and then defendants moved in Law Division to compel arbitration proceedings and dismiss plaintiff's suit without prejudice.   In the alternative, defendants moved that the Superior Court proceedings be stayed pending the conclusion of arbitration.

Relying on the Supreme Court's decisions in Garfinkel v. Morristown Obstetrics & Gynecology Associates, 168 N.J. 124 (2001), and Martindale v. Sandvik, Inc., 173 N.J. 76 (2002), the judge denied the motion.   Citing Leodori v. Cigna, 175 N.J. 293, 303, cert. denied, 540 U.S. 938, 124 S.Ct. 74, 157 L. Ed.2d 250 (2003), the judge concluded that, “a valid waiver [of statutory rights] results only from an explicit affirmative agreement․”  As the requisites for a valid statutory waiver apply across all contractual agreements, not just those providing for arbitration, she found the rule consonant with the “F[A]A's directive that states continue to regulate arbitration claims under [general] contract principles.”

The court found such “explicit” agreement lacking in this arbitration clause.   By carving out disputes relating to the “terms, conditions, interpretation or enforcement of the agreement”, she held the clause did not clearly encompass statutory claims and as such could not support an effective waiver on plaintiff's part.   Additionally, the judge rejected defendants' argument that plaintiff's challenge was to the agreements as a whole, not to the arbitration clauses specifically.   She found that:

[Plaintiff] challenges the arbitration agreement as not in compliance with New Jersey case law.   Plaintiff specifically challenges the arbitration clause separately from its challenges to the validity of the contract.   The plaintiff has a separate argument to the enforceability of the arbitration clause, not just that the invalidity of the contract also renders the arbitration clause invalid.

Finding that plaintiff's opposition to the motion was directed solely at the arbitration clause itself, and that New Jersey's rule governing waivers of statutory rights was compliant with the FAA, the judge denied defendants' motion.

We granted leave to appeal.

The issues here present the conflict between competing policy interests.   First, New Jersey has long been supportive of arbitration as a means of dispute resolution.  “Even under seventeenth-century colonial rule, arbitration was fostered by statute ․ reflecting a public policy unchanged to the present day.”  Barcon Assoc. v. Tri-County Asphalt Corp., 86 N.J. 179, 186 (1981) (citation omitted);  see also E. Eng'g Co. v. City of Ocean City, 11 N.J. Misc. 508, 510 (Sup.Ct.1933);  Fennimore v. Childs, 6 N.J.L. 386, 388 (Sup.Ct.1797).   Like the FAA, New Jersey's Arbitration Act, N.J.S.A. 2A:23B-1 to -32, provides that agreements to arbitrate are valid except on “a ground that exists at law or in equity for the revocation of a contract.”   N.J.S.A. 2A:23B-6(a).

“An agreement to arbitrate should be read liberally in favor of arbitration [,]” Marchak v. Claridge Commons, Inc., 134 N.J. 275, 282 (1993), provided, however, “that only those issues may be arbitrated which the parties have agreed shall be.”  In re Arbitration Between Grover & Universal Underwriters Ins. Co., 80 N.J. 221, 228 (1979).   This clarity of intent is required to “assure that the parties know that in electing arbitration as the exclusive remedy, they are waiving their time-honored right to sue.”  Marchak, supra, 134 N.J. at 282.   In ascertaining the parties intent, it is “[that] expressed or apparent in the writing that controls.”  Garfinkel, supra, 168 N.J. at 135;  Martindale, supra, 173 N.J. at 92 (citing Cohen v. Allstate Ins. Co., 231 N.J.Super. 97, 101 (App.Div.), certif. denied, 117 N.J. 87 (1989)).  “[A]ny doubts concerning the scope of arbitrable issues should be resolved in favor of arbitration,” Moses H. Cone Mem'l Hosp. v. Mercury Constr.   Corp., 460 U.S. 1, 24-25, 103 S.Ct. 927, 941, 74 L. Ed.2d 765, 785 (1983), and courts are to presume arbitrability “unless it may be said with positive assurance that the arbitration clause is not susceptible of an interpretation that covers the asserted dispute.”  Caldwell v. KFC Corp., 958 F.Supp. 962, 973 (D.N.J.1997) (citations omitted).

Creating a tension against this formidable commitment to enforce arbitration provisions are statutory claims where the Legislature has made those claims non-arbitrable as against public policy.   See Cohen, supra, 231 N.J.Super. at 101.   In pursuing an inquiry directed to this specific legislative preclusion, courts consider both the plain language of the agreement as well as the statutory language and purposes of the remedy at issue.   See, e.g., Garfinkel, supra, 168 N.J. at 130-31 (stating that New Jersey's Law Against Discrimination “provides aggrieved employees with a choice of forum to prosecute their claim[s]” and “[t]he choice of forum established by the LAD is an integral feature of the statute”);  Gras v. Assocs.   First Capital Corp., 346 N.J.Super. 42, 52-53 (App.Div.2001) (noting “[t]here is no inherent conflict between arbitration and the underlying purposes of the CFA[,]” as “plaintiffs can vindicate their statutory rights in the arbitration forum”), certif. denied, 171 N.J. 445 (2002).

Here, the relevant statutory provisions under the LLA are as follows:

[A] consumer lender who knowingly and willfully violates any provision of this act shall also forfeit to the borrower three times any amount of the interest, costs or other charges collected in excess of that authorized by law.

[N.J.S.A. 17:11C-33(b).]

The CFA provides, in pertinent part:  “The refund of moneys herein provided for may be recovered in a private action[,]” N.J.S.A. 56:8-2.12, and “[a]ny person who suffers any ascertainable loss of moneys or property ․ as a result of the use ․ of any method, act, or practice declared unlawful under this act ․ may bring an action or assert a counterclaim therefor in any court of competent jurisdiction.”  N.J.S.A. 56:8-19.

Finally, the TCCWNA provides:

Any person who violates the provisions of this act shall be liable to the aggrieved consumer․  [Damages] may be recoverable by the consumer in a civil action in a court of competent jurisdiction or as part of a counterclaim․  A consumer also shall have the right to petition the court to terminate a contract which violates [the statute].

[N.J.S.A. 56:12-17.]

Inquiries regarding the scope of an arbitration clause are properly decided by the court unless the parties have agreed to submit that issue to the arbitrator.  First Options v. Kaplan, 514 U.S. 938, 944-45, 115 S.Ct. 1920, 1924, 131 L. Ed.2d 985, 994 (1995);  Standard Motor Freight, Inc. v. Int'l Brotherhood of Teamsters, 49 N.J. 83, 96 (1967);  see also Granite Rock Co. v. Int'l Bd. of Teamsters, 561 U.S. _, _ S.Ct. _, _ L. Ed.2d _ (slip op. at 7) (2010).

Defendants correctly observe that plaintiff's underlying claims challenge the “legality” and “statutory validity” of the contracts.   Plaintiff does not dispute that these are valid agreements to arbitrate but that the statutory claims fall outside of the scope of these agreements.

We recently discussed the scope of arbitration provisions in Epix Holding Corp. v. Marsh & McLennan Cos., Inc., 410 N.J.Super.   453 (App.Div.2009).   In Epix, the plaintiff sought to avoid arbitration by arguing defendants' underlying conduct occurred months before the contract including the arbitration provision was signed.   We disagreed, noting that any judicial review must “focus on the factual allegations in the complaint rather than the legal causes of action asserted[,]” and that if those factual claims “touch matters” encompassed by the contract, they must be arbitrated.  Id. at 472-73.   We said:

Were it not for its contractual relationship with [defendants], plaintiff would not have suffered its alleged damages.   It is difficult to conceive how plaintiff could maintain its claim ․ without reference to, and reliance upon, the underlying contract.   A claim “that draws its very essence from the fact of and performance under the [Agreement] in question ․ necessarily is a claim that arises out of and relates to the Agreement.”

[Id. at 475 (citing S+L+H S.p.A. v. Miller-St.   Nazianz, Inc., 988 F.2d 1518, 1524 (7th Cir.1993)).]

The arbitration provision contained in Epix made no reference to statutory or other related claims but simply referred to “unresolved dispute[s] arising out of this Agreement․”  Id. at 461.

More recently, we upheld an order mandating arbitration where the allegations included a claim under the CFA, and the arbitration provision made no reference to statutory claims.  Curtis v. Cellco P'ship d/b/a Verizon Wireless, 413 N.J.Super. 26, 36-40 (App.Div.2010).

In Epix, we also distinguished Garfinkle by noting:

We have also recognized, however, that these articulated limits to otherwise broadly-worded arbitration clauses do not apply outside “the special area” of a “plaintiff's enforcement of statutory employment claims.”   Indeed, a party who agrees to arbitrate a statutory claim “does not forgo the substantive rights afforded by the statute;  it only submits their resolution in an arbitral, rather than judicial, forum.”

[Id. at 476 (citations omitted).]

We further held that:

Only “if a statute or its legislative history evidences an intention to preclude alternate forms of dispute resolution, will arbitration be an unenforceable option.”  Alamo Rent A Car, Inc., v. Galarza, 306 N.J.Super. 384, 389 (App.Div.1997).   In Gras v. Assocs.   First Capital Corp., we found nothing in the [CFA] that precluded vindication of a consumer's statutory rights in the arbitral forum.  346 N.J.Super. 42, 52 (App.Div.2001), certif. denied, 171 N.J. 445 (2002).

[Id. at 477.]

We apply that same principle here.   Contrary to the motion judge's finding, the claims asserted here “arise” out of the contract at issue.   As defendants correctly assert, the contracts are the sole connection between the two parties.   As the factual background, not the legal characterization, of a claim determines its connection to an arbitration clause, plaintiff's causes of action would properly be resolved by arbitration.

We note that the arbitration clause grants defendants discretion to choose the venue for resolving disputes brought by both defendants and plaintiff.   Ultimately, plaintiff's claims will be adjudicated in a forum that can resolve the dispute and afford plaintiff appropriate relief.   Moreover, clauses that distinguish between the forum as between contracting parties are not invalid per se.   See Delta Funding Corp. v. Harris, 189 N.J. 28, 43-44 (2006).

We do have concern with section (c) of the dispute resolution clause, as written, which provides that plaintiff must indemnify CMG against any loss or liability it incurs as the result of an action brought by plaintiff himself.   Arbitration agreements placing significantly less burdensome requirements on successful plaintiffs have been struck down, including here in New Jersey.   See id. at 41-45 (finding, on certified question of law from the Third Circuit, that provisions which allowed arbitrator to assess all costs to plaintiff outside a finding of bad faith removed plaintiff's ability to receive attorney's fees where provided for by statute, and which prevented plaintiff from obtaining fees and costs on appeal, are unconscionable);  see also McKee v. AT & T Corp., 191 P.3d 845, 859-60 (Wash.2008) (holding unconscionable an arbitration clause limiting plaintiff's ability to recover attorney's fees);  Simpson v. MSA of Myrtle Beach, Inc., 644 S.E.2d 663, 670-71 (S.C.2007) (holding unconscionable a provision preventing plaintiff from recovering statutory damages).   We question the enforceability of this provision and remand the matter to the Law Division to address this issue under the severability clause of the contract.

We conclude that plaintiff's claims must be resolved through arbitration.   We remand this matter to the Law Division to address the issue of whether subsection (c) is enforceable.

Reversed and remanded for further proceedings consistent with this opinion.   We do not retain jurisdiction.

FOOTNOTES

FN1. Citing Perez v. Rent-A-Center, Inc., 186 N.J. 188, 213-15 (2006), cert. denied, 549 U.S. 1115, 127 S.Ct. 984, 166 L. Ed.2d 710, plaintiff asserts that “the Criminal Usury Statute interest rate cap in incorporated into the LLA's consumer loan provisions․”.  FN1. Citing Perez v. Rent-A-Center, Inc., 186 N.J. 188, 213-15 (2006), cert. denied, 549 U.S. 1115, 127 S.Ct. 984, 166 L. Ed.2d 710, plaintiff asserts that “the Criminal Usury Statute interest rate cap in incorporated into the LLA's consumer loan provisions․”

PER CURIAM