On May 31, 2007, the Pennsylvania Supreme Court held that an arbitration agreement entered into by a mortgagor and a subprime mortgage company, in which there was an exception from mandatory arbitration for judicial remedies related to foreclosure, was not presumptively unconscionable. Salley v. Option One Mortgage Corp., ___ A.2d ___, 2007 WL 1583359 (Pa., May 31, 2007) [certified to the Pennsylvania Supreme Court by the United States Court of Appeals for the Third Circuit].

The appellant, a low-income homeowner, applied for and received a residential mortgage from Option One Mortgage Corporation. The application provided an arbitration agreement, which excepted from mandatory arbitration “any judicial or non-judicial foreclosure proceeding against any real or personal property that serves as collateral for the loan.” When appellant commenced a federal action against the Option One, the mortgage company filed a motion to dismiss or, alternatively, stay the action pending arbitration. The Pennsylvania Supreme Court accepted for certification the question of whether the arbitration agreement, which exempted from arbitration certain remedies while making mandatory the submission of other claims to arbitration, was unconscionable under Pennsylvania law.

Option One argued that the exception for judicial remedies in foreclosure struck a balance between protecting the lender’s interest in expeditiously establishing the right to reclaim the mortgaged property on one hand, while safeguarding the borrower’s interests on the other by providing the substantive protections of Pennsylvania foreclosure law. The Pennsylvania Supreme Court agreed with Option One and rejected the prior holding of Lytle v. CitiFinancial Services, Inc., 810 A.3d 643 (Pa. Super. Ct., Oct. 24, 2002), which had held that the reservation by a financial institution of access to the courts for itself, but to the exclusion of the consumer, creates a presumption of unconscionability. The Supreme Court based its analysis on Delta Funding v. Harris, 912 A.2d 104 (N.J., Aug. 9, 2006), which concluded that foreclosure to proceed in a judicial forum may be burdensome, but that it is not unconscionable because foreclosure is a uniquely judicial process. The Pennsylvania Supreme Court found “sound pragmatic and policy reasons why foreclosure proceedings should be pursued in a court of law,” including regularity and consistency for the benefit of both the borrower and the lender.

While the Pennsylvania Supreme Court returned the case to the Third Circuit, the federal court is fully expected to apply the Supreme Court’s decision and let arbitration proceed. This case is a significant development in the enforcement of consumer arbitration provisions in Pennsylvania.

  • Mike Tomkies and Kathleen Manley