                                                                                                                           Opinions of the United
2007 Decisions                                                                                                             States Court of Appeals
                                                                                                                              for the Third Circuit


8-9-2007

Salley v. Option One Mtg Corp
Precedential or Non-Precedential: Non-Precedential

Docket No. 04-4241




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                                                              NOT PRECEDENTIAL

                      UNITED STATES COURT OF APPEALS
                           FOR THE THIRD CIRCUIT
                             __________________

                                     No. 04-4241
                                 __________________

                                 WILL SALLEY, JR.,
                                           Appellant

                                           v.

                 OPTION ONE MORTGAGE CORP.; CIT GROUP;
                   JOHN DOE TRUSTEE; JOHN DOE TRUST;
                           JOHN DOE #’S 1-100


                                  _________________

                   On Appeal from the United States District Court
                      for the Eastern District of Pennsylvania
                                 (No. 04-cv-02227)
                   District Judge: Honorable Eduardo C. Robreno

                                 __________________

                             Argued: September 26, 2005
                               __________________


             Before: RENDELL, FUENTES, and GARTH, Circuit Judges

                                 (Filed: August 9, 2007)


Brian R. Mildenberg [Argued]
Sherri Braunstein
Carol E. Kravitz-Verlin
Mildenberg and Stalbaum, P.C.
1845 Walnut Street, 22nd Floor
Philadelphia, PA 19103
              Counsel for Appellant

Alan C. Gershenson [Argued]
Blank Rome LLP
One Logan Square
130 North 18th Street
Philadelphia, PA 19103
              Counsel for Appellee Option One Mortgage Corp.

Mark S. Melodia
James C. Martin
Donna M. Doblick
Colin E. Wrabley
Reed Smith LLP
435 Sixth Avenue
Pittsburgh, PA 15219
              Counsel for Appellee Option One Mortgage Corp.

                                   __________________

                                OPINION OF THE COURT

                                   __________________


GARTH, Circuit Judge.


       In 2004, plaintiff-appellant Will Salley, Jr. brought an action against the defendant-

appellees (hereinafter collectively “Option One”) alleging that the arbitration agreement into

which he entered with Option One was unconscionable and unenforceable. We heard oral

argument in this appeal in September 2005 and then unanimously voted to petition the

Pennsylvania Supreme Court to accept certification of a question of Pennsylvania law.1 See


       1
       Our Court’s Local Rule 110.1, “Certification of Questions of State Law,”
provides:

                                              2
Salley v. Option One Mortgage Corp., et al., No. 04-4241, 2005 WL 3724871 (3d Cir. Oct.

20, 2005). Thereafter, the Pennsylvania Supreme Court accepted certification of our petition

and on May 31, 2007 rendered its opinion. See Salley v. Option One Mortgage Corp., et al,

925 A.2d 115 (Pa. 2007). That Court answered the question which we had certified and

returned Salley’s appeal to us. Having received an answer to the question we certified, we

will affirm the order of the District Court dismissing Salley’s complaint without prejudice.



                                             I.

       The material facts here are uncontested, and we summarize them briefly. Salley is a

low-income homeowner in Philadelphia County, Pennsylvania, who applied for and received

a residential mortgage loan from Option One,2 a sub-prime lender. As part of this


       When the procedures of the highest court of a state provide for certification
       to that court by a federal court of questions arising under the laws of that
       state which will control the outcome of a case pending in the federal court,
       this court, sua sponte or on motion of a party, may certify such a question
       to the state court in accordance with the procedures of that court, and will
       stay the case in this court to await the state court’s decision whether to
       accept the question certified. The certification will be made after the briefs
       are filed in this court. A motion for certification shall be included in the
       moving party’s brief.

3d Cir. L.A.R. 110.1 (2002). See also 210 Pa. Code § 63.10 (2007) for certification of a
question arising under the laws of Pennsylvania.
       2
        Option One is a California corporation with its principal place of business outside
of Pennsylvania. Salley is a Pennsylvania resident. The real property that is collateral
for the Option One-Salley loan is in Pennsylvania. The District Court’s jurisdiction was
based on 28 U.S.C. § 1332. We have jurisdiction under 28 U.S.C. § 1291. Our standard
of review is plenary. See Medtronic AVE, Inc., v. Advanced Cardiovascular Systems,

                                             3
transaction, the parties entered into an Agreement for the Arbitration of Disputes

(“Agreement”). The Agreement required that at either party’s request any dispute would be

subject to binding arbitration, but excepted from that arbitration requirement certain creditor

remedies. The “Exceptions” provision provided in part:

       The following are not disputes subject to this Agreement: (1) any judicial or
       non-judicial foreclosure proceeding against any real or personal property that
       serves as collateral for the loan, whether by the exercise of any power of sale
       under any deed of trust, mortgage, other security agreement or instrument or
       under applicable law, (2) the exercise of any self-help remedies (including
       repossession and setoff rights) and (3) provisional or ancillary remedies with
       respect to the loan or any collateral for the loan such as injunctive relief,
       sequestration, attachment, replevin or garnishment, the enforcement of any
       assignment of rents provision in any loan documents, the obtaining of
       possession of any real property collateral for the loan by an action for unlawful
       retainer or the appointment of a receiver by a court having jurisdiction.

(Agreement at 2.)

       On May 21, 2004, Salley filed a complaint against Option One in the United States

District Court for the Eastern District of Pennsylvania. Salley alleged predatory lending

practices and mortgage law violations under various federal and state consumer protection

statutes.3 Option One filed a motion to dismiss or stay the action pending arbitration. In

response, Salley argued that the Agreement was substantively unconscionable, and thus

unenforceable, because it provided for a judicial forum for foreclosure and certain other



Inc., 247 F.3d 44, 53 (3d Cir. 2001).
       3
        The complaint and the opinion of the Pennsylvania Supreme Court detail many of
Salley’s allegations, which include, inter alia, “bait and switch” tactics; the failure of
Option One to deliver funds at closing; the failure of Option One to pay the mortgage at
closing; etc.

                                              4
creditor remedies while requiring that all claims the borrower might wish to assert against

the lender be resolved through arbitration.4

       A then-recent decision issued by the Pennsylvania Superior Court provided support

for Salley’s argument. In Lytle v. CitiFinancial Serv., Inc., 810 A.2d 643 (Pa. Super. Ct.

2002), the Superior Court held that:

       under Pennsylvania law, the reservation by [the lender] of access to the courts
       for itself to the exclusion of the consumer creates a presumption of
       unconscionability, which in the absence of ‘business realities’ that compel
       inclusion of such a provision in an arbitration provision, renders the arbitration
       provision unconscionable and unenforceable under Pennsylvania law.

Id. at 665. However, this holding conflicted with an earlier decision of this court in Harris

v. Green Tree Fin. Corp., 183 F.3d 179 (3d Cir. 1999). Predicting Pennsylvania law, we held

in Harris that “the mere fact that [the lender] retains the option to litigate some issues in

court, while [the individual homeowner] must arbitrate all claims does not make the



       4
         In the District Court, Option One offered to pay the costs of arbitration, even
though the Agreement provided that if a dispute went to arbitration, each party would
bear its own costs and expenses including attorneys’ fees. As we discussed in the
Petition for Certification of Question of Law, this offer satisfied the District Court that
the Agreement was not unconscionable because the cost of arbitration might be
prohibitively expensive. Salley did not raise this issue in his appellate brief, thereby
waiving it on appeal. See Nagle v. Alspach, 8 F.3d 141, 143 (3d Cir. 1993) (noting that
absent extraordinary circumstances, an issue not set forth in the statement of issues or the
argument section of an appellate brief is waived).
        The majority of the Pennsylvania Supreme Court did not consider this issue,
although it discussed the fee-shifting provision in the similar certification petition
decided by the New Jersey Supreme Court in Delta Funding Corp. v. Harris, 912 A.2d
104 (N.J. 2006). See Salley, 925 A.2d at 127. Madame Justice Baldwin, who dissented
from the Pennsylvania Supreme Court’s decision, would not have considered our court’s
waiver determination as controlling.

                                               5
arbitration agreement unenforceable.” Id. at 183.

       Faced with conflicting holdings of Harris from our Court and of Lytle from the

intermediate state court, the District Court followed Harris as the controlling authority on

Pennsylvania law with respect to the unconscionability determination. On September 29,

2004, the District Court granted Option One’s motion and dismissed all claims without

prejudice. Salley appealed, urging this Court to revisit our holding in Harris in light of Lytle.

       Noting the “substantial confusion and inconsistent results among the lower federal

courts” due to the uncertainty over whether Harris or Lytle correctly stated Pennsylvania law,

Salley, 2005 WL 3724871, at *3, we petitioned for certification of this question of law to the

Pennsylvania Supreme Court. See 3d Cir. L.A.R. 110.1 (2002), supra note 1. The question we

certified asked:

       Whether the arbitration agreement under consideration in this case, which
       exempts from binding arbitration certain creditor remedies, while requiring the
       submission of other claims to arbitration, is unconscionable under
       Pennsylvania law, as suggested by Lytle v. CitiFinancial Serv., Inc., 810 A.2d
       643 ([Pa. Super.] 2002) (one-sided agreement presumptively unconscionable)
       (contra Harris v. Green Tree Fin. Corp., 183 F.3d 173 (3d Cir. 1999), and is
       therefore unenforceable?

Salley, 2005 WL 3724871, at *3.5 The Pennsylvania Supreme Court issued its decision on

May 31, 2007.6



       5
        Our petition for certification is not reported in the Federal Reporter, third series.
       6
       After the filing of the Pennsylvania Supreme Court’s opinion, we instructed
counsel to file supplemental statements commenting on that opinion. We received a
supplemental statement from Option One, but no statement from Salley’s counsel.

                                               6
                                               II.

         We briefly summarize the analysis and conclusions of the Pennsylvania Supreme

Court.

         That Court began by noting that the Agreement is subject to the Federal Arbitration

Act (“FAA”), which “expresses a liberal federal policy favoring arbitration agreements.” Id.

at 118. See 9 U.S.C. § 2. Although the FAA provides that a written provision to settle

contract disputes through arbitration is “valid, irrevocable, and enforceable,” 9 U.S.C. § 2,

the Court emphasized that under the FAA, “generally applicable state-law contract defenses,

such as fraud, duress, or unconscionability, still may be applied to invalidate arbitration

agreements.” Salley, 925 A.2d at 119.

         The Pennsylvania Supreme Court explained that according to Pennsylvania law, a

contract or term is unconscionable, and thus unenforceable, where there is both “a lack of

meaningful choice in the acceptance of the challenged provision and the provision

unreasonably favors the party asserting it.” Id. That is, there must be both procedural and

substantive unconscionability for the defense to apply.                The burden to show

unconscionability is on the party challenging the agreement.

         The Pennsylvania Supreme Court went on to remark that having a court make a

threshold unconscionability determination in all cases would thwart Congress’s purpose to

facilitate a just and speedy alternative forum to resolve disputes.           To that end, the

Pennsylvania Supreme Court noted that the Supreme Court has held that if the challenge is

to the validity of the contract as a whole, it must be presented to the arbitrator, and only when

                                               7
the challenge is directed solely to the arbitration component itself can a court consider the

challenge in the first instance. See Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S.

395, 406 (1967); Buckeye Check Cashing, Inc. v. Cardegna, 546 U.S. 440,            , 126 S. Ct.

1204, 1209 (2006).

       Turning to the allegation of unconscionability in this case, the Court stated that there

did appear to be “a substantial level of procedural unconscionability present in the sub-prime

lending industry” and that the “[p]rocedural unconscionability would be particularly high in

the present case if various of the facts asserted by Mr. Salley, such as lender non-disclosure

and dishonesty in the application and settlement process, are true.” Salley, 925 A.2d at 128.7

       Nevertheless, the Pennsylvania Supreme Court held that the reservation of foreclosure

and other in rem remedies does not, as a matter of law, render the Agreement substantively

unconscionable. Id. That court explained that “there is a facially apparent business

justification for such an exception, as the safeguards thereby preserved assure regularity and

consistency for the benefit of both lender and borrower, and accordingly, there are sound

pragmatic and policy reasons why foreclosure proceedings should be pursued in a court of

law.” Id. As such, this exception did not unreasonably favor the party asserting it. The court

did note, however, that a party may bring evidence tending to show that a lender used an


       7
         The Pennsylvania Supreme Court noted in a footnote, however, that in light of the
Supreme Court precedent regarding the appropriate forum to hear a challenge to an
arbitration clause or agreement, it is “questionable whether the facts asserted by Mr.
Salley concerning the application and settlement process could be considered in a court’s
initial assessment concerning the arbitration agreement, since they are substantially
intertwined with the merits of the underlying dispute.” Id. at 128 n.16.

                                              8
exception such as the one here as a tool of predatory lending, but that “such evidence goes

beyond a mere challenge to the foreclosure reservation or the arbitration agreement itself, but

also subsumes aspects of the underlying asserted consumer lending violations.” Id. at 128-

29.

       The Pennsylvania Supreme Court concluded that while “Lytle was well intentioned

in its effort to guard against pernicious lending practices, . . . it swept too broadly. Under

Pennsylvania law, . . . there is no presumption of unconscionability associated with an

arbitration agreement merely on the basis that the agreement reserves judicial remedies

associated with foreclosure.” Id. at 129 (emphasis added). The Court therefore held that “the

exception from mandatory arbitration for foreclosure contained within the Option-One/Salley

arbitration agreement, in and of itself, does not render the agreement presumptively

unconscionable under Pennsylvania law.” Id. Having answered the certified question, the

Court returned the case to our court and relinquished jurisdiction.

       The Pennsylvania Supreme Court having determined that Harris, rather than Lytle,

most accurately states the Pennsylvania law on this matter, we will affirm the order of the

District Court to dismiss Salley’s complaint without prejudice pending arbitration.

__________________




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