                IN THE COURT OF APPEALS OF TENNESSEE
                           AT KNOXVILLE
                               November 6, 2013 Session

             RICHARD A. BERENT v. CMH HOMES, INC. ET AL.

                 Appeal from the Circuit Court for Hamilton County
                  No. 12C1524     W. Jeffrey Hollingsworth, Judge


             No. E2013-01214-COA-R3-CV-FILED-FEBRUARY 28, 2014




The issue on this appeal is the enforceability of an arbitration agreement. The trial court,
applying the principles promulgated in Taylor v. Butler, 142 S.W.3d 277 (Tenn. 1996), held
that the arbitration agreement was unconscionable because it requires the plaintiff to submit
to arbitration virtually all of his claims, while allowing the defendants access to a judicial
forum for some of their potential claims. We agree with the trial court that the Supreme
Court’s decision in Taylor is controlling and that Taylor mandates a holding that the
agreement is unconscionable and unenforceable. The judgment of the trial court is affirmed.

        Tenn. R. App. P. 3 Appeal as of Right; Judgment of the Circuit Court
                            Affirmed; Case Remanded

C HARLES D. S USANO, JR., C.J., delivered the opinion of the Court, in which D. M ICHAEL
S WINEY and J OHN W. M CC LARTY, JJ., joined.

William S. Rutchow and Jennifer S. Rusie, Nashville, Tennessee, for the appellants, CMH
Homes, Inc. and Vanderbilt Mortgage and Finance, Inc.

Andrew S. Basler, Chattanooga, Tennessee, for the appellee, Richard A. Berent.
                                          OPINION

                                               I.

       On December 15, 2010, Richard Berent (“plaintiff”) bought a manufactured mobile
home from CMH Homes, Inc. Plaintiff financed the home by way of a mortgage provided
by Vanderbilt Mortgage and Finance, Inc. Plaintiff and CMH Homes entered into a retail
installment contract that provided the terms of the sale and the obligations of each party.
CMH Homes then assigned its rights under the contract to Vanderbilt Mortgage.

       On December 18, 2012, plaintiff brought this action against defendants CMH Homes
and Vanderbilt Mortgage, alleging breach of contract, breach of express and implied
warranties, fraud, and violation of the Tennessee Consumer Protection Act. Plaintiff further
alleged that “the Installment Contract is unconscionable, and void.” Defendants filed a
motion to dismiss or to compel plaintiff to arbitrate his claims under the contract’s arbitration
provisions which, in pertinent part, are as follows:

              Agreement to Arbitrate: Buyer and Seller (sometimes called the
              “Parties”) agree to mandatory, binding arbitration
              (“Arbitration”) of all disputes, claims, controversies, grievances,
              causes of action, including, but not limited to, common law
              claims, contract and warranty claims, tort claims, statutory
              claims, and, where applicable, administrative law claims, and
              any other matter in question (“Claims”) arising from or relating
              to this Contract, any products/goods, services, insurance, or real
              property (including improvements to the real property) sold or
              financed under this Contract, and the interpretation, scope,
              validity or enforceability of this Contract (with the exception of
              this agreement to arbitrate, the “Arbitration Agreement”). The
              interpretation, scope, validity, or enforceability of this
              Arbitration Agreement or any clause or provision herein and the
              arbitrability of any issue shall be determined by a court of
              competent jurisdiction.

(Underlining in original.) Plaintiff argued in response that the arbitration agreement was
void for unconscionability because it forced him to arbitrate virtually all of his claims while
allowing defendants to pursue judicial relief for certain claims. The arbitration agreement
provides the following exceptions allowing defendants to bring certain causes of action in
a judicial forum:



                                               -2-
              G. Exceptions: Notwithstanding any other provision of this
              Arbitration Agreement, Buyer agrees that Seller may use judicial
              process (filing a lawsuit): (a) to enforce the security interest
              granted in this Contract or any related mortgage or deed of trust,
              and (b) to seek preliminary relief, such as a restraining order or
              injunctive relief, in order to preserve the existence, location,
              condition, or productive use of the Manufactured Home or other
              Collateral. Buyer and Seller also agree that this Arbitration
              Agreement does not apply to any Claim where the amount in
              controversy is less than the jurisdictional limit of the small
              claims court in the jurisdiction where the Buyer resides,
              provided, however, that the Parties agree that any such small
              claims Claim may only be brought on an individual basis and
              not as a class action. Bringing a court proceeding described in
              this paragraph G., however, shall not be a waiver of Seller’s or
              Buyer’s right to compel Arbitration of any other Claim that is
              covered by this Arbitration Agreement, including Buyer’s
              counterclaim(s) in a suit brought by Seller.

(Underlining and emphasis in original.) Plaintiff relies on the Supreme Court’s decision in
the Taylor case, wherein the High Court held an arbitration clause to be “unconscionable and
therefore void because it reserves the right to a judicial forum for the defendants while
requiring the plaintiff to submit all claims to arbitration.” 142 S.W.3d 277 at 280.

       The trial court denied defendants’ motion, holding as follows:

              The arbitration agreement contained within the Retail
              Installment Contract (“RIC”) is unconscionable, under the
              reasoning of the Tennessee Supreme Court in [Taylor]. Under
              the arbitration agreement, the buyer is required to submit all
              claims he may have against the seller to arbitration. The seller,
              on the other hand, may choose to proceed in court “(a) to
              enforce the security interest granted in this contract or any
              related mortgage or deed of trust.” . . . This exception is similar
              to the one struck down in Taylor and is therefore to be
              considered unconscionable and unenforceable.

              This ruling applies only to the arbitration agreement. It does not
              pertain to the enforceability of the remainder of the RIC.



                                              -3-
(Defined term “RIC” in original.) Defendants timely filed a notice of appeal under Tenn.
Code Ann. § 29-5-319 (2012), which provides that “[a]n appeal may be taken from: (1) an
order denying an application to compel arbitration made under § 29-5-303 . . . in the same
manner and to the same extent as from orders or judgments in a civil action.” See also
McGregor v. Christian Care Ctr. of Springfield, L.L.C., No. M2009-01008-COA-R3-CV,
2010 WL 1730131 at *3 (Tenn. Ct. App. M.S., filed Apr. 29, 2010); Reno v. Suntrust, Inc.,
No. E2006-01641-COA-R3-CV, 2007 WL 907256 at *2 (Tenn. Ct. App. E.S., filed Mar. 26,
2007) (“Although an appeal as of right typically must address a final judgment of a trial
court, . . . the Tennessee Uniform Arbitration Act . . . provides that an appeal may be taken
from an order denying an application to compel arbitration”).

                                               II.

        The precise issue on appeal is whether the trial court erred in refusing to order
plaintiff to arbitrate his claims, the court’s decision being predicated on the ground that the
arbitration agreement was unconscionable under the controlling principles set forth by the
Supreme Court in Taylor.

        Defendants also raise the following issue, as quoted in their brief: “Did the Trial Court
err in denying the Motion to Compel arbitration where the Court should have simply severed
the Exceptions clause of the Arbitration Agreement?” We decline to address this issue.
Defendants have waived it by failing to raise it with the trial court. Defendants did not ask
the court to sever the exceptions clause, nor did they ever point out, or argue the applicability
of, the severability provision in the arbitration agreement at the trial level. “Under Tennessee
law, issues raised for the first time on appeal are waived.” Black v. Blount, 938 S.W.2d 394,
403 (Tenn. 1996); accord Dick Broad. Co. of Tenn. v. Oak Ridge FM, Inc., 395 S.W.3d
653, 670 (Tenn. 2013).

                                              III.

       “The question of whether a contract or provision thereof is unconscionable is a
question of law.” Taylor, 142 S.W.3d at 284-85. Consequently, our review is de novo with
no presumption of correctness of the trial court’s legal decision on the subject issue. Brown
v. Tenn. Title Loans, Inc., 216 S.W.3d 780, 783 (Tenn. Ct. App. 2006).

       In Taylor, the Supreme Court addressed the validity of an arbitration agreement that
“reserve[d] the right to a judicial forum for the defendants while requiring the plaintiff to
submit all claims to arbitration.” 142 S.W.3d at 280. The High Court, holding the agreement
“unconscionable and therefore void,” id., stated the following:



                                               -4-
In her brief on appeal, Taylor focuses on the following provision
contained in the arbitration agreement of the Buyers Order:
“Dealer, however may pursue recovery of the vehicle under the
Tennessee Uniform Commercial Code and Collection of Debt
due by state court action.” Taylor asserts that this provision
renders the contract unconscionable because City Auto has
retained for itself legal remedies beyond arbitration while
restricting Taylor to those remedies available under the Federal
Arbitration Act.

                     *      *         *

If a contract or term thereof is unconscionable at the time the
contract is made, a court may refuse to enforce the contract, or
may enforce the remainder of the contract without the
unconscionable term. See Restatement (Second) of Contracts §
208 (1981). “The determination that a contract or term is or is
not unconscionable is made in the light of its setting, purpose
and effect. Relevant factors include weaknesses in the
contracting process like those involved in more specific rules as
to contractual capacity, fraud, and other invalidating
causes. . . .” Restatement (Second) of Contract[s] § 208, cmt. a
(1981).

Enforcement of a contract is generally refused on grounds of
unconscionability where the “inequality of the bargain is so
manifest as to shock the judgment of a person of common sense,
and where the terms are so oppressive that no reasonable person
would make them on the one hand, and no honest and fair
person would accept them on the other.” An unconscionable
contract is one in which the provisions are so one-sided, in view
of all the facts and circumstances, that the contracting party is
denied any opportunity for meaningful choice.

While Tennessee has yet to address the issue of whether an
arbitration provision in a consumer contract which reserves a
right to access to the courts only for the merchant and not the
consumer is voidable on the basis of unconscionability, a
number of other jurisdictions have addressed such one-sided
arbitration provisions.

                                -5-
Taylor, 142 S.W.3d at 284-85 (internal citations omitted). After reviewing opinions from
other jurisdictions addressing this issue, the Supreme Court concluded:

              The arbitration agreement in this case is comparable to those
              that were found to be unconscionable in the aforementioned
              cases. City Auto has a judicial forum for practically all claims
              that it could have against Taylor. Indeed, it is hard to imagine
              what other claims it would have against her other than one to
              recover the vehicle or collect a debt. At the same time, Taylor is
              required to arbitrate any claim that she might have against City
              Auto.

              The contract signed between Taylor and City Auto is one of
              adhesion, in that it is a standardized contract form that was
              offered on essentially a “take it or leave it” basis without
              affording Taylor a realistic opportunity to bargain. See Black’s
              Law Dictionary 40 (6th ed. 1990). We have previously
              determined that enforceability of contracts of adhesion generally
              depends upon whether the terms of the contract are beyond the
              reasonable expectations of an ordinary person, or oppressive or
              unconscionable. See Buraczynski v. Eyring, 919 S.W.2d 314,
              320 (Tenn. 1996). Courts will not enforce adhesion contracts
              which are oppressive to the weaker party or which serve to limit
              the obligations and liability of the stronger party. Id. Looking
              at the arbitration agreement in the present case, it is clear that it
              is unreasonably favorable to City Auto and oppressive to Taylor.

Id. at 286.

        We have twice applied the Taylor holding and rationale to invalidate an arbitration
provision that had a similar one-sided effect of allowing one party access to the judicial
system and restricting the other party’s access. See Brown, 216 S.W.3d at 786-87 (observing
that “[t]he arbitration agreements require Plaintiffs to arbitrate any and all claims they may
have against Defendant. Defendant, however, is allowed to bypass arbitration altogether and
proceed through the court system with regard to any claims against Plaintiffs ‘to enforce’
Plaintiffs’ ‘payment obligation, in the event of default’ ”); see also McGregor, 2010 WL
1730131 at *6-7 (invalidating arbitration agreement that “forces [the plaintiff] to go to
arbitration for any claims she may have against the nursing home, but it gives the nursing
home recourse to the courts for certain claims against her”).

                                               -6-
        As already stated, the Taylor Court held the arbitration clause “unconscionable and
therefore void because it reserves the right to a judicial forum for the defendants while
requiring the plaintiff to submit all claims to arbitration.” Id. at 280, 287. The arbitration
provision in the present case has a similar effect. In this case, the printed form agreement,
presented to plaintiff by CMH Homes, allows defendants the right to a judicial forum for
primary and significant claims: “(a) to enforce the security interest granted in this Contract
or any related mortgage or deed of trust, and (b) to seek preliminary relief, such as a
restraining order or injunctive relief, in order to preserve the existence, location, condition,
or productive use of the Manufactured Home or other Collateral.” Moreover, in the event
that defendants file a lawsuit under the agreement’s exceptions to the arbitration requirement,
plaintiff is barred from bringing a counterclaim in the same court; the agreement requires
such a counterclaim to be submitted to arbitration. Although the arbitration agreement in this
case is different from the one in Taylor in at least one respect – allowing either party to bring
a claim “where the amount in controversy is less than the jurisdictional limit of the small
claims court in the jurisdiction where the Buyer resides” – the agreement reserves the right
to a judicial forum for defendants to present arguably their most likely, and most significant,
causes of action, while substantially restricting plaintiff’s access to the courts. Thus, as we
held in Brown and McGregor, the Supreme Court’s decision in Taylor is controlling here.

       Defendants argue that the trial court erred in refusing to enforce the arbitration
agreement because plaintiff’s claim of unconscionability is preempted by the Federal
Arbitration Act (“FAA”), 9 U.S.C.A. § 1 et seq. Like the agreement in Taylor, the arbitration
agreement here provides that the arbitration shall be governed by and conducted under the
FAA. In Taylor, the Court recognized that the FAA allows states to regulate arbitration
contracts under general contract law principles, including applying defenses such as
unconscionability, stating as follows:

              Generally, whether a valid agreement to arbitrate exists between
              the parties is to be determined by the courts, and if a complaint
              specifically challenges the arbitration clause on grounds such as
              fraud or unconscionability, the court is permitted to determine
              it[s] validity before submitting the remainder of the dispute to
              arbitration.

              In determining whether there is a valid agreement to arbitrate,
              “courts generally . . . should apply ordinary state-law principles
              that govern formation of contracts,” First Options of Chicago,
              Inc. v. Kaplan, 514 U.S. 938, 944, 115 S.Ct. 1920, 131 L.Ed.2d
              985 (1995). As the United State[s] Supreme Court noted in
              Allied–Bruce Terminix Cos. v. Dobson:

                                               -7-
                      Section 2 [of the FAA] gives States a method for
                      protecting consumers against unfair pressure to
                      agree to a contract with an unwanted arbitration
                      provision.     States may regulate contracts,
                      including arbitration clauses, under general
                      contract law principles and they may invalidate an
                      arbitration clause “upon such grounds as exist at
                      law or in equity for the revocation of any
                      contract.” 9 U.S.C. § 2.

              513 U.S. 265, 281, 115 S.Ct. 834, 130 L.Ed.2d 753 (1995).
              “[G]enerally applicable contract defenses, such as fraud,
              duress, or unconscionability, may be applied to invalidate
              arbitration agreements without contravening” the enforcement
              provisions of the FAA. Doctor’s Assoc., Inc. v. Casarotto, 517
              U.S. 681, 687, 116 S.Ct. 1652, 134 L.Ed.2d 902 (1996).

142 S.W.3d 283-84 (internal citations and footnote omitted; emphasis added). As this
analysis demonstrates, the FAA does not preempt the application of a generally applicable
state-law contract defense such as unconscionability. Furthermore, in this case the arbitration
agreement specifically provides that “[t]he interpretation, scope, validity, or enforceability
of this Arbitration Agreement or any clause or provision herein and the arbitrability of any
issue shall be determined by a court of competent jurisdiction.”

        Finally, the defendants state in their brief that “[t]his appeal calls into question the
continuing viability of the Supreme Court’s decision in Taylor,” citing numerous decisions
from other jurisdictions in support of their argument that “Taylor is no longer in the legal
majority; indeed, the law propounded in Taylor is only accepted in a small minority of
jurisdictions.” It is not the prerogative of this Court to address the “continuing viability” of
a Supreme Court decision other than to note that it continues to remain viable until the
Supreme Court says otherwise. We responded to a similar argument in Brown with the
following observations that are equally applicable in the present case:

              Defendant correctly notes that several jurisdictions have reached
              conclusions different from the result reached by the Tennessee
              Supreme Court in Taylor v. Butler. Defendant argues that the
              Taylor decision was not sound and urges this Court to side with
              those jurisdictions reaching conclusions contrary to Taylor. . . .
              This Court, however, is not at liberty to reverse decisions of our

                                              -8-
             Supreme Court. If Defendant believes Taylor was wrongly
             decided, that argument needs to be directed to the Supreme
             Court.

216 S.W.3d at 787.
                                          IV.

       The judgment of the trial court is affirmed. Costs on appeal are assessed to the
appellants, CMH Homes, Inc. and Vanderbilt Mortgage and Finance, Inc. This case is
remanded to the trial court, pursuant to applicable law, for further proceedings.




                                 _____________________________________
                                 CHARLES D. SUSANO, JR., CHIEF JUDGE




                                          -9-
