Torrence v. Nationwide Budget Finance

NO. COA12-453

NORTH CAROLINA COURT OF APPEALS

Filed: 4 February 2014

JAMES P. TORRENCE, SR., and TONYA

BURKE, on behalf of themselves and

all other persons similarly

situated,

Plaintiffs

v. New Hanover County

No. 05 CVS 447

NATIONWIDE BUDGET FINANCE, QC

HOLDINGS, INC., QC FINANCIAL

SERVICES, INC. FINANCIAL SERVICES

OF NC, INC. and DON EARLY,

Defendants

Appeal by defendants from orders entered 25 January 2012 by

Judge D. Jack Hooks, Jr. in New Hanover County Superior Court.

Heard in the Court of Appeals 28 November 2012.

Hartzell & Whiteman, L.L.P., by J. Jerome Hartzell, and North

Carolina Justice & Community Development Center, by Carlene

McNulty, for plaintiff-appellees.

Ellis & Winters LLP, by Paul K. Sun, Jr. and Kelly Margolis

Dagger, and Katten Muchin Rosenman LLP, by Claudia Callaway,

for defendant-appellants.

STEELMAN, Judge.

Where the arbitrator named in the arbitration agreement was

no longer conducting arbitrations, the trial court erred in not

appointing a substitute arbitrator pursuant to § 5 of the Federal

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Arbitration Act. Based upon the decisions of the United States

Supreme Court in Concepcion and Italian Colors, the trial court

erred in holding that the arbitration agreement was unconscionable

and refusing to compel arbitration.

I. Factual and Procedural History

County Bank of Rehoboth Beach, Delaware (“County Bank”), an

FDIC-insured Delaware bank, began offering short-term consumer

loans to North Carolina residents in 2002. In March 2003, County

Bank retained Financial Services of North Carolina, Inc., (“FSNC”)

to offer County Bank loans at FSNC locations. Applications for

loans were submitted at FSNC locations, and were transmitted to

County Bank for approval. Approved applications were sent back by

County Bank with a proposed loan agreement.

Between May 2003 and February 2004, James Torrence

(“Torrence”) applied for eleven County Bank loans or renewals. On

each occasion, he signed an identical loan note and disclosure

agreement that contained a clause entitled “Agreement to Arbitrate

All Disputes.”

Between October 2003 and January 2004, Tonya Burke (“Burke”)

applied for seven County Bank loans and/or renewals. On each

occasion, she signed an identical loan note and disclosure

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agreement that contained a clause entitled “Agreement to Arbitrate

All Disputes.”

Each of the loans signed by the plaintiffs with County Bank

contained the following arbitration provisions:

AGREEMENT TO ARBITRATE ALL DISPUTES: You and

we agree that any and all claims, disputes or

controversies between you and us and/or the

Company, any claim by either of us against the

other or the Company (or the employees,

officers, directors, agents or assigns of the

other or the Company) and any claim arising

from or relating to your application for this

loan or any other loan you previously, now or

may later obtain from us, this Loan Note, this

agreement to arbitrate all disputes, your

agreement not to bring, join or participate in

class actions, regarding collection of the

loan, alleging fraud or misrepresentation,

whether under the common law or pursuant to

federal, state or local statute, regulation,

or ordinance, including disputes as to the

matters subject to arbitration, or otherwise,

shall be resolved by binding individual (and

not joint) arbitration by and under the Code

of Procedure of the National Arbitration Forum

(“NAF”) in effect at the time the claim is

filed.

This agreement to arbitrate all disputes shall

apply no matter by whom or against whom the

claim is filed. Rules and forms of the NAF

may be obtained and all claims shall be filed

at any NAF office, on the World Wide Web at

www.arb-forum.com, by telephone at 800-474-

2371, or at “National Arbitration Forum, P.O.

Box 50191, Minneapolis, Minnesota 55405.”

Your arbitration fees may be waived by the NAF

in the event you cannot afford to pay them.

The cost of any participatory, documentary or

telephone hearing, if one is held at your or

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our request, will be paid for solely by us as

provided in the NAF Rules and, if a

participatory hearing is requested, it will

take place at a location near your residence.

This arbitration agreement is made pursuant to

a transaction involving interstate commerce.

It shall be governed by the Federal

Arbitration Act, 9 U.S.C. Sections 1-16.

Judgment upon the award may be entered by any

party in any court having jurisdiction.

NOTICE: YOU AND WE WOULD HAVE HAD A RIGHT OR

OPPORTUNITY TO LITIGATE DISPUTES THROUGH A

COURT AND HAVE A JUDGE OR JURY DECIDE THE

DISPUTES BUT HAVE AGREED INSTEAD TO RESOLVE

DISPUTES THROUGH BINDING ARBITRATION.

AGREEMENT NOT TO BRING, JOIN OR PARTICIPATE IN

CLASS ACTIONS: To the extent permitted by law,

you agree that you will not bring, join or

participate in any class action as to any

claim, dispute or controversy you may have

against us, our employees, officers,

directors, servicers and assigns. You agree

to the entry of injunctive relief to stop such

a lawsuit or to remove you as a participant in

the suit. You agree to pay the attorney’s

fees and court costs we incur in seeking such

relief. This Agreement does not constitute a

waiver of any of your rights and remedies to

pursue a claim individually and not as a class

action in binding arbitration as provided

above.

SURVIVAL: The provisions of this Note dealing

with the Agreement to Arbitrate All Disputes

and the Agreement Not To Bring, Join Or

Participate In Class Actions shall survive

repayment in full and/or default of this Note.

Subsequent to plaintiffs executing the notes containing the

arbitration agreements, the National Arbitration Forum (“NAF”)

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ceased conducting arbitrations, in accordance with the terms of a

consent judgment entered into with the Attorney General of

Minnesota on 17 July 2009. This judgment arose from allegations

of bias on the part of NAF in favor of business claimants against

consumer claimants.

On 8 February 2005, plaintiffs filed a complaint in this

action as a class action. Plaintiffs alleged that defendants QC

Holdings, Inc., QC Financial Services, Inc., and Don Early, under

the name Nationwide Budget Finance (collectively, “defendants”)

violated the North Carolina Consumer Finance Act, the North

Carolina unfair trade practices laws, and North Carolina usury

laws. Plaintiffs further sought to pierce the corporate veil in

order to hold QC Holdings, Inc. and Don Early personally liable.

On 11 April 2005, defendants filed an answer, as well as a motion

to dismiss for lack of personal jurisdiction and a motion to compel

arbitration.

On 25 January 2012, the trial court filed three orders that:

(1) denied defendants’ motion to compel arbitration; (2) granted

plaintiffs’ motion for class certification; and (3) denied the

motions of QC Holdings, Inc. and Don Early to dismiss for lack of

personal jurisdiction.

Defendants appeal.

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On 20 June 2013, the United States Supreme Court handed down

its decision in American Express Co. v. Italian Colors Rest., ___

U.S. ___, 133 S.Ct. 2304, 186 L.Ed.2d 417 (2013). On 15 July 2013,

this Court granted the motion of plaintiffs-appellees to allow the

parties to submit supplemental briefs to this Court concerning

their respective positions on the impact of the Italian Colors

decision upon this case. Both plaintiffs and defendants submitted

supplemental briefs.

II. Interlocutory Appeal

The trial court’s orders do not constitute a final judgment

and are therefore interlocutory. Veazey v. City of Durham, 231

N.C. 357, 361-62, 57 S.E.2d 377, 381 (1950). “Generally, there is

no right of immediate appeal from interlocutory orders and

judgments.” Goldston v. Am. Motors Corp., 326 N.C. 723, 725, 392

S.E.2d 735, 736 (1990). However, where an interlocutory order

affects a substantial right, an immediate appeal may be taken.

N.C. Gen. Stat. § 1-277 (2013).

“The right to arbitrate a claim is a substantial right which

may be lost if review is delayed, and an order denying arbitration

is therefore immediately appealable.” Howard v. Oakwood Homes

Corp., 134 N.C. App. 116, 118, 516 S.E.2d 879, 881, review denied,

350 N.C. 832, 539 S.E.2d 288 (1999), cert. denied, 528 U.S. 1155,

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145 L.Ed.2d 1072 (2000). “Jurisdiction in this Court over an

interlocutory order is proper where the appeal is from the denial

of a motion to dismiss for lack of personal jurisdiction.” Hammond

v. Hammond, 209 N.C. App. 616, 621, 708 S.E.2d 74, 78 (2011)

(citing N.C. Gen. Stat. § 1-277(b)).

The trial court’s rulings denying defendants’ motion to

compel arbitration and to dismiss for lack of personal jurisdiction

are properly before this Court.

III. Standard of Review

The standard governing our review of this case

is that “findings of fact made by the trial

judge are conclusive on appeal if supported by

competent evidence, even if ... there is

evidence to the contrary.” Lumbee River Elec.

Membership Corp. v. City of Fayetteville, 309

N.C. 726, 741, 309 S.E.2d 209, 219 (1983)

(citation omitted). “Conclusions of law drawn

by the trial court from its findings of fact

are reviewable de novo on appeal.” Carolina

Power & Light Co. v. City of Asheville, 358

N.C. 512, 517, 597 S.E.2d 717, 721 (2004).

Tillman v. Commercial Credit Loans, Inc., 362 N.C. 93, 100-01, 655

S.E.2d 362, 369 (2008).

IV. Defendants’ Motion to Compel Arbitration

The trial court entered a detailed order denying defendants’

motion to compel arbitration. This order contained a number of

separate rulings. First, the trial court held that “[t]he

designation of the National Arbitration Forum (“NAF”) as the sole

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arbitration provider and the designation of NAF rules were integral

features of the arbitration clause.” Second, the trial court held

that there was not a valid arbitration agreement because of the

taint of NAF, “because there was no legally effective and knowing

consent.” Third, the trial court held as a matter of law that the

North Carolina Supreme Court case of Tillman v. Commercial Credit

Loans, Inc., 362 N.C. 93, 655 S.E.2d 362 (2008) was not overruled

by the United States Supreme Court case of AT&T Mobility v.

Concepcion, ___ U.S. ___, 131 S.Ct. 1740, 179 L.Ed.2d 742 (2011).

Fourth, the trial court held that the arbitration agreement was

substantively unconscionable. Fifth, the trial court held that

the arbitration agreement was procedurally unconscionable. Sixth,

the trial court held that the arbitration clause prohibiting class

actions “is an unlawful exculpatory clause and is unenforceable.”1

V. Appointment of a Substitute Arbitrator

In their first argument, defendants contend that the trial

court erred in not compelling arbitration and appointing a

substitute arbitrator. This argument encompasses the first two

rulings of the trial court outlined above. We agree.

1 In their Supplemental Memorandum filed 25 July 2013, plaintiffs

acknowledged that pursuant to the United States Supreme Court’s

ruling in Italian Colors, the exculpatory clause ground for the

trial court’s decision “is no longer valid.” We therefore do not

address this ground in our opinion.

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There is no dispute that the parties entered into an agreement

for binding arbitration governed by the Federal Arbitration Act

(“FAA”), codified at 9 U.S.C. § 1 et seq. There is no dispute

that NAF can no longer serve as arbitrator of any dispute between

the parties, by virtue of the consent judgment entered into with

the Attorney General of Minnesota. There is also no dispute that

the FAA contains a specific provision that controls a situation

where the arbitrator named in the agreement is unable to serve, or

the method agreed upon for the selection of the arbitrator fails.

§ 5 of the FAA provides:

If in the agreement provision be made for a

method of naming or appointing an arbitrator

or arbitrators or an umpire, such method shall

be followed; but if no method be provided

therein, or if a method be provided and any

party thereto shall fail to avail himself of

such method, or if for any other reason there

shall be a lapse in the naming of an arbitrator

or arbitrators or umpire, or in filling a

vacancy, then upon the application of either

party to the controversy the court shall

designate and appoint an arbitrator or

arbitrators or umpire, as the case may

require, who shall act under the said

agreement with the same force and effect as if

he or they had been specifically named

therein; and unless otherwise provided in the

agreement the arbitration shall be by a single

arbitrator.

9 U.S.C. § 5.

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In the recent case of King v. Bryant, ___ N.C. App. ___, 737

S.E.2d 802 (2013), we analyzed the effect of § 5 of the FAA upon

an agreement to arbitrate. The trial court held that an

arbitration agreement, under the terms of which the parties agreed

to select three arbitrators, was nothing more than an “agreement

to agree” and was an unconscionable agreement. We held that:

Congress enacted the FAA, 9 U.S.C. § 1 et seq.,

“[t]o overcome judicial resistance to

arbitration,” Buckeye Check Cashing, Inc. v.

Cardegna, 546 U.S. 440, 443, 126 S.Ct. 1204,

163 L.Ed.2d 1038 (2006), and to declare “a

national policy favoring arbitration of claims

that parties contract to settle in that

manner.” Preston v. Ferrer, 552 U.S. 346, 353,

128 S.Ct. 978, 169 L.Ed.2d 917 (2008)

(quotation marks and citation omitted).

King, ___ N.C. App. at ___, 737 S.E.2d at 806. We further held

that the trial court had failed to consider the applicability of

§ 5 of the FAA, which “provides the trial court authority to

appoint a panel of arbitrators if the parties cannot come to an

agreement.” Id. at ___, 737 S.E.2d at 807. Indeed, § 5 is explicit

on that point, providing a vehicle for the court to appoint an

arbitrator where there is evidence that the parties agreed to

arbitrate. Similarly, under North Carolina law, “[w]here the

mandate of an arbitrator terminates for any reason, a substitute

arbitrator shall be appointed according to the rules that were

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applicable to the appointment of the arbitrator being replaced.”

N.C. Gen. Stat. § 1-567.45(a) (2013).

The specific issue of the enforceability of arbitration

agreements with reference to NAF has been addressed in other courts

as well. For example, the United States Court of Appeals for the

Seventh Circuit has noted that:

Two courts of appeals have held that the

identity of the Forum as arbitrator is not

“integral” to arbitration agreements and that

§ 5 may be used to appoint a substitute. Khan

v. Dell, Inc., 669 F.3d 350 (3d Cir. 2012);

Pendergast v. Sprint Nextel Corp., 691 F.3d

1224, 1236 n. 13 (11th Cir. 2012); Brown v.

ITT Consumer Financial Corp., 211 F.3d 1217,

1222 (11th Cir. 2000). The Supreme Court must

have assumed this in CompuCredit Corp. v.

Greenwood, ––– U.S. ––––, 132 S.Ct. 665, 181

L.Ed.2d 586 (2012), which held that claims

under the Credit Repair Organizations Act are

arbitrable. The agreement in that case

specified use of the Forum, see id. at 677 n.

2 (Ginsburg, J., dissenting), yet the Court

saw no obstacle to enforcing the arbitration

clause. We grant that Ranzy v. Tijerina, 393

Fed. Appx. 174 (5th Cir. 2010), deems

designation of the Forum “important” to

arbitration and makes an agreement

unenforceable once the Forum becomes

unavailable, but Ranzy is not precedential.

The decisions of the third and eleventh

circuits, and the assumption of the Supreme

Court, deserve greater weight.

Green v. U.S. Cash Advance Illinois, LLC, 724 F.3d. 787, 790 (7th

Cir. 2013). The Seventh Circuit correctly notes that CompuCredit,

which the United States Supreme Court decided after the 2009

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consent judgment against NAF, held that the arbitration clause

involving NAF could nonetheless be enforced.

The opinions cited above reaffirm the proposition that the

key aspect of the analysis of an agreement to arbitrate is the

intent of the parties to arbitrate, not the identity of the

arbitrator. We further note the United States Supreme Court’s

assertion that “[a]lthough § 2's saving clause preserves generally

applicable contract defenses, nothing in it suggests an intent to

preserve state-law rules that stand as an obstacle to the

accomplishment of the FAA's objectives.” Concepcion, ___ U.S. at

___, 131 S.Ct. at 1748, 179 L.Ed.2d at 753. The United States

Supreme Court has made it clear that it will no longer tolerate

State courts or laws which seek to frustrate the intent of Congress

in enacting the FAA.

We hold that the agreement of the parties evinced a clear

intent to resolve disputes through arbitration. The trial court

erred in not appointing a substitute arbitrator pursuant to § 5 of

the FAA.

The trial court’s second ruling was that the lack of

impartiality of NAF was a basis for voiding the arbitration

agreement. At the time that the defendants’ motion to compel

arbitration was heard by the trial court, NAF was no longer

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conducting arbitration, and since it was not going to arbitrate

the claims between the parties, its prior conduct was not a

relevant consideration for the trial court. Accordingly, we hold

that the trial court erred in considering the lack of impartiality

of a body which, the trial court acknowledged, could not serve as

an arbitrator in this case.

VI. Unconscionability

In their second argument, defendants contend that the trial

court erred in ruling that the arbitration agreement was

unconscionable. This argument encompasses the fourth and fifth

rulings of the trial court set forth in Section IV of this opinion.

We agree.

A. Tillman

The leading case in North Carolina dealing with

unconscionability in the context of an agreement to arbitrate is

Tillman v. Commercial Credit Loans, Inc., 362 N.C. 93, 655 S.E.2d

362 (2008). In Tillman, plaintiffs obtained loans from defendants.

Each of the loan agreements contained arbitration provisions that

required any disputes to be resolved by binding arbitration in

accordance with the FAA.2 Plaintiffs filed suit against the

2 While the agreements called for arbitration under the FAA, the

plurality opinion and the concurring opinion of the Supreme Court

make no reference to the FAA, and contain no analysis under the

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defendant lender seeking damages arising out of the lender’s

requirement that they purchase single premium credit life

insurance in connection with the loans. Defendants sought to

compel arbitration. The trial court found the agreement to

arbitrate to be unconscionable and unenforceable. On appeal, a

divided panel of the Court of Appeals reversed and remanded the

case to the trial court for entry of an order to compel

arbitration. Tillman v. Commercial Credit Loans, Inc., 177 N.C.

App. 568, 629 S.E.2d 865 (2006). On appeal, the North Carolina

Supreme Court reversed the Court of Appeals, holding the

arbitration agreement to be unconscionable.

In that case, a plurality of three justices concurred in the

decision of the Court, two justices concurred in the result only,

and two justices dissented. The plurality opinion stated that

unconscionability was an affirmative defense, and that the party

asserting that defense had the burden of establishing that the

agreement was unconscionable. Tillman, 362 N.C. at 102, 655

S.E.2d at 369. To establish unconscionability, a party must

demonstrate both procedural unconscionability and substantive

unconscionability. Id. at 102, 655 S.E.2d at 370 (citing Martin

v. Sheffer, 102 N.C. App. 802, 805, 403 S.E.2d 555, 557 (1991); 1

FAA. The dissent makes only a passing reference to the FAA.

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James J. White & Robert S. Summers, Uniform Commercial Code § 4–

7, at 315 (5th ed. 2006)). While both elements of

unconscionability must be present, a court may rule that a contract

is unconscionable “when [the] contract presents pronounced

substantive unfairness and a minimal degree of procedural

unfairness, or vice versa.” Id. at 103, 655 S.E.2d at 370.

The Supreme Court began its analysis by restating North

Carolina’s policy in favor of arbitration. Id. at 101, 655 S.E.2d

at 369. The Court first examined the issue of unconscionability

based upon procedural unconscionability:

In the instant case, the trial court did not

explicitly conclude that the facts supported

a finding of procedural unconscionability. We

note, however, that the trial court made the

following finding of fact, which is supported

by evidence in the record: “[Mrs.] Tillman and

[Mrs.] Richardson were rushed through the loan

closings, and the Commercial Credit loan

officer indicated where [Mrs.] Tillman and

[Mrs.] Richardson were to sign or initial the

loan documents. There was no mention of credit

insurance or the arbitration clause at the

loan closings.” In addition, defendants admit

that they would have refused to make a loan to

plaintiffs rather than negotiate with them

over the terms of the arbitration agreement.

Finally, the bargaining power between

defendants and plaintiffs was unquestionably

unequal in that plaintiffs are relatively

unsophisticated consumers contracting with

corporate defendants who drafted the

arbitration clause and included it as

boilerplate language in all of their loan

agreements. We therefore conclude that

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plaintiffs made a sufficient showing to

establish procedural unconscionability.

Id. at 103, 655 S.E.2d at 370.

With regard to substantive unconscionability, the Court

restated the trial court’s conclusion, noting that:

The trial court found the arbitration clause

to be substantively unconscionable because (1)

the arbitration costs borrowers may face are

“prohibitively high”; (2) “the arbitration

clause is excessively one-sided and lacks

mutuality”; and (3) the clause prohibits

joinder of claims and class actions. We agree

that here, the collective effect of the

arbitration provisions is that plaintiffs are

precluded from “effectively vindicating

[their] ... rights in the arbitral forum.”

Green Tree Fin. Corp.-Ala. v. Randolph, 531

U.S. 79, 90, 121 S.Ct. 513, 148 L.Ed.2d 373

(2000).

Id. at 104, 655 S.E.2d at 370-71. Relying on Green Tree, and on

the Fourth Circuit’s decision in Bradford v. Rockwell

Semiconductor Sys., Inc., 238 F.3d 549, 556 (4th Cir. 2001), the

Court held that, because plaintiffs were financially ill-equipped

to cover the costs of arbitration, the “loser pays” provision of

the arbitration agreement presented a powerful deterrent. The

Court then contrasted arbitration with litigation, and stated that

“paying for arbitrators is a significant cost that is simply not

faced in filing a lawsuit in court[,]” but that “the trial court

found that it is ‘unlikely that any attorneys would be willing to

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accept the risks attendant to pursuing [these] claims.’” Id. at

105, 655 S.E.2d at 371. The Court concluded that “the combination

of the loser pays provision, the de novo appeal process, and the

prohibition on joinder of claims and class actions creates a

barrier to pursuing arbitration that is substantially greater than

that present in the context of litigation. We agree with the trial

court that ‘[d]efendant's arbitration clause contains features

which would deter many consumers from seeking to vindicate their

rights.’” Id. at 106, 655 S.E.2d at 372.

Finally, the Court examined unconscionability based on the

provision prohibiting class actions and joinder. The Court

observed that:

Taken alone, such a prohibition may be

insufficient to render an arbitration

agreement unenforceable, but Brenner

instructs that an unconscionability analysis

must consider all of the facts and

circumstances of a particular case. Therefore,

the trial court correctly concluded that a

prohibition on joinder of claims and class

actions is a factor to be considered in

determining whether an arbitration provision

is unconscionable.

Id. at 107, 655 S.E.2d at 373 (citations and quotations omitted).

The Court observed, however, that:

In the instant case, the prohibition on

joinder of claims and class actions affects

the unconscionability analysis in two specific

ways. First, the prohibition contributes to

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the financial inaccessibility of the arbitral

forum as established by this arbitration

clause because it deters potential plaintiffs

from bringing and attorneys from taking cases

with low damage amounts in the face of large

costs that cannot be shared with other

plaintiffs. Second, the prohibition

contributes to the one-sidedness of the clause

because the right to join claims and pursue

class actions would benefit only borrowers.

Id. at 108, 655 S.E.2d 373.

The Court concluded that:

[T]he arbitration clause in plaintiffs' loan

agreements is unconscionable and therefore

unenforceable. The inequality of bargaining

power between the parties and the oppressive

and one-sided nature of the clause itself lead

us to this conclusion. Through the arbitration

clause at issue in this case, defendants have

not only unilaterally chosen the forum in

which they want to resolve disputes, but they

have also severely limited plaintiffs' access

to the forum of their choice. Defendants argue

that finding this clause to be unconscionable

would be “hostile to arbitration.” We disagree

but at the same time reaffirm this Court's

previous statements acknowledging the State's

strong public policy favoring arbitration.

However, this particular arbitration clause

simply does not allow for meaningful redress

of grievances and therefore, under Green Tree,

must be held unenforceable.

Id. at 108-09, 655 S.E.2d 373-74.

Our Supreme Court analyzed Tillman solely under

unconscionability. It did not address any issues under the FAA,

which clearly governed the agreement. Further, the Supreme Court

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did not have the benefit of two cases subsequently decided by the

United States Supreme Court, construing arbitration agreements

under the FAA; AT&T Mobility v. Concepcion, ___ U.S. ___, 131 S.Ct.

1740, 179 L.Ed.2d 742 (2011), and American Express Co. v. Italian

Colors Rest., ___ U.S. ___, 133 S.Ct. 2304, 186 L.Ed.2d 417 (2013).

B. Concepcion

In Concepcion, plaintiffs entered into a cellular telephone

contract with defendant. This contract included an arbitration

provision that contained a class action waiver. Plaintiffs filed

a putative class action suit in the federal district court seeking

damages for false advertising and fraud. Defendant’s motion to

compel arbitration was denied by the district court, and this

ruling was affirmed by the United States Court of Appeals for the

Ninth Circuit. The district court and Court of Appeals relied

upon a decision of the California Supreme Court in Discover Bank

v. Superior Court, 36 Cal.4th 148, 113 P.3d 1100 (2005). The

holding in Discover Bank was that class waivers in consumer

arbitration agreements were unconscionable if the agreement was

contained within a contract of adhesion. Discover Bank, 36 Cal.4th

at 162-63, 113 P.3d at 1110.

The United States Supreme Court recited § 2 of the FAA as

follows:

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A written provision in any maritime

transaction or a contract evidencing a

transaction involving commerce to settle by

arbitration a controversy thereafter arising

out of such contract or transaction ... shall

be valid, irrevocable, and enforceable, save

upon such grounds as exist at law or in equity

for the revocation of any contract.

Concepcion, ___ U.S. at ___, 131 S.Ct. at 1745, 179 L.Ed.2d at

750-51 (quotations omitted).

The Supreme Court held that this provision

permits arbitration agreements to be declared

unenforceable “upon such grounds as exist at

law or in equity for the revocation of any

contract.” This saving clause permits

agreements to arbitrate to be invalidated by

“generally applicable contract defenses, such

as fraud, duress, or unconscionability,” but

not by defenses that apply only to arbitration

or that derive their meaning from the fact

that an agreement to arbitrate is at issue.

Id. at ___, 131 S.Ct. at 1746, 179 L.Ed.2d at 751 (citations

omitted). The Court further stated that “[a]lthough § 2's saving

clause preserves generally applicable contract defenses, nothing

in it suggests an intent to preserve state-law rules that stand as

an obstacle to the accomplishment of the FAA's objectives.” Id.

at ___, 131 S.Ct. at 1748, 179 L.Ed.2d at 753. The Court cited to

a number of its own prior opinions to emphasize that these prior

cases clearly stated that the FAA supersedes any state law that

sets aside arbitration agreements or holds them to be

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unconscionable upon grounds that are exclusive to arbitration

agreements.

The Supreme Court expressly overruled Discover Bank, which

invalidated class action waivers, holding that it had the effect

of “manufacturing” class arbitration, contrary to the express

intent of the parties, which was “inconsistent with the FAA.”

Concepcion, ___ U.S. at ___, 131 S.Ct. at 1753, 179 L.Ed.2d at

759. The Court further dismissed the notion that class action

waivers somehow prevented consumers from seeking relief.

Subsequent to Concepcion, the question of whether the

provisions of the FAA superseded state court rulings similar to

Discover Bank has been discussed in a number of cases. The Fourth

Circuit recently followed Concepcion in holding that the trial

court erred in finding a class action waiver in an arbitration

agreement to be unconscionable. Muriithi v. Shuttle Exp., Inc.,

712 F.3d 173, 180-81 (4th Cir. 2013). In Muriithi, the Fourth

Circuit held that the holding of Concepcion was broader than simply

overruling Discover Bank:

In Concepcion, the Supreme Court cautioned

that the generally applicable contract defense

of unconscionability may not be applied in a

manner that targets the existence of an

agreement to arbitrate as the basis for

invalidating that agreement. 131 S.Ct. at

1746–47. Applying that principle to the

Discover Bank “rule” at issue, the Court

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explained that state law cannot “stand as an

obstacle to the accomplishment of the FAA's

objectives,” by interfering with “the

fundamental attributes of arbitration.” 131

S.Ct. at 1748.

We recently discussed the holding in

Concepcion in our decision in Noohi v. Toll

Bros., Inc., 708 F.3d 599, 606–07 (4th Cir.

2013). We explained that the holding

“prohibited courts from altering otherwise

valid arbitration agreements by applying the

doctrine of unconscionability to eliminate a

term barring classwide procedures.” Id.

(citing Concepcion, 131 S.Ct. at 1750–53).

Thus, contrary to Muriithi's contention, the

Supreme Court's holding was not merely an

assertion of federal preemption, but also

plainly prohibited application of the general

contract defense of unconscionability to

invalidate an otherwise valid arbitration

agreement under these circumstances. The

district court in the present case, deciding

the same issue of unconscionability prior to

Concepcion, reached the opposite conclusion.

Accordingly, we conclude that the district

court erred in holding that the class action

waiver was unconscionable.

Id.

C. Italian Colors

In the recent case of Italian Colors, the United States

Supreme Court considered the question of whether “the Federal

Arbitration Act permits courts ... to invalidate arbitration

agreements on the ground that they do not permit class arbitration

of a federal-law claim[.]” Italian Colors, ___ U.S. at ___, 133

S.Ct. at 2308, 186 L.Ed.2d at 423 (citing petition for certiorari).

-23-

The United States Court of Appeals for the Second Circuit held

that the class action waiver was unenforceable and therefore that

arbitration could not proceed. It then held Concepcion to be

inapplicable because it was a case involving pre-emption.

The Supreme Court reiterated its prior holding that “Congress

enacted the FAA in response to widespread judicial hostility to

arbitration.” Id. at ___, 133 S.Ct. at 2308-09, 186 L.Ed.2d at

423-24 (citing Concepcion, ___ U.S. at ___, 131 S.Ct. at 1745).

Plaintiffs argued that if they were required to arbitrate their

claims individually, it would contravene the policies of the

antitrust laws. The Supreme Court held that:

The antitrust laws do not “evinc[e] an

intention to preclude a waiver” of class-

action procedure. Mitsubishi Motors Corp. v.

Soler Chrysler–Plymouth, Inc., 473 U.S. 614,

628, 105 S.Ct. 3346, 87 L.Ed.2d 444 (1985).

The Sherman and Clayton Acts make no mention

of class actions. In fact, they were enacted

decades before the advent of Federal Rule of

Civil Procedure 23, which was “designed to

allow an exception to the usual rule that

litigation is conducted by and on behalf of

the individual named parties only.” Califano

v. Yamasaki, 442 U.S. 682, 700–701, 99 S.Ct.

2545, 61 L.Ed.2d 176 (1979). The parties here

agreed to arbitrate pursuant to that “usual

rule,” and it would be remarkable for a court

to erase that expectation.

Id. at ___, 133 S.Ct. at 2309, 186 L.Ed.2d at 424-25.

-24-

Plaintiffs then advanced the argument that there was a judge-

made exception to the FAA that allowed courts to invalidate

agreements that prevent the "effective vindication” of a federal

statutory right. While acknowledging the existence of the cases

dealing with “effective vindication,” the Supreme Court held that:

The class-action waiver merely limits

arbitration to the two contracting parties. It

no more eliminates those parties' right to

pursue their statutory remedy than did federal

law before its adoption of the class action

for legal relief in 1938[.]

Id. at ___, 133 S.Ct. at 2311, 186 L.Ed.2d at 426 (citations

omitted).

The Supreme Court then concluded:

Truth to tell, our decision in AT&T Mobility

all but resolves this case. There we

invalidated a law conditioning enforcement of

arbitration on the availability of class

procedure because that law “interfere[d] with

fundamental attributes of arbitration.” 563

U.S., at ––––, 131 S. Ct. 1740, 179 L. Ed. 2d

742. “[T]he switch from bilateral to class

arbitration,” we said, “sacrifices the

principal advantage of arbitration—its

informality—and makes the process slower, more

costly, and more likely to generate procedural

morass than final judgment.” Id., at ––––, 131

S. Ct. 1740, 179 L. Ed. 2d 742. We specifically

rejected the argument that class arbitration

was necessary to prosecute claims “that might

otherwise slip through the legal system.” Id.,

at ––––, 131 S. Ct. 1740, 179 L. Ed. 2d 742.

Id. at ___, 133 S.Ct. at 2312, 186 L.Ed.2d at 427.

-25-

D. Conclusions from Tillman, Concepcion and Italian Colors

The FAA embodies a strong Congressional policy in favor of

arbitration. Concepcion and Italian Colors clearly state that the

United States Supreme Court is weary of state and federal trial

courts assisting plaintiffs in getting around the mandatory

provisions of the FAA. While both Concepcion and Italian Colors

dealt with class action waivers, underlying those decisions was a

broader theme that unconscionability attacks that are directed at

the arbitration process itself will no longer be tolerated. See

Muriithi, supra.

This places the North Carolina Court of Appeals in the

difficult position that the holdings of the North Carolina Supreme

Court in Tillman conflict with those of the United States Supreme

Court in Concepcion and Italian Colors. Ultimately, we are bound

by the decisions of the United States Supreme Court construing

federal laws, such as the FAA. In re Fifth Third Bank, Nat. Ass'n,

___ N.C. App. ___, ___, 716 S.E.2d 850, 855 (2011) (quoting Dooley

v. Seaboard Air Line Ry. Co., 163 N.C. 454, 457–58, 79 S.E. 970,

971 (1913)). Certain of the holdings of Tillman may be

distinguished, because even though arbitration provisions of the

Tillman contract referred to the FAA, none of the analysis

-26-

contained in either the plurality or concurring opinions discussed

the FAA and federal law principles.

As noted in Section VI-A of this opinion, a key element of

the plurality opinion in Tillman on unconscionability is the

section dealing with substantive unconscionability. Our Supreme

Court cited three factors, the collective effect of which was to

preclude plaintiffs from effectively vindicating their rights in

an arbitration proceeding. First was the “prohibitively high”

potential arbitration costs. Tillman, 362 N.C. at 104, 655 S.E.2d

at 370-71. In Italian Colors, the United States Supreme Court

expressly rejected the model proposed by the Court of Appeals for

the Second Circuit, which would have required “that a federal court

determine (and the parties litigate) the legal requirements for

success on the merits claim-by-claim and theory-by-theory, the

evidence necessary to meet those requirements, the cost of

developing that evidence, and the damages that would be recovered

in the event of success.” Italian Colors, ___ U.S. at ___, 133

S.Ct. at 2312, 186 L.Ed.2d at 427. The Supreme Court went on to

hold that the imposition of such a “preliminary litigating hurdle”

at the point in the proceedings where the issue was whether or not

the parties were to proceed to arbitration “would undoubtedly

destroy the prospect of speedy resolution that arbitration in

-27-

general and bilateral arbitration in particular was meant to

secure.” Id. We can only construe this language as eliminating

the type of cost analysis applied by the North Carolina Supreme

Court in Tillman.

Second, the North Carolina Supreme Court in Tillman held that

there was substantive unconscionability based upon the arbitration

clause being “excessively one-sided and lack[ing] mutuality[.]”

Tillman, 362 N.C. at 104, 655 S.E.2d at 371. The United States

Supreme Court in Concepcion noted, however, that “the times in

which consumer contracts were anything other than adhesive are

long past.” Concepcion, ___ U.S. at ___, 131 S.Ct. at 1750, 179

L.Ed.2d at 755. The Court in Concepcion was dismissive of the

idea that an arbitration agreement, apart from any other form of

contract, could be found substantively unconscionable based solely

upon its adhesive nature. This was an explicit part of the Supreme

Court’s reasoning in overruling Discover Bank. We must therefore

hold that the one-sided quality of an arbitration agreement is not

sufficient to find it substantively unconscionable.

Third, the North Carolina Supreme Court in Tillman held that

there was substantive unconscionability based upon the arbitration

provision “prohibit[ing] joinder of claims and class actions.”

Tillman, 362 N.C. at 104, 655 S.E.2d at 371. Both Concepcion and

-28-

Italian Colors hold that a class action waiver does not render an

arbitration agreement unconscionable. Italian Colors specifically

holds that a party can “effectively vindicate” their rights in the

context of a bilateral arbitration. Italian Colors, ___ U.S. at

___, 133 S.Ct. at 2311, 186 L.Ed.2d at 426.

Thus, the legal theories upon which Tillman’s substantive

unconscionability analysis is based have been undermined by

subsequent decisions of the United States Supreme Court in the

context of cases under the FAA.

E. Ruling of the Trial Court

The trial court in the instant case, relying upon Tillman as

precedent, made the following findings of fact as to substantive

unconscionability:

H. SUBSTANTIVE UNCONSCIONABILITY.

42. No individual arbitration cases have ever

been brought challenging payday lending in

North Carolina, either against the defendants

in this case or against any other payday

lenders. In light of the large number of North

Carolina payday loan transactions that were

undertaken by these defendants and the

defendants in the other class cases after the

statutory authority for payday lending in

North Carolina expired on August 31, 2001, and

in light of the evidence that all payday

lenders required customers to sign loan

agreements with arbitration clauses

prohibiting participation in class actions,

the complete absence of any individual

arbitration cases tends to confirm that legal

-29-

challenges to North Carolina payday lending

conducted in cooperation with out-of-state

banks could not be challenged in individual

arbitration cases.

43. The language calling for arbitration

before the NAF required plaintiffs to submit

claims to an arbitration organization that

sought to build business by encouraging

relationships and providing accommodations to

debt-collector arbitration claimants, and

that on June 27, 2007, sold a 40% ownership

interest to participants in the consumer debt

collection industry. The NAF's lack of

neutrality affected arbitrator selection. The

arbitration clause requiring arbitration

before the NAF was substantively

unconscionable.

44. Plaintiffs offered the affidavit and

deposition testimony of attorneys George

Hausen, Glenn Barfield and Kenneth Schorr,

with live testimony of Mr. Barfield and Mr.

Hausen, each offering their opinion it was

unlikely an individual payday borrower,

proceeding on an individual (non-class) basis,

would be able to obtain legal counsel to

prosecute claims against defendants such as

those raised in this proceeding.

45. The Court notes that each of these

witnesses has been involved in recruiting

North Carolina lawyers to take civil cases on

behalf of low and moderate income persons in

North Carolina, specifically including

efforts to recruit lawyers both on a pro bono

basis and on a fee basis. Mr. Hausen is and

since 2002 has been the Executive Director of

Legal Aid of North Carolina. Mr. Schorr is the

Executive Director of Legal Services of the

Southern Piedmont, a nonprofit indigent civil

legal services program, serving Charlotte and

the western part of North Carolina. Mr.

Barfield is a lawyer in private practice who

-30-

is past president of Legal Services of North

Carolina, Inc., and past chairman of the board

of directors of Legal Aid of North Carolina.

Both Mr. Hausen and Mr. Schorr are and have

since 2005 been members of the North Carolina

Equal Access to Justice Commission.

Accordingly, the Court finds that these

witnesses are particularly knowledgeable as to

what cases North Carolina lawyers will accept,

both on a fee basis and on a pro bono basis.

46. The Court accepts the testimony of Messrs.

Barfield, Hausen and Schorr as experts. In

addition, because the Court has had the

opportunity to observe the demeanor of Mr.

Hausen and Mr. Barfield, witnesses, the Court

attaches particular weight to their testimony.

47. Mr. Barfield opined that, given the

complexity involved in cases challenging

payday lending in North Carolina presenting

questions such as are in issue in this case,

coupled with the motivation of the defendants

to vigorously defend, the necessity for out-

of-pocket expenditures, the uncertainty of

prevailing and the lack of ability to use

precedent in an arbitration forum, it is very

unlikely that any North Carolina lawyer would

be willing to bring such an individual case in

arbitration. Mr. Barfield regularly

represented defendants/counterclaimants in

cases brought by "debt buyers" in counties

close to his office. He wrote a manuscript to

encourage attorneys across the state to engage

in this work, but had virtually no success. In

Mr. Barfield's opinion, the complexity of

payday lending cases such as this case far

exceeds the complexity of the cases he handled

on behalf of consumers in the debt buyer

cases. Mr. Barfield testified that it is

simply not economically feasible to prosecute

payday lending cases such as this case, in

court or in arbitration on an individual

basis.

-31-

48. Mr. Hausen opined that it is very unlikely

that a payday borrower would be able to get

representation from a Legal Aid or pro bono

attorney in North Carolina. The demand for

services far exceeds the capacity to provide

legal representation. Legal Aid offices across

the state prioritize cases involving basic

needs such as preservation of shelter, access

to health care, access to public benefits such

as food stamps and Medicaid, and protection

from domestic violence. Neither Legal Aid nor,

in Mr. Hausen's opinion, the private attorneys

whom [L]egal Aid recruits to act as pro bono

volunteer attorneys, would have the resources

to act as attorneys for individual payday

borrowers. While his office has devoted

significant resources to foreclosure defense,

including developing and implementing a series

of training events for the private bar as a

way to encouraging [sic] referrals, it is not

likely that such an effort would be replicated

in an effort to represent payday lending

borrowers. Neither Legal Aid nor the volunteer

attorneys recruited to assist Legal Aid have

enough resources to accept cases seeking the

return of money from payday lenders.

49. Mr. Schorr testified that in his opinion,

people who were payday lending borrowers would

not be able to find attorneys at private firms

or with nonprofit organizations to handle

their claims on an individual basis. He

testified that the amount of damages and

attorneys' fees involved was not nearly at the

threshold that would make it likely that a

private attorney would take such a [c]ase, and

that nonprofit agencies would not handle them.

50. Messrs. Barfield, Hausen and Schorr each

opined that because the stakes of an

individual arbitration on behalf of a payday

borrower are so small, no attorney would be

willing to pursue a claim on behalf of a payday

-32-

borrower on an individual basis. They go

further to state that this is true despite the

availability of statutory attorney fees under

G.S. § 75-1.1 et seq. The individual claims

for individual borrowers that are at issue in

this case are in fact modest in amount.

Plaintiffs represent that Mr. Torrence's

largest damages claim is for treble the amount

of his net interest, which, after trebling, is

a total of $2,788.50. Ms. Burke's largest

claim is for recovery of all amounts paid, but

without trebling, which is a total of $561.

51. These witnesses also opined that because

of the nature of the claim and the federal

preemption issue, the claims in the instant

case are complex. The instant case is complex

because defendants contend they were engaged

in marketing and servicing loans for County

Bank. The Consumer Finance Act provides an

exemption for banks. Under federal preemption

laws, banks are not subject to state interest

rate limits. To prove that defendants are

subject to the CFA, a consumer must respond to

defendants' claims concerning exemption and

preemption. The complexity and proof will be

substantially the same regardless of whether

a claim is asserted on behalf of a single

individual or on behalf of a class.

52. The CFA assigns regulatory responsibility

over the small loan business to the North

Carolina Commissioner of Banks. The

Commissioner of Banks conducted an

administrative case against Advance America,

to determine whether that company was in

violation of the CFA by conducting payday

lending in North Carolina in cooperation with

an out-of-state bank. An order in that case

was rendered on December 22, 2005 (the "COB

Opinion"), ruling that Advance America was in

violation of the CFA.

53. The COB Opinion reflects that the issue of

-33-

whether payday lenders can avoid application

of the CFA by entering into contracts with

banks is complicated. The COB Opinion is 54

single spaced pages and has 292 footnotes.

Following an appeal, the COB Opinion was

affirmed by order rendered by Judge Donald W.

Stephens of Wake County Superior Court on

March 29, 2010, who found that the required

analysis is "heavily fact

dependent," and that Advance America's claim

to preemption was "not supported by the facts

in this matter."

54. A legal challenge to the issue of whether

defendants are lawfully permitted to

participate in payday lending in North

Carolina by purporting to act on behalf of an

out-of-state bank would present a fundamental

issue concerning whether defendants and other

payday lenders with similar bank arrangements

could continue to operate in North Carolina.

A legal challenge over such a fundamental

issue should be expected to give rise to a

vigorous defense supported by resources that

are more substantial that the amount in

controversy in a single individual

arbitration.

55. The successful prosecution of an

individual claim that defendants in this case

violated the CFA will likely require factual

development through depositions, document

review and expert analysis, just as the COB

Opinion reflected factual development through

depositions, document review and expert

analysis.

56. The COB Opinion devoted substantial

attention to financial relationships between

Advance America and the various banks, to the

actual results of such financial

relationships, to the historical development

of the relationships, to the companies'

apparent business objectives, and similar

-34-

matters.

57. Plaintiffs have submitted the affidavits

and depositions of two financial experts. One

of these experts, Ronald E. Copley, holds a

Ph.D. in Finance, has been a tenured professor

of Finance at the University of North Carolina

at Wilmington, is a Chartered Financial

Analyst, and is a licensed investment advisor.

Dr. Copley reviewed the COB Opinion and has

opined that it would require a minimum of 100

hours to perform financial analysis similar to

the analysis performed by the Commissioner of

Banks. The other of these experts, Michael J.

Minikus, is a North Carolina certified public

accountant. Mr. Minikus has opined that it

would require a minimum of 65 hours to perform

an analysis similar to the analysis performed

by the Commissioner. Dr. Copley charges $225

per hour for his services. Mr. Minikus charges

$125 per hour for his services. Regardless of

how many hours must be devoted to analysis by

a finance professional or a certified public

accountant, the costs of such experts are

likely to exceed the amount in controversy in

an individual case.

58. Regardless of whether the instant case

will require as much analysis as set out in

the COB Opinion, the legal issues in this case

are too factually and legally complex to be

addressed in an arbitration case involving

only the amount of damages that would be at

issue for a single plaintiff, because the time

and expense required to be invested in such a

case would be substantially in excess of the

amount that could be recovered if the case was

successful.

59. Defendants tendered the testimony of two

North Carolina lawyers, Samuel Forehand and

Woodward Webb, who stated that, in their

opinion, some North Carolina lawyer would

probably be willing to bring individual payday

-35-

loan arbitration cases.

60. Attorneys Forehand and Webb acknowledged

that they did not consider the complexities of

a CFA case challenging payday lending in North

Carolina done in cooperation with a bank, such

as the preemption issue and the other issues

identified in the COB Opinion. Mr. Webb

provided representative examples of cases

brought by consumer attorneys in North

Carolina and other states in an effort to

support his opinion that attorneys would

accept representation on behalf of a payday

borrower. None of these cases, however,

involved usury claims, federal preemption,

claims against a bank or a need for expert

witness testimony. Until the preemption issues

were brought to his attention at his

deposition, Mr. Forehand was not aware that

such a defense was likely to be involved in

this case. Mr. Forehand acknowledged that he

had no basis for disputing this Court's

earlier finding in prior cases that litigating

the preemption issue will require extensive

deposition, document review and expert

analysis as is reflected by the order of the

Commissioner of Banks, or that the cost of

expert witnesses alone would likely exceed the

amounts at issue in individual cases.

61. The significance of the opinion testimony

by attorneys Forehand and Webb is also

diminished by their failure to identify any

North Carolina lawyers who would in fact take

such cases. Mr. Webb acknowledged that he

would not accept one of these cases himself.

In his deposition Mr. Webb mentioned three

attorneys whom he thought might. However one

of the attorneys mentioned was no longer in

practice, and the other two attorneys signed

affidavits stating that they would not take

such cases on an individual basis. In his

hearing testimony Webb mentioned a fourth

attorney, but merely said he had spoken with

-36-

the attorney in passing who said he would

"look at it."

62. Defendants have objected to the tender of

affidavits of expert witnesses who were not

identified in interrogatory responses. The

Court understands this to be an objection to

Plaintiffs' Exhibits 47-49 (affidavits of

Carlene McNulty, John Van Alst and M. Jason

Williams). These affidavits are directed

simply to the issue of three specific lawyers'

willingness to take on individual cases

challenging bank-contract payday lending. The

objections are overruled.

63. Mr. Forehand testified that he would need

to undertake a detailed case acceptance

analysis before deciding whether he would take

one of these cases, which he has not yet been

able to complete; that even if he went through

the process outlined in his affidavit, he

would not be competent to state whether he

would file an individual arbitration claim,

having no prior experience with arbitration;

and that he could not identify any attorney

willing to represent a payday borrower or even

meet with a payday borrower.

64. Defendants introduced two letters written

by attorneys in North Carolina as evidence to

show that payday lending borrowers were able

to find legal representation. One letter made

allegations that the payday loan was illegal

and demanded that the payday loan company

cease collection efforts. The other letter

alleged that a payday borrower's check had

been cashed prematurely. The defendants

presented no evidence indicating that any

relief was provided to the clients as a result

of either letter, and no evidence that either

of these attorneys undertook further

representation on behalf of these borrowers or

any other borrowers such as filing suit in

court.

-37-

65. Even if North Carolina attorneys were

willing to pursue an individual arbitration on

behalf of an individual payday borrower, it is

unlikely that payday borrowers generally would

be able to obtain legal representation for

individual claims, given all witnesses'

inability to identify any lawyer who would

accept such individual cases.

66. It is extremely unlikely that payday

borrowers could effectively represent

themselves in pro se litigation or arbitration

against defendants in light of the complexity

of the issues, including the factual and legal

basis for federal preemption and statutory

exemption.

67. Unless consumers received legal assistance

that involved analyzing the legal legitimacy

of payday lenders' claims to federal

preemption and exemption, consumers would be

unaware that they possessed any sound basis

for a legal claim.

68. Defendants' witness Stephen Ware opined

that NAF arbitration afforded consumers a

reasonably accessible forum. Mr. Ware has

never practiced law in North Carolina and has

no familiarity with North Carolina law or

North Carolina lawyers, and did not identify

any North Carolina lawyer who is willing to

take individual payday loan cases such as the

instant case. Mr. Ware also did not review any

pleadings in this case other than the

complaint, did not review any of the briefs,

affidavits or depositions in the case; and did

not know what plaintiffs would have to prove

in order to prevail. He had no opinion as to

how many witnesses would be required to make

out a claim, or whether expert testimony would

be required; and had no knowledge of whether

proof of intent would be required.

-38-

69. Mr. Ware based his opinion that NAF

arbitration afforded consumers a reasonably

accessible forum, by comparing the NAF to our

court system as he contends it actually

exists. Mr. Ware testified that, even taking

the allegations of bias and corruption

asserted by former managerial employee Deanna

Richert as true, the NAF compares favorably to

our court system, "given the pressure on a

judge to rule in a particular way from a

governor or legislator or a contributor to a

judge's campaign."

70. Mr. Ware further based his opinion that

NAF arbitration afforded consumers a

reasonably accessible forum on information

that thirteen individual arbitration claims

had been advanced by Texas attorney Brian

Blakeley in arbitration cases before the

American Arbitration Association in which Mr.

Blakeley contended that "QC Financial Services

of Texas, Inc. was the 'true' lender for these

payday loan transactions and that the fees

collected by respondent constitute a deceptive

practice and that the respondent has violated

the Texas Credit Services Organization Act

and/or engaged in usury."

71. Mr. Blakeley provided an affidavit which

was introduced in evidence in the present

case, and Mr. Blakeley was deposed by

defendants. According to his affidavit, Mr.

Blakeley began pursuing cases against Texas

"credit service organizations" ("CSO's") in

late 2009, and sought to assert usury claims

on the ground that fees paid by his clients

that were purportedly credit service

organizations fees "should be considered to be

interest because the CSO should be regarded as

the true lender in the transaction; or because

the relationship between the CSO and the

purported lender is such that the purported

lender and the CSO are not truly independent."

Mr. Blakeley attached to his affidavit a Texas

-39-

Attorney General letter opining that

"[determining the true relationship between a

CSO and a lender would be a fact intensive

endeavor."

72. However Mr. Blakeley stated in his

affidavit and testified at his deposition that

he had abandoned usury claims against Texas

CSO's and was no longer asserting usury claims

in connection with payday lending in Texas.

Mr. Blakeley opined that "it is not possible

to pursue usury claims on an individual basis

in individual arbitrations conducted by the

[AAA] for the following reasons," and gave

five reasons that he believed such claims

could not be pursued in AAA consumer

proceedings.

73. Mr. Blakeley was deposed by defendants and

provided testimony consistent with his

affidavit. He continues to accept payday

lending clients, and has been successful in

seven out of twenty-two arbitration claims so

far in cases involving Texas law disclosure

claims unlike the claims in the present case.

However, Mr. Blakeley has unequivocally

abandoned all claims for usury and has no

intention of bringing those claims in the

future. Whether or not his decision to abandon

these claims is because Mr. Blakeley is "lazy"

as characterized by defendants or because the

claims are not economically viable, the fact

remains that Mr. Blakeley is not providing

legal representation to Texas payday borrowers

with fact-intensive claims concerning payday

lenders' business relationships with third

parties, and is not providing (nor has ever

provided) any representation to North Carolina

payday borrowers.

74. Mr. Blakeley practices law exclusively in

Texas, and is not licensed to practice law in

North Carolina. The claims brought by Mr.

Blakeley in the payday arbitration cases were

-40-

brought under Texas law, not North Carolina

law.

75. The Court finds that payday borrowers

would not be able to effectively vindicate the

type of claims raised by plaintiffs here, even

if the claims are legally justified and

correct, if payday borrowers are required to

proceed on an individual rather than class

basis. The facts demonstrate that this

conclusion is true, regardless of whether

consumers were to attempt to pursue their

claims in court or in arbitration.

76. The North Carolina Attorney General filed

an amicus brief in Kucan v. Advance America,

a North Carolina payday lending case alleging

similar legal issues as are alleged in the

instant case, stating that "no Attorney

General will ever have the funds or personnel

to pursue every remedy against every person or

company preying on North Carolina customers"

and that "it is critically important that

consumers be able to rely on the private bar—

as the legislature intended— for assistance in

obtaining restitution for injuries caused by

unfair or deceptive business practices."

77. Defendants' practice of holding customer

checks as security for loans gave defendants

considerable leverage in the event of a

nonpayment or dispute, making resort to court

or arbitration unnecessary: if the customer

failed to pay defendants could simply deposit

the check, either resulting in payment to

defendants or causing the customer to be faced

with the legal and practical consequences of

having their check bounce.

78. The arbitration agreements restrict

customers from bringing a class action. The

agreement contains no corresponding

prohibition against County Bank or any of the

defendants bringing or participating in a

-41-

class action.

This type of detailed analysis of the types of evidence

required for plaintiffs to pursue their claims and of the potential

costs of obtaining such evidence, at the stage of the proceeding

where the court determines whether the case should be sent to

arbitration, is precisely the approach rejected by the United

States Supreme Court in Italian Colors. See Italian Colors, ___

U.S. at ___, 133 S.Ct. at 2312, 186 L.Ed.2d at 427. This type of

analysis, based upon extensive evidentiary presentation, is not

only costly, but defeats the very purpose of arbitration, which is

for the parties to have a quick, expedited resolution of their

dispute.

We hold that, based upon Italian Colors, the trial court erred

in ruling that the arbitration agreement was substantively

unconscionable. In the absence of substantive unconscionability,

the entire unconscionability analysis must fail. See Tillman, 362

N.C. at 102-03, 655 S.E.2d at 370. Because there was no

substantive unconscionability, it is not necessary to review

procedural unconscionability. The trial court erred in not

granting defendants’ motion to compel arbitration.

VII. Impact of Concepcion upon Tillman

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Finally, the third basis of the trial court’s decision in the

instant case (as set forth in Section IV of this opinion) was that

Concepcion did not affect the Tillman analysis.

The trial court in the instant case acknowledged that

Concepcion overruled Discover Bank. It concluded, however, that

Discover Bank was distinct from Tillman, because where Discover

Bank featured a “rule of automatic invalidation, in a case in which

the plaintiff would be able to effectively vindicate his rights in

arbitration[,]” Tillman involved “consideration of all facts and

circumstances[.]” The trial court concluded that Tillman applied

because “the instant case involves plaintiffs who would not be

able to effectively vindicate their rights in NAF arbitration.”

The trial court’s attempt to distinguish Concepcion from

Tillman was in error. Concepcion, in overruling Discover Bank,

made clear that the FAA preempts any state law that prevents

bilateral arbitration of claims. Concepcion, ___ U.S. at ___, 131

S.Ct. at 1747, 179 L.Ed.2d at 752 (holding that “[w]hen state law

prohibits outright the arbitration of a particular type of claim,

the analysis is straightforward: The conflicting rule is displaced

by the FAA”). This applies regardless of whether the state

standard is “a rule of automatic invalidation,” as in Discover

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Bank, or “consideration of all facts and circumstances[,]” as in

Tillman.

The trial court further concluded that the fact that the

agreement was non-negotiable, along with the fact that “all payday

lenders doing business in North Carolina required borrowers to

execute loan agreements containing arbitration clauses prohibiting

participation in class actions[,]” was further evidence of

unconscionability. Yet the United States Supreme Court observed

in Concepcion that “the times in which consumer contracts were

anything other than adhesive are long past.” Id. at ___, 131 S.Ct.

at 1750, 179 L.Ed.2d at 755. That Court observed in a footnote

that:

Of course States remain free to take steps

addressing the concerns that attend contracts

of adhesion—for example, requiring class-

action-waiver provisions in adhesive

arbitration agreements to be highlighted. Such

steps cannot, however, conflict with the FAA

or frustrate its purpose to ensure that

private arbitration agreements are enforced

according to their terms.

Id., fn. 6. The United States Supreme Court’s position is explicit

– where the FAA governs, state laws (including Tillman) cannot

carve out exceptions.

VII. Personal Jurisdiction

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In their third argument, defendants contend that the trial

court erred in exercising personal jurisdiction over defendant Don

Early. However, because we have previously determined that the

case should have been submitted to arbitration, the matter was not

properly before the trial court. We therefore need not address

defendants’ contention that personal jurisdiction was improper.

See, e.g., Miller v. Two State Const. Co., Inc., 118 N.C. App.

412, 418, 455 S.E.2d 678, 682 (1995) (holding that where the

arbitration agreement was valid, we “need not address the other

issues raised by defendants”). These issues are properly to be

determined by an arbitrator.

VIII. Conclusion

The United States Supreme Court has made it clear that the

use of unconscionability attacks directed at the arbitration

process can no longer serve as a basis to invalidate arbitration

agreements. The intent of Congress in enacting the FAA was to

overcome judicial hostility to arbitration.

The trial court erred in not designating a substitute

arbitrator in this case pursuant to § 5 of the FAA; in determining

that the arbitration was unconscionable; and in not entering an

order compelling arbitration.

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The orders of the trial court denying defendants’ motion to

compel arbitration, granting plaintiffs’ motion for class

certification, and denying the motions of QC Holdings and Don Early

to dismiss for lack of personal jurisdiction are vacated, and this

matter is remanded to the trial court for entry of an order

directing that the parties arbitrate plaintiffs’ claims, and

appointing a substitute arbitrator.

VACATED AND REMANDED.

Judges STEPHENS and McCULLOUGH concur.