Opinions of the United
2006 Decisions                                                                                                             States Court of Appeals
                                                                                                                              for the Third Circuit


10-3-2006

Delta Funding Corp v. Harris
Precedential or Non-Precedential: Precedential

Docket No. 04-1951




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Recommended Citation
"Delta Funding Corp v. Harris" (2006). 2006 Decisions. Paper 264.
http://digitalcommons.law.villanova.edu/thirdcircuit_2006/264


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                                             PRECEDENTIAL

         UNITED STATES COURT OF APPEALS
              FOR THE THIRD CIRCUIT



                        No. 04-1951



            DELTA FUNDING CORPORATION

                               v.

                    ALBERTA HARRIS,
                              Appellant


       On Appeal from the United States District Court
              for the District of New Jersey
              (D.C. Civil No. 02-cv-04080)
           District Judge: Hon. John C. Lifland



                   Argued: May 10, 2005

Before: SLOVITER, FISHER and ALDISERT, Circuit Judges

                  (Filed: October 3, 2006)



Madeline L. Houston (Argued)
Houston & Totaro
Bloomfield, New Jersey 07003

      Attorney for Appellant
Alan S. Kaplinsky
Martin C. Bryce, Jr. (Argued)
Ballard Spahr Andrews & Ingersoll, LLP
Philadelphia, PA 19103

       Attorneys for Appellee

Baher A. Azmy
Andrew McNally
Erin Kahn
Steven Klutkowski
Seton Hall Law School
Center for Social Justice
Newark, New Jersey 07102

       Attorneys for Amici Curiae,
       American Civil Liberties Union of New Jersey,
       New Jersey Institute for Social Justice, New Jersey
       Citizen Action Coalition, New Jersey Public Policy
       Research Institute, American Association of Retired
       Persons, and National Association of Consumer
       Advocates in Support of Appellant Alberta Harris


                   OPINION OF THE COURT


SLOVITER, Circuit Judge.

       This matter is before us following issuance of an opinion
by the Supreme Court of New Jersey in response to a question of
law that we certified to it.1 See Delta Funding Corp. v. Harris,


       1
             We express our appreciation to that court for accepting
our certified question. The certified question procedure is a useful
vehicle for federal courts to give the state supreme courts an
opportunity to elucidate an important issue of state law, thereby
avoiding erroneous predictions that will confuse rather than clarify
the issue. The Supreme Court has stated that certification “does
. . . in the long run save time, energy, and resources and helps build

                                  2
No. 04-1951, 

, at *13-14 (3d Cir.
July 27, 2005). A brief summary of the background and issue is
called for.

       In 1999, Alberta Harris, a 78-year-old African-American
woman with a sixth-grade education and very little financial
sophistication, entered into a mortgage loan contract with Delta
Funding Corporation, a lender specializing in the sub-prime
market.2 Under the contract, Delta provided Harris with a
$37,700 loan secured by a mortgage on her house. Harris owned
her home outright and had lived in it for more than thirty years.
Harris’s only basis for financial support in 1999 was the social
security payment of approximately $900 per month. The annual
percentage rate on the Delta loan was 14%, resulting in monthly
payments of approximately $444.44; nearly half of Harris’s
monthly income. Delta subsequently assigned the loan to Wells
Fargo as trustee. Harris was unable to afford the required
monthly payments and Wells Fargo instituted a mortgage
foreclosure suit against her in the Superior Court of New Jersey,
Essex County, Chancery Division.

       The loan agreement contains an arbitration provision that
allows either party to elect binding arbitration as the forum to
resolve covered claims. In response to Wells Fargo’s mortgage
foreclosure action, Harris filed an Answer and Counterclaim and
a Third-Party Complaint against Delta, alleging violations of the
Truth in Lending Act (“TILA”), 15 U.S.C. §§ 1601 to -67, the
Real Estate Settlement Procedures Act (“RESPA”), 12 U.S.C. §§



a cooperative judicial federalism.” Lehman Bros. v. Schein, 

, 391 (1974).
       2
          Sub-prime lending refers to lending to persons who,
because of poor credit history or even discrimination by traditional
lenders, have been historically excluded from obtaining credit.
These loans charge higher interest rates, points, and fees than
comparable loans in the prime market. See generally HUD-
TREASURY TASK FORCE ON PREDATORY LENDING, CURBING
PREDATORY HOME MORTGAGE LENDING 27-28 (June 2000),
available at http://www.huduser.org/Publications/pdf/treasrpt.pdf.

                                 3
2601 to -17, and the New Jersey Consumer Fraud Act (“CFA”),
N. J. Stat. Ann. §§ 56:8-1 to -135.

        Delta filed a petition in the United States District Court
for the District of New Jersey seeking to compel arbitration of
Harris’s claims against it. Harris filed an answer to Delta’s
petition and thereafter she filed a motion for summary judgment.
In that motion, she argued, inter alia, that the arbitration clause
was unconscionable under New Jersey state law because it (1)
imposes prohibitive costs which preclude her from effectively
vindicating her statutory rights; and (2) requires her to adjudicate
her claims in two forums; i.e., she must contest the foreclosure
action in state court, but bring all related claims in arbitration.
The District Court denied Harris’s motion for summary
judgment and granted Delta’s motion to compel arbitration.3

        Believing that the issue presented a question of New
Jersey law that was undecided, we issued a petition pursuant to
New Jersey Court Rule 2:12A-3 certifying a question to the New
Jersey Supreme Court. That Court accepted and reformulated
the question as follows: “Is the arbitration agreement at issue, or
any provision thereof, unconscionable under New Jersey law,
and, if so, should such provision or provisions be severed?”
Delta Funding Corp. v. Harris, 

, 

(N.J. 2005). The New Jersey Supreme Court issued its decision
on August 9, 2006. See Delta Funding Corp. v. Harris, 2006 N.
J. LEXIS 1155 (N.J. Aug. 9, 2006).

       We will not rescribe the analysis and reasoning of the
New Jersey Supreme Court because it is available in the
published opinion. We summarize it briefly.

       That Court stated that “Most of the disputed provisions in
the instant arbitration agreement are, to some degree, ambiguous.
To the extent that the unconscionability of those provisions
ultimately turns on how the arbitrator resolves the ambiguities,
we are unable to determine whether the provisions are, in fact,


       3
        The state court presiding over the foreclosure action then
dismissed Harris’s third-party complaint against Delta.

                                 4
unconscionable.” 

The Court then identified
general principles of New Jersey contract law that this court and
the arbitrator can apply to the agreement.

       The Court first considered the claim of procedural
unconscionability and referred to its opinion in Rudbart v. North
Jersey District Water Supply Commission, 

, 

, 687 (N.J. 1992), which focused on the procedural and
substantive aspects of a contract of adhesion in order to
determine whether the contract is so oppressive or inconsistent
with the vindication of public policy that it would be
unconscionable to permit its enforcement. The Court noted that
“Harris alleges certain facts surrounding her signing of the
contract that suggest a high level of procedural
unconscionability” that “must be taken into account.” Delta
Funding, 2006 N.J. LEXIS 1155, at *21, 22.

        With respect to Harris’s reference to the provision of the
arbitration agreement regarding payment of hearing-level costs,
the Court reviewed the parties’ respective arguments and noted,
“The agreement as written, and as yet uninterpreted by an
arbitrator, could force Harris to bear the risk that she will be
required to pay all arbitration costs. That risk is unconscionable
in that it is a deterrent to the vindication of her statutory rights.”

       The Court next considered the provision in the arbitration
agreement that states, “[u]nless inconsistent with applicable law,
each party shall bear the expense of that party’s attorneys’,
experts’ and witness fees, regardless of which party prevails in
the arbitration.” 

The New Jersey Supreme Court
concluded that “To the extent that this provision in Harris’s
consumer contract would prevent her from recovering
discretionary attorney’s fees and costs under RESPA, it is
unconscionable.” 

       4
          All citations to the text of the New Jersey Supreme
Court’s decision are to the version in LEXIS because the opinion
has not been printed in the official reporter.

                                  5
         The arbitration agreement also provides that “the cost of
. . . an appeal will be borne by the appealing party regardless of
the outcome of the appeal.” 

With respect to that
provision, the Court stated that “[t]he same conclusion in respect
of the unconscionability of the hearing-level costs provision
applies to the allocation of costs related to appeals available
within the arbitral forum.” 

“the arbitration provisions are subject to
interpretation, but only by an arbitrator,” 

the Court
stated that “if an arbitrator were to interpret all of the disputed
provisions in a manner that would render them unconscionable,
we have no doubt that those provisions could be severed and that
the remainder of the arbitration agreement would be capable of
enforcement.” 

        Finally, the Court ruled that the “class-arbitration waiver
in [Harris’s] arbitration agreement is not unconscionable per se,”

that the provision of the arbitration agreement that
excludes any foreclosure actions that may be brought against
Harris is burdensome but not unconscionable, 

and
that Harris’s challenge to the discovery and confidentiality
provisions of the arbitration agreement, which are a form of
generalized attacks on arbitration as a method of dispute
resolution, are “not persuasive.” 

        We have undertaken to summarize the New Jersey
Supreme Court’s opinion only because the result is undoubtedly
of interest to the district courts in this circuit. Of course, the
New Jersey Supreme Court opinion speaks for itself, and those
interested in its conclusions are directed to the opinion.

       For the reasons set forth above, we will remand this
matter to the District Court with directions that it should enforce
the arbitration agreement, attaching to its order a copy of the
New Jersey Supreme Court opinion.