Most of the current litigation over foreclosures has played out in the courts, but a recent decision from the Appellate Division, Banquez v. Deutsche Bank National Trust Company, involved a foreclosure-related dispute that was headed to arbitration. Actually, the decision in Banquez sent the dispute to arbitration after the trial court originally held that it could stay in state court where the plaintiff originally filed it. It is an interesting decision on the enforceability of arbitration agreements, particularly on the issue of whether an arbitrator or a court gets to decide the threshold question of whether a dispute is arbitrable.
In Banquez, plaintiff purchased residential property in Linden and executed a note and mortgage to the lender. At the same time, plaintiff signed a separate arbitration agreement with the lender. The agreement gave either party the “absolute right” to demand that any “Claim” be submitted to arbitration. The agreement defined “Claim” broadly and required that any dispute about whether a Claim was subject to the agreement would be resolved by an arbitrator, not a court. The agreement also contained several “Excluded Claims” that would not be covered by the agreement, including actions “to effect a judicial or quasi-judicial foreclosure.” The agreement was silent as to whether an arbitrator or a court would decide whether a purported Excluded Claim would be governed by the agreement. Finally, the agreement contained a class action waver, which prohibited plaintiff from participating in a class action, absent the lender’s consent, if the lender elected to arbitrate a claim. The agreement provided that the validity and effect of the class action waiver was to be “determined exclusively by a court and not by an arbitrator.”
Two years after entering into the note and mortgage, Plaintiff defaulted. The loan servicer sent her two Notices of Intention to Foreclose (“NOI”), both of which contained contact information for the servicer, but neither of which identified the lender. Three years after sending the NOIs, the lender filed a foreclosure complaint, but, soon after that, the parties agreed to a loan modification and the lender dismissed the foreclosure action.
Six months later, plaintiff filed a putative class action alleging that the lender violated the Fair Foreclosure Act because the NOIs did not identify the lender. The lender elected to arbitrate and demanded that plaintiff dismiss the complaint. When plaintiff refused, the lender moved to compel arbitration.
The trial court denied the motion. First, it held that the question of whether the putative class action involved an Excluded Claim could be resolved by the court, as opposed to an arbitrator. In support of this conclusion, the court observed that, while the agreement required that an arbitrator determine whether a Claim was covered by the agreement, the agreement was silent on whether a court or an arbitrator could determine whether something was an Excluded Claim. Further, the court observed that the agreement specifically required that a court, not an arbitrator, determine the enforceability of the class action waiver. Second, the trial court held that plaintiff’s claim was an Excluded Claim and was not covered under the agreement because it “most certainly had to do with foreclosure proceedings that took place involving [plaintiff] and [the lender].” Specifically, the trial court held that a NOI was “required as a preliminary aspect of foreclosure proceedings” and was thus “an ancillary remedy in connection with judicial or quasi-judicial foreclosure proceedings.”
The Appellate Division agreed with the trial court on the first holding, but not on the second. In other words, the Appellate Division agreed that the trial court could decide the procedural question of whether the dispute between the parties was arbitrable, but disagreed with the trial court’s substantive conclusion that it was.
On the first, more procedural question – whether the trial court, as opposed to an arbitrator, could decide if the dispute was arbitrable – the Appellate Division noted that, while courts usually determine whether a claim is arbitrable, the parties are free to delegate that power to an arbitrator. If they do, however, there must be “clear and unmistakable evidence” that the parties agreed to “arbitrate arbitrability.” The Appellate Division explained that the general presumption in favor of arbitration does not apply in such situations because it is “less likely that parties [ ] actually [gave] thought to the question of who decides disputes over arbitrability.” Therefore, ambiguity or silence on that issue should not be interpreted as delegating that power to an arbitrator. In Banquez the agreement was ambiguous because there was: specific delegation to the arbitrator in the section defining Claims; silence on the issue in the section defining Excluded Claims; and specific delegation to the court in the section on class action waivers. Therefore, the Appellate Division held that there was no “clear or unmistakable” evidence that the parties agreed to delegate the issue of arbitrability to an arbitrator, and it was appropriate for the trial court to decide this threshold issue.
But, on the second, more substantive question – whether the dispute between the parties was arbitrable – the Appellate Division reversed the trial court. Specifically, the Appellate Division rejected the trial court’s conclusion that the violation of the Fair Foreclosure Act alleged in the complaint was “ancillary” to a foreclosure action such that it would fall within the definition of Excluded Claims contained in the agreement. The Appellate Division observed that, while a NOI was a necessary precursor to foreclosure, the complaint did not allege that a violation of the Fair Foreclosure Act requires the actual filing of a foreclosure lawsuit. The Appellate Division noted: “[S]ervice of a NOI does not obligate a lender to file a foreclosure action. Indeed, we assume that the sending of an NOI often has the salutary effect of preventing any foreclosure.” Therefore, the Appellate Division held that a violation of the Fair Foreclosure Act cannot be considered “ancillary” to a foreclosure action “as it arises whether or not a foreclosure action is brought.” Accordingly, although the trial court had the right to decide whether the dispute in Banquez was arbitrable, the Appellate Division held that it came to the wrong conclusion on that issue.