Please ensure Javascript is enabled for purposes of website accessibility

Class Actions: Third Circuit Adopts N.J. Supreme Court Delta Funding v. Harris Opinion (Web)

A Third U.S. Circuit Court of Appeals panel has endorsed the New Jersey Supreme Court’s approach in a case the federal appellate court had certified to the state court.

The result in Delta Funding Corp. v. Harris, No. 04-1951, 2006 WL 2806870 (3rd Cir. Oct. 2, 2006), is that the unanimous panel strongly backed the state Supreme Court's ruling in Delta Funding Corp. v. Harris, No. A-44-05 (also available at; summarized in this Web site's Recent News feature on Aug. 17, and available using the archive feature for arbitration articles). It means that a 78-year-old Social Security recipient will have to arbitrate questions about the unconscionability of a mortgage she took out on a home she owned outright from a sub-prime lender. A decision on the arbitration agreement’s unconscionability eventually will be made by an arbitrator.

In December 1999, Newark, N.J., resident Alberta Harris, who has a sixth-grade education, secured a $37,700 loan with a mortgage on her home. Delta Funding later assigned the loan to Wells Fargo.

Harris was unable to make the loan payments. Wells Fargo instituted a foreclosure action in New Jersey Superior Court. Harris filed a reply and counterclaim, as well as a third-party complaint against Delta Funding alleging violations of the Truth in Lending Act, the Real Estate Settlement Procedures Act, or Respa, and the New Jersey Consumer Fraud Act.

Delta Funding sought to compel arbitration in the federal district court. At the same time, Harris filed a summary judgment motion contending that the arbitration agreement was unconscionable and unenforceable.

In March 2004, the district court denied Harris's summary judgment motion, and granted Delta Funding's motion to compel arbitration. Delta Funding Corp. v. Harris, 396 F. Supp. 2d 512 (D.N.J. 2004). The state court then dismissed her third-party complaint against Delta Funding.

Harris appealed to the Third Circuit, which certified the case to New Jersey's Supreme Court. The circuit court in its latest opinion noted that granting certification on questions of law “gives 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.”

Circuit Judge Dolores K. Sloviter, writing on behalf of the Third Circuit panel, summarized the state Supreme Court opinion. The state court “identified general principles of New Jersey contract law that [the Third Circuit] and the arbitrator can apply to the agreement.”

The Sloviter opinion notes that the N.J. Supreme Court referred to Rudbart v. North Jersey District Water Supply Commission, 127 N.J. 344, 605 A.2d 681, 687 (N.J.1992), while addressing Harris's procedural unconscionability claim.

The Supreme Court had observed potential unconscionability in 1) the fee-shifting provisions that could deter Harris, and similarly situated consumers, from pursuing statutory claims through mandatory arbitration agreement; 2) the fact that “[t]he 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,” 3) a provision that would prevent her from recovering discretionary attorneys’ fees and costs under a statute; and 4) that Harris would incur the entire costs of taking an appeal but the arbitration provision would bar Harris from being awarded costs if she prevailed.

The New Jersey Court, however, ruled that the class-arbitration waiver in Harris's agreement was not “unconscionable per se,” in part since Harris was seeking more than $100,000 in damages--not a low-value case which would not be litigated absent the availability of a class proceeding.

Harris had adequate incentive to bring her claim as an individual action, because her home's foreclosure was at stake--and the statutes under which she sought relief provided for attorney fees and costs to prevailing plaintiffs.

The state Supreme Court also had agreed that the bifurcated claims resolution structure was burdensome, but it did not hold it unconscionable.

The New Jersey Court found that Harris's challenges to the discovery and confidentiality provisions of the arbitration agreement were generalized attacks on arbitration as a method of dispute resolution and “not persuasive.”

The Third Circuit briefly summarized the findings in backing the New Jersey decision “only because the result is undoubtedly of interest to the district courts in this circuit.”

Adds Circuit Judge Sloviter, “Of course, the New Jersey Supreme Court opinion speaks for itself, and those interested in its conclusions are directed to the opinion.”

The case was remanded to the District Court with directions to enforce the arbitration agreement. Sloviter ordered the District Court to attach the New Jersey Court opinion to its arbitration order.

--Ongmu Tshering, CPR Intern