Washington Mutual Finance Group, LLC v. Bailey

United States Court of Appeals for the Fifth Circuit · Contracts

ContractsArbitrationUnconscionabilityFAAarbitration agreementilliteracyprocedural unconscionabilityduty to read

Facts

Several appellees obtained loans from WM Finance or its predecessors and, in the same transactions, purchased related insurance from the insurer appellants. Each of those appellees signed a separate arbitration agreement, but later argued the agreements were unenforceable because they were illiterate and were not specifically told they were signing arbitration agreements. They sued in Mississippi state court alleging they were sold unwanted insurance, and WM Finance sought to compel arbitration in federal court. Miriah Phinizee did not sign an arbitration agreement herself, but her claims arose from her husband's loan and insurance transactions.

Issue

Whether, under Mississippi law, arbitration agreements signed by illiterate parties are unenforceable as procedurally unconscionable because the signers did not understand them and were not specifically told they were arbitration agreements. Also, whether a nonsignatory plaintiff whose claims arise from the underlying loan and insurance transactions may be compelled to arbitrate under equitable estoppel.

Rule

Under Mississippi law, a signatory is charged with knowledge of the contents of a document he executes and cannot avoid a written contract on the ground that he did not read it or have it read to him; illiteracy alone does not render an arbitration agreement unconscionable or unenforceable, and a contracting party's illiteracy does not shift to the other party a duty specifically to explain the agreement. A defense alleging misrepresentation about the arbitration clause fails where the response given was not plainly misleading and any misunderstanding would have been cured by reading or having the separate arbitration document read. A nonsignatory may be compelled to arbitrate under equitable estoppel when she seeks to claim benefits arising from the same transaction while avoiding the arbitration burden attached to it.

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One of 10 multiple-choice questions for this case. Pick an answer to see why.

In Jackson, Mississippi, Leon Price obtained a consumer loan from Magnolia Crest Finance and signed a separate one-page document titled in large capital letters, "DISPUTE RESOLUTION AGREEMENT." Leon later admitted he could not read and said no employee orally explained arbitration to him before he signed.

If Leon argues the arbitration agreement is procedurally unconscionable solely because he is illiterate and did not understand what he signed, how should a court rule under the majority opinion's rule?

Explanation. Under the governing rule, Mississippi law charges a person with knowledge of the contents of a document he signs and does not create a separate contract regime for illiterate parties. Illiteracy alone does not render an arbitration agreement procedurally unconscionable or unenforceable; the signer must read or have the contract read to him. (Derived from Washington Mutual Finance Group, LLC v. Bailey (n.d.).)