Class Action Waivers Enforceable Under Federal Arbitration Act

On June 20, 2013, the United States Supreme Court reversed the United States Court of Appeals for the Second Circuit and held that a class action waiver contained in standard form contract between American Express and various merchants was enforceable and could not be invalidated under the Federal Arbitration Act on the ground that the cost for an individual plaintiff to proceed would outstrip the recovery to plaintiff. See American Express Co. v. Italian Colors Restaurant, Case No. 12-133 (June 20, 2013). The decision by the United States Supreme Court continued the trend set by the Supreme Court in Stolt-Nielsen S.A. v. AnimalFeeds Int’l Corp., 559 U.S. 662 (2010) when it held that a party may not be compelled to submit to class arbitration absent an agreement to do so.

The decision in American Express Co. v. Italian Colors is important because the Supreme Court emphasized a number of points. Courts “must rigorously enforce” arbitration agreements according to their terms and the Federal Arbitration Act reflects the overarching principle that arbitration is a matter of contract. See American Express Co. v. Italian Colors Restaurant, Case No. 12-133 (June 20, 2013, ), citing, Rent-A-Center, West, Inc. v. Jackson, 561 U.S.___, ___ (2010) (slip op., at 3) (“overarching principle) and Dean Witter Reynolds, Inc. v. Byrd, 470 U.S. 213, 221 (1985) (rigorous enforcement). The Supreme Court also distinguished American Express Co. v. Italian Colors Restaurant from cases where the “right to pursue a claim is eliminated” under the effective vindication exception set out in dicta by the Court in Mitsubishi Motors Corp. v. Soler Chrysler Plymouth, Inc., where a contractual provision forbids the raising of certain statutory claims or a high filing fee makes the forum impracticable. The fact that a case is not worth the expense does not constitute an elimination of the right to pursue the remedy. See American Express Co. v. Italian Colors Restaurant, Case No. 12-133 (June 20, 2013), citing, Mitsubishi Motors Corp. v. Soler Chrysler Plymouth, Inc., 473 U.S. 614 (1985). The Supreme Court reiterated that the regime set out by the Second Court of Appeals of a legal requirements of success on the merits claim-by-claim and theory-by-theory determination on enforceability of an arbitration agreement was not built into the Federal Arbitration Act and would “undoubtedly destroy the prospect of speedy resolution that arbitration” was meant to secure. The court specifically emphasized the switch from bilateral to class arbitration “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.” See American Express Co. v. Italian Colors Restaurant, Case No. 12-133 (June 20, 2013), citing, AT & T Mobility LLC. v. Concepcion, 563 U.S. __ (2011) (slip op., at 14). The short version of the ruling is simply that courts should enforce arbitration agreements as written and not engage in expensive evidentiary challenges to enforcement under the Federal Arbitration Act because arbitration is a matter of contract and to do so defeats the purpose of arbitration-informality, speed and lower cost.

The opinions of this Blog are solely the author’s and any comments, suggestions or replies can be sent to me at


Supreme Court of Texas Issues ACORN Opinion on Home Equity Lending

On June 21, 2013, the Supreme Court of Texas issued its long awaited opinion in The Finance Commission of Texas, et al. v. Valerie Norwood, et. al. This case is more commonly known as the ACORN case because it was filed in 2005 by the Association of Community Organization for Reform Now (ACORN) and six individuals against the Texas Finance and Credit Union Commissions challenging a number of home equity regulations adopted by the Commissions as being unconstitutional. Because the case has been going on so long, a short background summary may be helpful.

Texas was the fiftieth state to adopt and allow home equity lending in 1997. Political compromises were made to get the law enacted and the Texas Home Equity Law was subject to “a maze of 25, or more, exacting conditions regulating the loan amount, recourse and enforceability, fees and charges, permitted loan terms and the lender’s loan origination and closing practices.” The Finance Commission of Texas v. Valerie Norwood, ___S.W.3d ____ (Tex. June 21, 2013) (Case No. 10-0121), citing, J. Alton Alsup, Pitfalls (and Pratfalls) of Texas Home Equity Lending, 52 Consumer Fin. L. Q. Rep. 437 (1998).

Tex. Const. art. XVI, § 50 set out “Draconian” consequences of non-compliance, whether intentional or inadvertent and not only involved the loss of the right of forced sale of the homestead, but forfeiture of all principal and interest. Within months of Section 50 taking effect, four state agencies issued a “Regulatory Commentary on Home Equity Procedures” to provide guidance to lenders and consumers concerning the regulatory views of the meaning of the amendment while also providing a warning that “a court may or may not defer to this interpretation.” See Office of Consumer Credit Comm’r et al., Regulatory Commentary on Equity Lending Procedures 1 (Oct. 7, 1998). Subsequently the Office of the Texas Attorney General issued an opinion stating that no state agency or legislature could interpret the constitutional provisions because to do so would violate the separation of powers allowing courts the ultimate power to construe constitutional provisions. The OAG recommended that the Constitution be amended to solve the problem. See Tex. Att’y Gen. Op. No. DM-495 (1998).

As a result, Tex. Const. art. XVI, § 50 was amended in 2003 and Section 50(u) added allowing the legislature to delegate to state agencies the power to interpret the home equity sections and provided a safe harbor for lenders as long as agency interpretations were followed. The Finance and Credit Union Commissions held hearings, invited public comment and issued final regulatory interpretations effective January 8, 2004. Three weeks later the ACORN lawsuit was filed.  The trial court granted summary judgment to ACORN and the individual plaintiffs and invalidated many provisions of the law including defining what constituted “interest.” The Austin Court of Appeals affirmed in part and reversed in part and when the case was argued before the Texas Supreme Court, there were three essential issues left to be decided. Before reaching those issues, the Supreme Court of Texas made it clear that the Commissions’ interpretations of Section 50 are subject to judicial review.

Issue One: Section 50(a)(6)(E)  caps “fees to any person that are necessary to originate, evaluate, maintain, record, insure or service the extension of credit” at three (3) percent of principal. Fees do not include interest and the question was whether the Commissions gave “interest” the same meaning as Section 301.002(a)(4) of the Texas Finance Code. The Supreme Court of Texas held that consistent with the history, purpose and text of Section 50(a)(6)(E), “interest” as used in that provision means the amount determined by multiplying the loan principal by the interest rate.” As stated in the opinion, “this narrower definition of interest does not limit the amount a lender can charge for a loan; it limits only what part of the total charge can be paid in front-end fees rather than interest over time. See The Finance Commission of Texas v. Valerie Norwood, ___S.W.3d ____ (Tex. June 21, 2013) (Case No. 10-0121).

Issue Two: Section 50(a)(6)(N) provides that a loan may only be closed at the office of a lender, an attorney at law or a title company.  The Commissions interpreted tis provision to allow a borrower to mail a lender the required consent to having a lien placed on his homestead. The Court of Appeals held that this interpretation was correct.  The Supreme Court of Texas held that “Executing the required consent or a power of attorney are part of the closing process and must occur only at one of the locations allowed by the constitutional provisions.” The Finance Commission of Texas v. Valerie Norwood, ___S.W.3d ____ (Tex. June 21, 2013) (Case No. 10-0121).  The Court further held that it is precisely the common use of mail and powers of attorney in a closing transaction that gives rise to the danger of coercion Section 50(a)(6)(N) was intended to prevent. Id.

Issue Three: Section 50(g) requires that a loan not be closed before the 12th day after the lender “provides” the borrower the prescribed notice. The Commissions interpreted this provision with a rebuttable presumption that notice is received, and therefore provided, three days after it is mailed. The Court of Appeals concluded that this was appropriate and the Supreme Court of Texas upheld the interpretation as a reasonable procedure because it does not prevent the homeowner from insisting that the lender establish actual receipt of notice in each case. The Finance Commission of Texas v. Valerie Norwood, ___S.W.3d ____ (Tex. June 21, 2013) (Case No. 10-0121).

Much more will be said about the ACORN opinion in the coming days and weeks. Procedures used in home equity lending will need to be changed as soon as possible now that the opinion is out.  The opinions in this blog are solely the author’s and any suggestions, replies and comments should be provided to me at

Challenging Personal Jurisdiction in Texas by Special Appearance

Texas Rule of Civil Procedure 120a allows a nonresident defendant to challenge a Texas Court’s personal jurisdiction without becoming subject to the jurisdiction of Texas courts. Rule 120a is the Texas implementation of the Due Process Clause of the United States Constitution protecting persons from being hauled into a forum when there is no meaningful contacts, ties or business relationship. See National Indus. Sand Assn. v. Gibson, 897 S.W.2d 769, 772 (Tex. 1995). Special appearances are subject to the due order of pleading rules and a special appearance is a verified pleading that must be the first pleading a defendant files. As a general rule with a couple of exceptions, if a special appearance is filed after some other pleading, you will be deemed to have appeared and waived your ability to contest jurisdiction. A person does not make a general appearance and waive their special appearance if they file a notice of removal, file a Rule 11 Agreement, or correspond with the court without asking for affirmative relief and expressly stating that correspondence is subject to special appearance. See Exito Elecs. Co. v. Trejo, 142 S.W.3d 302, 306 (Tex. 2004) (Rule 11 extending time to initial pleading does not waive special appearance even if not subject to special appearance); Antonio v. Rico Marino, S.A., 910 S.W.2d 624, 629 (Tex. App.-Houston [14th Dist.] 1995, no writ) (notice of removal does not waive special appearance); N803RA, Inc. v. Hammer, 11 S.W.3d 363, 367 (Tex. App.-Houston [1st Dist.] 2000, no pet.) (letter to court did not waive special appearance because letter also challenged jurisdiction). While the Supreme Court of Texas has held that every other pleading is presumed to be subject to the court’s ruling on the special appearance, it is recommended that all pleadings be filed subject to the special appearance. See Dawson-Austin v. Austin, 968 S.W.2d 319, 322 (Tex. 1998) (holding other pleadings presumed to be subject to ruling on special appearance).

There are three essential cases that should be reviewed when preparing a special appearance. The cases are BMC Software Belgium, N.V. v. Marchand, 83 S.W.3d 789 (Tex. 2002), CSR Ltd. v. Link, 925 S.W.2d 591, 596 (Tex. 1996), and Kelly v. General Interior Contrs., Inc., 301 S.W.3d 653 (Tex. 2010). The Kelly opinion is important because it discusses the pleading requirements for Plaintiff and Defendant and the shifting burdens of proof in a challenge to personal jurisdiction.  Once a plaintiff has pleaded sufficient jurisdictional allegations, the defendant has the burden to negate all bases of personal jurisdiction alleged by plaintiff. Kelly v. General Interior Constr. Inc., 301 S.W.3d 653, 658 (Tex. 2010). If the plaintiff fails to plead facts bringing the defendant within reach of Texas’ long-arm statute, a defendant need only prove that it does not live in Texas to negate jurisdiction. Siskind v. Villa Foundation for Educ., Inc., 642 S.W.2d 434, 438 (Tex. 1982).

Special appearances are very fact driven. Plaintiff’s should plead as specifically as possible to show that a defendant is subject to jurisdiction in Texas. Restating the general allegations of the long-arm statute and tying in specific facts is a useful first step. Courts will consider the quality and nature of the defendant’s contacts (not the number), whether the defendant purposely availed themselves to a Texas forum by putting products in the stream of commerce or through advertising, or whether a defendant’s internet activity is sufficient to determine if jurisdiction exists. See Michiana Easy Livin’ Country, Inc. v. Holten, 168 S.W.3d 777, 784-85 (Tex. 2005) (stream of commerce and nature and quality not number); Spir Star AG v. Kimich, 310 S.W.3d 868, 873 (Tex. 2010) (stream of commerce, intent to serve Texas customers, marketing through a distributor); Schexnayder v. Daniels, 187 S.W.3d 238, 248 (Tex. App.-Texarkana 2006, pet. dism’d) (courts consider three levels of internet activity to determine sufficiency).

The opinions in this blog are the author’s and any comments, replies or suggestions can be sent to me at Happy Father’s Day to everyone.