Nursing home arbitration agreement was unconscionably unbalanced, says Court of Appeals

Over the past week and a half, the Court of Appeals has issued a trifecta of decisions dealing with arbitration agreements.

The first of these, Figueroa v. THI of New Mexico at Casa Arena Blanca LLC, addressed a nursing home arbitration agreement providing that all disputes between the resident and nursing home were subject to arbitration, except for “guardianship proceedings, collection and eviction actions initiated by” the nursing home, and “any dispute” where the amount at issue is less than $2,500.

Unfortunately, the resident died a few months after admission, and her son filed a wrongful death lawsuit against the nursing home, which moved to compel arbitration.  The trial court denied the motion on the ground that the agreement was unconscionable under the Supreme Court’s decision in Cordova v. World Finance Corporation of New Mexico, 2009-NMSC-021, 146 N.M. 256, 208 P.3d 901, which held that arbitration agreements that are unfairly and unreasonably one-sided in the drafter’s favor are unconscionable under state law.

The nursing home argued that Cordova’s analysis is preempted by the Federal Arbitration Act (FAA), but Judge Michael Vigil’s opinion rejected that argument on the ground that Cordova is simply a specific application of New Mexico’s law of unconscionability, which allows a court in equity to refuse to enforce any contract (not just one dealing with arbitration) that is “unfair, unequal, or unjust.”  The opinion cites several New Mexico cases refusing to enforce unfairly unbalanced terms in any contract (¶¶ 18-19).  And under the FAA, arbitration agreements are enforceable “save upon such grounds as exist at law or in equity for the revocation of any contract.” (emphasis added).  Thus, the Court concluded that the FAA did not preempt the trial court’s decision. 

I think the opinion is correct to say that state-law unconscionability principles can invalidate arbitration agreements provided that those principles apply equally to all contracts.  Thus, a state’s refusal to enforce an unfairly unbalanced arbitration contract might pass muster under the FAA if the state also refuses to enforce unfairly unbalanced contracts in contexts that have nothing to do with arbitration.

The interesting question (and one the Court does not address) is whether New Mexico cases have in fact applied this principle to other sorts of contracts with the same rigor that they have applied it to arbitration agreements.  I have not researched this subject myself, so it may well be that New Mexico treats all unfairly unbalanced contracts in the same way, although this seems doubtful.

But if a case could be made that arbitration agreements are treated with greater strictness than other contracts, then the rule in Cordova would arguably be preempted, despite its facial neutrality.  I don’t know whether the nursing home in this case attempted an argument like that, but if someone does in the future then it would make for an interesting case. In my opinion, Cordova and Figueroa are vulnerable to an argument that they are indeed preempted by the FAA.

(Disclosure: I have defended nursing homes from various claims in the past, and I presently represent clients who are most often seeking to enforce consumer arbitration agreements).

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