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Salvadori v. Option One Mortgage Corp.

420 F.Supp.2d 349 (D. N.J. 2006)

ARBITRATION—While New Jersey law prohibits violations of clearly established rights, such as the right to a jury trial, it does not prohibit voluntary waivers of such rights.

A buyer borrowed money to finance the purchase of a home and secured it with a mortgage. The mortgage had prepayment penalty provisions applicable if the borrower repaid the loan in full before the end of the two years. Simultaneously with the execution of the note and mortgage, the borrower executed an arbitration agreement applicable to all disputes between the borrower and lender related to the loan. In the event either the lender or the borrower failed to submit to arbitration after a receipt of proper demand for arbitration from the other party, the non-cooperating party had to reimburse the other for all costs incurred compelling arbitration.

Within 24 months of closing, the borrower repaid the loan in full, incurring the prepayment penalty. Although the borrower paid the prepayment fee, it filed suit in State court challenging the validity of the penalty. The lender demanded that its borrower submit to arbitration. The borrower voluntarily dismissed its complaint, never submitted the dispute to arbitration, but filed a second suit in State court. The State court dismissed the second action and compelled the borrower to submit to arbitration. The borrower appealed and the matter was remanded to allow the borrower to amend its complaint to include additional claims colorable under federal law. So, the borrower filed an amended complaint alleging breach of the Federal Trade Commission Act, as well as various state laws. The lender removed the case to federal court and moved to compel arbitration.

In federal court, motions to compel arbitration are reviewed under the federal summary judgment standard. Therefore, the lender had to establish there was no genuine issue of material fact and that it was entitled to judgment as a matter of law.

The borrower claimed that the arbitration agreement violated the New Jersey Truth in Consumer Contract, Warranty and Notice Act because the agreement compelled it to waive its right to a trial. The Court rejected this argument, holding that the New Jersey law prohibits violations of clearly established rights, but does not prohibit voluntary waivers thereof.

Further, the Court ruled that, under the Federal Arbitration Act, in deciding whether a case must be submitted to arbitration, courts must decide: (1) whether a valid agreement to arbitrate exists; and (2) whether the dispute before the Court falls within the substantive scope of the agreement to arbitrate. Here, the Court held that because there was a valid arbitration agreement that covered any claim or controversy related to the loan, the present dispute fell within the scope of the agreement. As a result, any claim by the borrower that the prepayment penalty violated the Federal Trade Commission Act had to be submitted to arbitration.

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