Breach of implied warranty of merchantability or fitness may be a tort

by Richard Alderman

In JCW Electronics v. Garza, the Texas Supreme Court considered whether to apply the state’s proportionate-responsibility statute to a claim based on a UCC implied warranty.  Despite the fact that a prior version of the state expressly included UCC claims -- an inclusion that the legislature removed and replaced with language stating it applied to “to any cause of action based on tort” -- the court held that the statute applied.  The court found that “a party who seeks damages for death or personal injury under a breach-of-implied-warranty claim seeks damages in tort.”  Interestingly, it appears that if the same cause of action were brought for property damage, the claim would not sound in tort, but would be a breach of contract.  In other words, at least in Texas, a UCC implied-warranty claim might be tort or contract depending on the nature of the damages. One wonders what the result would be if the claim involved property damage and personal injury.

Times Articles on Foreclosure Issues, Mortgage Fees, and College Loans

Here are links to a few articles from the Times on consumer law issues from June that I've been stockpiling:

From June 22, Bob Tedeschi's Mortgages Column, "A Close Look at All Those Fees," is about how little consumers know about the fees charged in obtaining mortgages, and which fees can be negotiated.  An excerpt:

A recent survey, done by the Center for Economic and Entrepreneurial Literacy, a Washington-based research center, asked 1,000 people in April to choose the four most relevant factors in obtaining a mortgage. Nearly 70 percent did not identify their credit score, which chiefly determines the borrower’s loan eligibility and interest rate.

* * *

Another recent study . . . by the Urban Institute, also based in Washington, found that borrowers living in an area full of college-educated homeowners paid about $1,100 less in mortgage fees than those in areas where few people attended college. The study noted racial differences as well: on average, African-American borrowers paid $415 more for their loans than white counterparts did, while Latinos paid $365 more.

I wonder if there's an ECOA violation in the different fees charged different groups.

Some New York news: On June 19, the Times ran a piece, "Court Offers Homeowners Help Avoiding Foreclosure," on a program announced by New York's Chief Judge Kaye about a new court section that will help "borrowers and lenders reach speedy settlements."  New York's legislature also just passed a bill to help homeowners, and the Governor is expected to sign it.  Back on June 1, Tedeschi did another piece, "Legal Help in Face of Foreclosure," about local efforts to establish a Nassau County program under which lawyers will be trained and provide help to consumers facing foreclosure on a pro bono basis.

On June 18, the Times published "Bill Promotes Universal College Loans."  An excerpt:

Under the proposal, lenders that participate in the federal loan program would have to extend credit to any eligible student, regardless of such things as income or the number of years of education, as long as the college is part of the program.

Perhaps the refusal to lend to students at particular schools would create ECOA issues, depending on the demographics of the student body.  In any event, it's not clear to me what effect such a bill, if enacted, would have on higher education.  If lenders would rather not lend to students at certain schools because, for example, students at those schools are unable to get jobs and so default on their loans, would forcing the lenders to continue making such loans keep the schools afloat and students attending them--only to discover that they can't get jobs later?  Or is the refusal of lenders to make loans not because of higher default rates?  Would such a law increase student loan rates generally?  Or does the federal loan program guarantee keep rates low regardless of the default rate?   

The Other Foreclosure Crisis

If you think the foreclosure crisis is about greedy home buyers stretching to buy a fancy house in California, you should read this article in the current issue of the Nation. It is one of the best accounts I have seen thus far of the huge loss of wealth in the African-American community.

Florencia Marotta-Wurgler Study of EULAs

Florencia Marotta-Wurgler of NYU has written "'Unfair' Dispute Resolution Clauses: Much Ado About Nothing?" in Boilerplate: Foundations of Market Contracts (Omri Ben-Shahar, ed., Cambridge University Press, 2007), analyzing dispute resolution clauses in end user license agreements.  Here's the abstract:

Dispute resolution clauses are a common and potentially important component of many types of standard form contracts. I examine the use of dispute resolution clauses in 597 end-user license agreements (EULAs) of software packages sold online. I find that 75% of EULAs include choice of law clauses, 28% include forum selection clauses, 6% include arbitration clauses, and none include class action waivers. Sellers are equally likely to include dispute resolution clauses in the EULAs of consumer-oriented and business-oriented products. Despite the concerns of some legal academics, I do not find much evidence of "strategic" use of DRCs to advantage sellers over buyers. For example, sellers located in states with "seller-friendly" laws are no more likely to include choice of law or choice of forum clauses than sellers in states with stronger consumer protections; despite UCITA's flexible choice-of-law rules and otherwise seller-friendly provisions, sellers do not go out of their way to select UCITA; and, there is no evidence that fora selected are intentionally inconvenient to buyers. These results question certain proposals to regulate dispute resolution clauses in consumer form contracts on the basis of strategic behavior by sellers.

Times Editorial on the Need for Congressional Action in the Foreclosure Crisis

The Times editorializes here in today's paper about the importance of Congressional action on the foreclosure crisis.  Some excerpts:

By the time the Senate returns next Monday from its July 4 recess, some 55,000 more homes will have entered foreclosure. And that’s hardly the full picture of the growing calamity. More than three million homeowners are currently at risk of default and millions more are expected to join them in the coming year as home prices drop, the economy falters and delinquencies rise. Yet the Senate went ahead with its vacation last Friday without passing a foreclosure prevention measure.

* * *

The foreclosure prevention bill is not a cure-all, by any means, but is a way to try to break the cycle. It would allow many troubled borrowers to exchange their unaffordable loans for new mortgages guaranteed by the federal government — as long as the lender agreed to reduce the existing loan balance to 85 percent of the home’s current value. It is questionable whether lenders would be willing to take the loss, and there’s nothing in the law to prod them to do so.

Still, the bill’s passage, which should be the Senate’s priority next week, would be an overdue acknowledgment that the foreclosure mess requires government intervention. Lawmakers could build on the effort as needed, but it is unconscionable not to take the first step.

Prima Paint applies to confidentially agreement

by Richard Alderman

In an interesting case, ITT Educ. Serv. Inc. v. Arce, the Fifth Circuit has held that parties to an arbitration may not disclose a copy of the arbitrator’s findings in an independent proceeding involving the same defendant. The consumer appellants argued that the arbitrator’s findings constituted a finding of fraudulent inducement. Accordingly, the consumers argued, the entire Enrollment Agreement–including the confidentiality provision–was void under Texas law, such that the consumers may disclose the results of the prior arbitration. The defendant, IRR, disputed that the arbitrator made a finding of fraudulent inducement.

Oren Bar-Gill & Richard A. Epstein Debate Behavioral Economics vs. Neoclassical Economics in the Context of Consumer Contracts

Oren Bar-Gill of NYU and Richard A. Epstein of Chicago and Stanford's Hoover Institute have each contributed a piece to "Consumer Contracts: Behavioral Economics vs. Neoclassical Economics,"  92 Minnesota Law Review (2007-2008).  Here's the abstract:

In the past decade behavioral economics has established itself as a contender to the throne of neoclassical economics in the economic analysis of law. The pros and cons of behavioral as compared to neoclassical economics have been vigorously debated at the general, methodology level. But the success or failure of the behavioral challenge will be judged by its ability to improve upon neoclassical economics - both descriptively and prescriptively - in specific legal applications. Consumer contracts provide an important test case for behavioral economics. In this exchange we offer the first comprehensive debate between the behavioral and neoclassical perspectives as applied to the law and economics of consumer contracts.

New Mexico Supreme Court strikes down class-action ban

by Deepak Gupta

On Friday, New Mexico's highest court unanimously handed consumers an important victory, holding that, "in the context of small consumer claims that would be prohibitively costly to bring on an individual basis, contractual prohibitions on class relief are contrary to New Mexico's fundamental public policy of encouraging the resolution of small consumer claims and are therefore unenforceable in this state."  New Mexico joins a unanimous and growing group of state and federal courts in declaring that the Federal Arbitration Act does not preempt such state-law rulings--a question the U.S. Supreme Court refused to hear last month.

The New Mexico case involved allegations that Dell misrepresented the amount of memory in its computers--a misrepresentation that was widespread, but which cost each customer only $10-$20 each.  The opinion has some great language about the value of the class action device in cases involving small consumer claims.  The court recognized that "the class action functions as a gatekeeper to relief when the cost of bringing a single claim is greater than the damages alleged." Dell's class-action ban had "essentially foreclosed the possibility that Plaintiff may obtain any relief," such that "enforcing the class action ban would be tantamount to allowing Defendant to unilaterally exempt itself from New Mexico consumer protection laws." Congratulations go to Paul Bland and Amy Radon of Public Justice, who argued the unconscionability issue as amicus curiae.

Times Reports that New Housing Bill Will Help Only a Fraction of Borrowers in Distress

  Today's Times reports in "As Housing Bill Evolves, Crisis Grows Deeper," that the bill making its way through Congress will help only about 400,000 of the millions of borrowers in distress.  Some excerpts:

“It’s not enough, even in the best of circumstances,” said Mark Zandi, chief economist of Moody’s Economy.com. The number of people who will be helped “is going to be overwhelmed by the three million that are headed toward default.”

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The effectiveness of the bill will depend to some extent on how it is handled by the F.H.A., an agency created during the Great Depression to insure home loans. It will have several challenges: persuading the lenders who made second mortgages and home equity loans to cooperate; screening loans to make sure borrowers have a good shot at keeping their homes after refinancing; and weeding out those trying to take advantage of the system.

Obama on Consumer Debt

Barack Obama discusses his legislative agenda regarding consumer debt with Michelle Singletary of the Washington Post. Obama notes that until he cashed in on his best-selling books, he and his wife were carrying significant student loan debt. "We were making payments the size of a mortgage every month," Obama said.