The Unconscionability Claim/Defense

The claim that a contract is unenforceable because it is unconscionable is more often than not the equivalent of a Hail Mary pass – a long shot that is rarely successful (unless you were Aaron Rodgers facing the Detroit Lions in 2015). Although the Court of Appeals recently affirmed the denial of a summary disposition motion seeking dismissal of an unconscionability claim in Glaske v. Independent Bank Corp., 2016 Mich.App. LEXIS 121 (January 21, 2016), the case illustrates how rare it is to be able to mount a successful claim based on that doctrine.

In Glaske, the plaintiff filed a class action against a local bank complaining about its policy of batching and reordering customers’ transactions so as to maximize overdraft charges. The Court illustrated this policy by positing that a customer had $300 in her checking account and three outstanding checks for $75, $60 and $250. The bank would post the $250 check first, so that it could collect two overdraft fees for the remaining checks. Had the bank posted the checks from lowest to highest value, it would have been able to collect only one overdraft fee. Mimicking a successful federal court class action in In re Checking Account Overdraft Litigation, 694 F. Supp. 2d 1302 (SD Fla.2010), the plaintiff filed suit and included a claim for unconscionability. The trial court denied the bank’s motion to dismiss the claim, which the Court of Appeals affirmed.

The Court of Appeals discussed the familiar distinction between procedural and substantive unconscionability, both of which must be proved to state a valid claim. Citing Allard v. Allard, 308 Mich.App. 536, 543 (2014), the Court of Appeals stated that the first element requires a showing that the weaker party had no realistic alternative to accepting the challenged contract terms. The second element requires a showing that the challenged terms are not substantively reasonable, i.e., the inequity of the terms is “so extreme as to shock the conscience.”

In determining that the plaintiff in Glaske was able to satisfy those requirements, the Court of Appeals drew heavily on the Southern District of Florida court’s opinion in the successful class action, which challenged the same bank practices. As to the procedural unconscionability element, the Court of Appeals adopted the federal district court’s finding that even though the plaintiffs did not allege that they had been coerced into accepting the overdraft policy, there was an obvious disparity in sophistication and bargaining power between them and the banks. In addition, the overdraft terms were contained in voluminous boilerplate language drafted by the bank and the plaintiffs had no meaningful opportunity to negotiate them. Another key factor was that the banks did not notify the plaintiffs they had the option to decline the overdraft protection service even though they had that option. The federal district court also noted the requirement that the customer had to notify the bank he or she wanted to opt out of that service, which was against industry standards. For the Glaske Court, the aggregate of these factors supported a finding that the procedural unconscionability element had been met.

As to substantive unconscionability, the Court of Appeals again relied on the Florida federal district court’s analysis. The Court of Appeals cited the factors used by the federal district court, namely, “the commercial reasonableness of the contract terms, the purpose and effect of the terms, the allocation of the risks between the parties and similar public policy concerns”. The banks in both Glaske and the Florida matter argued that the posting practice was a standard industry practice endorsed by the UCC, a contention the Florida federal district court and the Court of Appeals in Glaske rejected as “not entirely correct”. That factor, combined with the plaintiffs’ arguments in the federal class action that no reasonable person would have agreed to the banks’ overdraft policies and that the fees were not reasonably related to the costs or risks associated with providing overdraft protection, tipped the balance in favor of the plaintiffs.

The question is whether Glaske helps or hinders litigants who wish to assert unconscionability claims. On balance, the case shows how difficult it is to assert the claim or defense of unconscionability, particularly where a lender seeks to foreclose a mortgage or obtain a judgment on an unpaid loan. The borrower will be hard pressed to convince a trial court to rule as the Court of Appeals did in Glaske. While it is true that loan documents and promissory notes contain boilerplate language weighted heavily in favor of lenders, in the commercial context the borrower will usually find it difficult to claim lack of sophistication. As far as bargaining power is concerned, the lenders can credibly argue the borrowers could simply have gone elsewhere if they did not like the terms offered. Furthermore, unlike in Glaske, most borrowers are fully aware of the terms they will later characterize as too onerous. Finally, the boilerplate clauses challenged by the lenders are in fact almost universally used by lenders, who will likely be able to convince the trial courts (if they are not already convinced) that they are commercially reasonable because of the frequency of borrower defaults.

In any event, the Glaske opinion stands as a recent roadmap of the proof required to prevail on an unconscionability claim or defense. It also demonstrates the difficulty of doing so outside of the context of a consumer class action.

For more information, please contact Jennifer Grieco at jgrieco@nagmlaw.com.