## Facts

- Rosie Sharpe took out a loan and entered into a home-improvement contract with Aames Funding Corporation and its agents.
- The contract contained an arbitration provision stating that the parties would arbitrate disputes related to the agreement.
- The provision also reserved to Aames the ability to pursue certain matters in court, including foreclosure proceedings, bankruptcy applications, and Aames’s claims for damages tied to Sharpe’s default.
- A dispute arose about the amount of cash Sharpe was supposed to receive from the home-improvement loan.
- Sharpe sued Aames and its agents in Pennsylvania state court based on the transaction.
- Aames filed a petition in the U.S. District Court for the Eastern District of Pennsylvania to compel arbitration under the Federal Arbitration Act (FAA).
- Sharpe opposed the petition, arguing the arbitration provision was unconscionable.

## Issues

1. Whether the arbitration provision—requiring arbitration of disputes related to the agreement while allowing Aames to litigate foreclosure, bankruptcy, and default-related damages claims—was unconscionable and therefore unenforceable.

## Decision

- The court denied Aames’s request to compel arbitration.
- The court concluded that the arbitration provision was unconscionable because it required Sharpe to arbitrate disputes related to the agreement while preserving for Aames the ability to take key lender remedies to court.

## Legal Principles

- The FAA generally requires enforcement of written arbitration agreements, but allows refusal to enforce an arbitration clause based on generally applicable state-law contract defenses such as unconscionability.
- Unconscionability looks to both the contracting process (procedural unfairness, including take-it-or-leave-it presentation and unequal bargaining power) and the substance of the term (whether it is unreasonably one-sided).
- An arbitration clause that broadly requires a consumer to arbitrate disputes related to a transaction, while reserving to the lender the right to litigate core lender remedies (such as foreclosure and default-related claims), may be substantively unconscionable.

## Conclusion

Because the arbitration provision compelled Sharpe to arbitrate disputes related to the agreement while allowing Aames to pursue foreclosure, bankruptcy-related proceedings, and default-related damages in court, the district court treated the provision as unconscionable and declined to compel arbitration under the FAA.


Aames Funding Corp. v. Sharpe, 2004 WL 2418284 (2004)