## Facts

- Donald and Helen Flores, elderly homeowners, entered a reverse-mortgage transaction with Transamerica HomeFirst, Inc. in February 1997, executing a loan agreement, note, and deed of trust.
- The reverse mortgage provided a lump sum and monthly payments; repayment became due when the Floreses sold the home in July 1999.
- At payoff, HomeFirst demanded repayment of principal and interest plus “contingent interest” equal to 50% of the home’s appreciation, which the Floreses paid under protest.
- The Floreses sued alleging multiple consumer and contract claims (including unfair business practices, Consumer Legal Remedies Act violations, unconscionability, fraud, unlawful charges, and bad faith).
- The loan agreement (14 pages) included an arbitration clause requiring arbitration of any dispute related to the loan documents, except foreclosure; the clause was conspicuous but presented on lender-drafted, nonnegotiable forms.
- The arbitration scheme required the borrowers to arbitrate essentially all disputes while allowing HomeFirst to pursue judicial remedies (including foreclosure) and to proceed in court even while arbitration was pending.
- The trial court denied HomeFirst’s petition to compel arbitration, finding the arbitration provisions unconscionable and unenforceable; HomeFirst appealed.

## Issues

1. Whether the arbitration provisions were procedurally unconscionable because they were imposed in an adhesive consumer loan transaction involving elderly borrowers.
2. Whether the arbitration provisions were substantively unconscionable because they required borrowers to arbitrate most claims while preserving broad judicial remedies for the lender, including concurrent foreclosure litigation.
3. If unconscionable, whether the proper remedy was severance of offending terms or refusal to enforce the arbitration provisions.

## Decision

- The Court of Appeal affirmed the order denying the petition to compel arbitration.
- The court held the arbitration provisions were unconscionable and therefore unenforceable.
- The court declined to sever terms and refused to enforce the arbitration scheme as drafted, leaving the dispute to proceed in court.

## Legal Principles

- Unconscionability under California law requires a showing of both procedural and substantive unconscionability, evaluated on a sliding scale.
- Procedural unconscionability may be shown by oppression or lack of meaningful choice in an adhesive, take-it-or-leave-it contract formed under unequal bargaining power.
- Substantive unconscionability exists where terms are overly harsh or one-sided, including arbitration schemes that impose arbitration on the weaker party while reserving court access for the drafting party.
- Public policy favoring arbitration does not require enforcement of arbitration provisions that are unconscionable under generally applicable contract defenses.

## Conclusion

The court held that an arbitration scheme in a reverse-mortgage contract was unenforceable where the elderly borrowers were bound to arbitrate nearly all disputes but the lender retained broad, unilateral access to judicial remedies—especially foreclosure—even during arbitration.


Flores v. Transamerica HomeFirst, Inc., 93 Cal. App. 4th 846 (Cal. Ct. App. 2001)