## Facts

- Juan Phillips obtained a $72,900 residential mortgage loan in May 2000 from Associates Home Equity Services, Inc. for home improvements and debt consolidation.
- A mortgage broker arranged the loan; Phillips executed standard closing documents, including TILA disclosures and a notice of right to cancel.
- Phillips and the lender also executed a separate, written arbitration agreement covering “all claims and disputes” arising out of or relating to the loan.
- Phillips filed a putative class action alleging that Associates Home Equity and related corporate entities violated the Truth in Lending Act (TILA) in connection with the transaction.

## Issues

1. Whether the parties’ arbitration agreement was enforceable under the Federal Arbitration Act (FAA) and applicable state contract law so as to require arbitration of Phillips’s TILA claims and stay the case.
2. Whether the court should dismiss the class allegations at the pleading stage under Rules 23(d)(4) and 12(b)(6).

## Decision

- The court denied defendants’ motion to compel arbitration and to stay the judicial proceedings.
- The court held the arbitration agreement unenforceable because it was unconscionable under generally applicable state-law contract principles.
- The court deferred ruling on defendants’ motion to dismiss the class claims.

## Legal Principles

- The FAA favors enforcement of arbitration agreements, but such agreements may be invalidated by generally applicable contract defenses, including unconscionability.
- Unconscionability may be shown through a combination of procedural unfairness (e.g., adhesion-like presentation to a consumer with little ability to bargain) and substantively one-sided or oppressive terms.
- Arbitration provisions that impose cost structures or procedural limitations that effectively deter or prevent pursuit of statutory remedies may be unenforceable as unconscionable.
- TILA claims are not categorically nonarbitrable, but an arbitration agreement must permit effective vindication of TILA’s statutory rights and remedies.

## Conclusion

The court refused to compel arbitration of a borrower’s TILA claims because the loan-related arbitration agreement was unconscionable and therefore unenforceable; the case proceeded in federal court, with class-dismissal issues reserved for later determination.


Phillips v. Associates Home Equity Servs., Inc., 179 F. Supp. 2d 840 (N.D. Ill. 2001)