Martz v. Beneficial Montana

Can You Sue in Court If Your Montana Loan Contract Has an Arbitration Clause? Martz v. Beneficial Montana, Inc., 2006 MT 94

Boland Aarab PLLP

Often not, if you challenge the whole contract. In Martz v. Beneficial Montana, Inc., 2006 MT 94, the Montana Supreme Court held that under the U.S. Supreme Court’s decision in Buckeye Check Cashing v. Cardegna, a claim that an entire loan contract is void must go to the arbitrator, not a court. The Court also held that the borrowers’ challenge to the arbitration clause itself was not preserved. One justice concurred “very reluctantly,” and two dissented.

Key Takeaways

• Where a complaint challenges a contract as a whole, the Federal Arbitration Act and Buckeye require a court to compel arbitration if the contract has an arbitration clause (Martz ¶ 18).
• A challenge aimed specifically at the arbitration clause, such as unconscionability, may be decided by a court (¶¶ 15, 19).
• New theories raised for the first time in a motion for reconsideration are not treated as properly raised in the district court (¶ 24).
• Justice Cotter, joined by Justice Morris, would have reached the unconscionability issue and reversed. Justice Nelson concurred only because the U.S. Supreme Court’s ruling bound the Court (¶¶ 27–35).

In this case sheet: At a glance · What the Court held · Our position and how the Court differed · What changed · Statutes · When it applies · How hard · FAQ

The practice Tom Boland built is the practice that handles your case today. Contact Boland Aarab PLLP for a free consultation at (406) 315-3737.

At a glance

What did the Montana Supreme Court hold in Martz v. Beneficial?

In November 1997, Beneficial Montana, a licensed consumer loan business, lent Timothy and Robin Martz $25,000. The loan included a $500 “loan origination fee,” a $350 “document preparation fee” and a substantial prepayment penalty. After two refinancings, the second on or about October 18, 2000, the principal rose to about $112,000, secured by their home (¶ 5). Beneficial added an arbitration rider to the October 2000 agreement. The Martzes had no lawyer and signed it without discussion. Beneficial admitted the contract was one of adhesion (¶ 6).

After the Martzes defaulted in 2004 and Beneficial started non-judicial foreclosure, they sued in Park County. They alleged the loan contracts were void under the Montana Consumer Loan Act, the Unfair Trade Practices Act and other laws (¶ 7). The District Court granted Beneficial’s motion to compel arbitration. The Martzes moved for reconsideration, arguing for the first time that the arbitration clause itself was unconscionable, and then appealed before the court ruled (¶¶ 8–9).

The Supreme Court affirmed on two issues:

1. Who decides whether the whole contract is void? The arbitrator. Under Buckeye, “a challenge to the validity of the contract as a whole, and not specifically to the arbitration clause, must go to the arbitrator,” in state and federal court alike (¶ 17). The Court stated its conclusion “with certainty, if not enthusiasm” (¶ 18).
2. Was the unconscionability challenge preserved? No. The complaint said “nothing of the arbitration clause itself” (¶ 20). The opposition to the motion attacked the clause only because the underlying contract violated the Consumer Loan Act (¶ 21). There was “no record on unconscionability” (¶ 22). New theories raised in a motion for reconsideration that the district court never ruled on are not properly before the Supreme Court (¶¶ 24–25).

What did Tom Boland argue, and how did the Court differ?

On who decides. The Martzes argued that challenges to a contract as a whole must be heard by courts, because a void contract would necessarily void its arbitration clause (¶ 11). They relied on federal decisions that read Prima Paint narrowly, as limited to claims of fraud in the inducement (¶ 16). Buckeye was decided after they filed their brief. The Court acknowledged that timing but held that, after Buckeye, the argument “is without merit” (¶ 16).

On unconscionability. On appeal the Martzes also challenged the arbitration clause itself as unconscionable (¶ 19). The majority agreed that a court decides that question but held it was not preserved (¶¶ 19–25).

Two justices agreed with us that the Court should reach the issue. Justice Cotter, joined by Justice Morris, wrote that the District Court “obviously entertained arguments regarding the conscionability of the arbitration rider.” Its order had discussed the Martzes’ reliance on Kloss and Iwen and found the clause did not take unfair advantage of them (¶¶ 32–34). She would have reached the merits, “squarely reject[ed]” the District Court’s analysis, and reversed the order compelling arbitration (¶¶ 31, 35).

A third justice agreed with the outcome only under compulsion. Justice Nelson concurred “very reluctantly.” He wrote that the U.S. Supreme Court had stretched the FAA beyond what Congress intended. He concurred “only because a higher authority than this Court has declared the law of the land” (¶¶ 27–30).

What did Martz change in Montana law?

Martz brought Buckeye into Montana law. The Court summarized the rule in two parts (¶ 18):

1. When a complaint challenges the arbitration clause specifically, a court may hear the challenge.
2. When a complaint challenges the contract as a whole, the court must compel arbitration.

The Court also noted that, under Prima Paint and Buckeye, an arbitration clause is severable from the rest of the contract as a matter of federal law, regardless of state severability rules (¶ 15 & n.1).

The decision is also regularly cited on procedure: the de novo standard for orders compelling arbitration (¶ 10) and the “procedural trap for the unwary” of a motion for reconsideration (¶ 24). Later Montana Supreme Court decisions citing Martz include Larsen v. Western States Insurance Agency, 2007 MT 270, Horton v. Horton, 2007 MT 181, Thompson v. Lithia Chrysler Jeep Dodge, 2008 MT 175, Woodruff v. Bretz, Inc., 2009 MT 329, and Turner v. City of Dillon, 2020 MT 83.

Which Montana laws and rules apply?

• 9 U.S.C. § 2: the Federal Arbitration Act’s rule that written arbitration agreements in transactions involving commerce are “valid, irrevocable, and enforceable” (¶ 12).
• § 32-5-101, MCA: the Montana Consumer Loan Act, under which the Martzes claimed the loans were void (¶¶ 7, 18). The Court did not reach that claim, which went to the arbitrator.
• § 30-14-103, MCA: the Unfair Trade Practices and Consumer Protection Act, which the complaint also invoked (¶ 20).
• Mont. R. Civ. P. 59 (motions to alter or amend). A “motion for reconsideration” is not authorized by the rules. The Court will sometimes treat it as a Rule 59 motion, but not when it presents new theories (¶ 24).
• Buckeye Check Cashing, Inc. v. Cardegna, 546 U.S. 440 (2006), Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395 (1967) and Southland Corp. v. Keating, 465 U.S. 1 (1984)

When might Martz apply to you?

• A lender or seller moves to compel arbitration. If your complaint attacks only the contract as a whole, Martz says the arbitrator decides whether the contract is void.
• You think the arbitration clause itself is unfair. That challenge belongs in court, but it must be raised specifically and early, with a record, in your complaint or your opposition to the motion (¶¶ 19–22).
• You lose a motion and want the trial court to reconsider. Raising a new theory in a motion for reconsideration may not preserve it for appeal (¶ 24).

Every case turns on its own facts and on how the claims were pleaded.

How hard is it to avoid arbitration in Montana?

When a contract has an arbitration clause governed by the FAA, it is hard.

• Standard of review. The Supreme Court reviews an order compelling arbitration de novo (¶ 10). That favorable standard does not help if federal law requires arbitration.
• Federal law controls. The FAA “create[d] a body of federal substantive law” that applies in state courts (¶ 12). A state court cannot adopt a different rule on who decides a challenge to the whole contract (¶¶ 17–18).
• Preservation. The Court “will not review an issue that was not raised in the district court” (¶ 25). It has also told litigants “not to come to this Court with claims of oppression or unconscionability unless the record in regard to these issues has been adequately developed” (¶ 22).

The practical lesson is to attack the arbitration clause directly, and with evidence, from the first response to a motion to compel.

The Boland Aarab Way

Thomas E. Boland, with Jeremiah C. Lynch, represented Timothy and Robin Martz in this appeal. Tom was admitted in 1974 and practiced in Great Falls from 1979. His daughter, Caitlin Boland Aarab, and Samir F. Aarab founded Boland Aarab PLLP in 2017 as the successor to his practice. We lost Martz, and two justices would have ruled for our clients. We publish losses like this because they show how the law really works, and because the lesson is to build the record from the first filing. That is how the firm approaches the catastrophic injury cases and serious trucking and injury cases it handles today. When you hire Boland Aarab, you work directly with the attorneys who carry that practice forward.

Frequently Asked Questions

If my Montana loan contract is illegal, can a court decide that instead of an arbitrator? Not if you challenge the contract as a whole and it contains an arbitration clause governed by the FAA. That question goes to the arbitrator (Martz ¶ 18).

Can a Montana court decide whether an arbitration clause is unconscionable? Yes. A challenge aimed specifically at the arbitration clause may be decided by a court, but it must be properly raised in the district court (Martz ¶¶ 19, 24–25).

Does a motion for reconsideration preserve a new argument for appeal in Montana? Generally not. The Court will not treat new theories raised in a motion for reconsideration as properly raised in the district court (Martz ¶ 24).

Work With the Lawyers Behind These Cases

Boland Aarab is a Great Falls trial firm built on Tom Boland’s practice. The same attorneys who brief and argue before the Montana Supreme Court handle our clients’ serious injury, trucking and wrongful-death cases from the first call. Contact Boland Aarab PLLP for a free consultation at (406) 315-3737.

About Boland Aarab PLLP: Boland Aarab PLLP is a Great Falls, Montana trial firm. Its attorneys, Caitlin Boland Aarab and Samir F. Aarab, have appeared in more than 40 matters before the Montana Supreme Court and have argued twice before the U.S. Court of Appeals for the Ninth Circuit. The firm carries on the Great Falls practice Thomas E. Boland began in 1974. Meet our attorneys.

Sources:

• Martz v. Beneficial Montana, Inc., 2006 MT 94 (CourtListener PDF)
• 9 U.S.C. § 2
• § 32-5-101, MCA
• § 30-14-103, MCA
• Buckeye Check Cashing, Inc. v. Cardegna, 546 U.S. 440 (2006)
• Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395 (1967)
• Southland Corp. v. Keating, 465 U.S. 1 (1984)

Disclaimer: This article is for informational purposes only and does not constitute legal advice. Reading it does not create an attorney-client relationship.