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James v. Nat'l Fin., LLC - 132 A.3d 799 (Del. Ch. 2016)


Unconscionability is a concept that is used sparingly. The notion that a court can and will review contracts for fairness seems dangerous, subjecting negotiated bargains to the loosely constrained review of the judicial process. Perhaps for this reason, courts have evoked this doctrine with extreme reluctance and only when all of the facts suggest a level of unfairness that is unconscionable. A finding of unconscionability generally requires the taking of an unfair advantage by one party over the other. A court must find that the party with superior bargaining power used it to take unfair advantage of his weaker counterpart. For a contract clause to be unconscionable, its terms must be so one-sided as to be oppressive. Whether a contract is unconscionable is determined at the time it was made. The outcome turns on the totality of the circumstances. 


Defendant National Financial, LLC ("National") was a consumer finance company that operated under the trade name "Loan Till Payday." In May 2013, National loaned $200 to plaintiff Gloria James (the "Disputed Loan"). National described the loan product as a "Flex Pay Loan." In substance, it was a one-year, non-amortizing, unsecured cash advance. The terms of the Disputed Loan called for James to make 26, bi-weekly, interest-only payments of $60, followed by a 27th payment comprising both interest of $60 and the original principal of $200. The total repayments added up to $1,820, representing a cost of credit of $1,620. According to the loan document that National provided to James, the annual percentage rate for the Disputed Loan was 838.45%. James defaulted. After National rejected her request for a workout agreement, she filed a lawsuit in Delaware chancery court seeking to rescind the Disputed Loan.


Was the Disputed Loan unconscionable, thereby rendering it subject to rescission by James?




The court rendered judgment for James. A consumer loan contract, such as the one executed by James, that had an extremely high annual percentage rate and provided for a year of biweekly interest-only payments before a final balloon payment was unconscionable and invalid under Del. Code Ann. tit. 6, § 2-302 and the case law, the court ruled. The terms of the Disputed Loan were fundamentally unfair, the provisions were confusingly worded and incomprehensible to unsophisticated and financially vulnerable consumers, and the contract was designed contrary to Del. Code Ann. tit. 5, § 2235A(f) to evade the payday loan restrictions. In addition, National's truth in lending violation entitled Jones to recover statutory damages and attorneys' fees and costs under 15 U.S.C.S. § 1640(a)(2), (3). Judgment was entered in favor of James in the amount of $3,237. Pre- and post-judgment interest was to accrue at the legal rate, compounded quarterly, beginning on May 7, 2013, the date of the Disputed Loan.

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