Originally from Dispute Resolution Journal

Why carve-outs for creditor remedies against collateral do not make the arbitration clause one-sided. The answer is that they are essential to vindicate the borrower’s statutory rights.

In this article we discuss the vindication of non-waivable statutory rights when a secured creditor exercises its remedies against real property and/or tangible personal property under mortgage foreclosure laws, replevin laws, or Article 9 of the Uniform Commercial Code. We are concerned with the specific situation in which a debtor and creditor have agreed to arbitrate disputes that may arise under the note, mortgage, security agreement, and/or other loan document with two important exceptions. The first exception is when a secured creditor takes steps to protect its rights by exercising statutory remedies against the collateral in a judicial proceeding, such as a foreclosure or replevin action.

The second exception is when the creditor seeks preliminary relief, such as a restraining order or injunctive relief, from a court in order to preserve the existence, location, condition, or productive use of the collateral (i.e., maintain the status quo). The creditor’s goal here is to prevent the debtor or other obligor from disposing of the collateral, or failing to maintain or operate it (assuming it is productive property) before the foreclosure or other action is completed.

We call these two exceptions from the parties’ arbitration obligation “carve-outs.” It is important to recognize that these carve-outs do not in any way alter the parties’ obligation to arbitrate other disputes that may arise between the creditor and debtor.