Special Child: For Mentally Retarded Borrower, Arbitration a Losing Proposition

John Brown is 44 years old. In court papers his attorney, Eason Mitchell, calls him “a special child of God” whose mental development essentially stopped when he was an infant. His mother interprets for others who can’t understand “John’s language” of hand gestures and labored speech.

His disability did not prevent him from co-signing a mortgage contract alongside his mother, who says she took out the loan because she was having trouble making ends meet and “I didn’t want my baby to starve and have nothing to eat.”

Mitchell says John’s mother, Catherine Brown, is illiterate and mildly retarded herself and that she was manipulated into taking out a loan that fleeced her and John of thousands of dollars. Mitchell filed suit in Macon, Miss., on behalf of John—in a state where juries are known for returning harsh verdicts against lenders who target disadvantaged borrowers.

But John’s case never made it before a jury. The lender, CitiFinancial, invoked the loan contract’s arbitration clause.

Last August the Fifth Circuit U.S. Court of Appeals ruled that the issue of whether John was competent to sign an arbitration clause was a question that should be decided in, well, arbitration.

One of the judges added, however, that if the facts were as they seemed, “I can conceive of no way in which the contract underlying this action could be enforced against the profoundly retarded and incompetent Mr. Brown.”

The arbitrator hired by CitiFinancial saw things differently. In February, he ruled John was subject to the arbitration clause, because his mother was acting as his guardian and had authority to bind him to the contract. The arbitrator then dismissed the fraud and negligence claims against the company.

Mitchell argues the loan was abusive because it moved Mrs. Brown from a government-subsidized, low-interest mortgage to a high-interest CitiFinancial mortgage. He notes that the refinancing also forced her to repay nearly $8,000 in government interest subsidies.

But the arbitrator said the loan helped the Browns, reducing their monthly debt payments and saving them from bankruptcy. He said he found no evidence of fraud or economic harm to John. “Because he is profoundly mentally retarded,” the arbitrator wrote, “John Brown was not, in fact, could not, be defrauded since he relied on Iris mother, not CitiFinancial.”

Mitchell, the Browns’ attorney, says the ruling is flawed, because the law doesn’t allow parents to bind their children to contracts except for true necessities. And while the deal reduced Mrs. Brown’s monthly payments, he says, it did so only by stretching them out over a longer term, ratcheting up her overall debt and rolling unsecured credit card balances into a mortgage that could endanger ownership of her home.

Mitchell says he hopes to appeal the arbitrator’s decision into the courts, even though Citi’s arbitration program provides for no appeal. The attorney says John Brown’s case shows the arbitration system is hopelessly flawed.

“If that one is lost, the cause is lost,” Mitchell argues. “There is no way to obtain any fairness in the process.”