225 F.3d 366 (3rd Cir. 2000), 00-5047, Johnson v West Suburban Bank

Docket Nº:00-5047
Citation:225 F.3d 366
Party Name:TERRY JOHNSON, v. WEST SUBURBAN BANK; TELE-CASH INC.; COUNTY BANK OF REHOBOTH BEACH, DELAWARE Tele-Cash Inc.; County Bank of Rehoboth Beach, Delaware, Appellants.
Case Date:August 29, 2000
Court:United States Courts of Appeals, Court of Appeals for the Third Circuit

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225 F.3d 366 (3rd Cir. 2000)



WEST SUBURBAN BANK; TELE-CASH INC.; COUNTY BANK OF REHOBOTH BEACH, DELAWARE Tele-Cash Inc.; County Bank of Rehoboth Beach, Delaware, Appellants.

No. 00-5047

United States Court of Appeals, Third Circuit

August 29, 2000

Argued July 17, 2000

On Appeal From the United States District Court For the District of Delaware, D.C. Civ. No. 99-cv-00104, District Judge: Honorable Gregory M. Sleet

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[Copyrighted Material Omitted]

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WALTER WEIR, JR., ESQUIRE SUSAN VERBONITZ, ESQUIRE (ARGUED) Weir and Partners, LLP 1339 Chestnut Street Suite 500, The Widener Building Philadelphia, PA 19107, JAMES D. GRIFFIN, ESQUIRE Griffin & Hackett 116 West Market Street Mellon Bank Building Georgetown, DE 19947, Counsel for Appellants

CATHLEEN M. COMBS, ESQUIRE (ARGUED) JOHN M. BRODERICK, ESQUIRE Edelman, Combs & Latturner 120 South LaSalle Street, 18th Floor Chicago, IL 60603, WILLIAM L. O'DAY, JR., ESQUIRE Law Office of William L. O'Day, Jr. 2118 Kirkwood Highway Wilmington, DE 19805, Counsel for Appellee

CHRISTOPHER R. LIPSETT, ESQUIRE ERIC J. MONGILNICKI, ESQUIRE MICHAEL D. LEFFEL, ESQUIRE Wilmer, Cutler & Pickering 2445 M Street, NW Washington, DC 20037-1420, Counsel for Amici Curiae - The Delaware Retail Council; The New Jersey Retail Merchants Association; The Pennsylvania Retailers Association

RICHARD P. ECKMAN, ESQUIRE STEPHEN G. HARVEY, ESQUIRE JEFFREY K. TECHENTIN, ESQUIRE Pepper Hamilton, LLP 3000 Two Logan Square Philadelphia, PA 19103-2799, Counsel for Amici Curiae - American Bankers Association, American Financial Services Association, Consumer Bankers Association, and Delaware Bankers Association

Before: BECKER, Chief Judge, SLOVITER and NYGAARD, Circuit Judges.


BECKER, Chief Judge.

This appeal arises under the Truth in Lending Act ("TILA"), 15 U.S.C. S 1601 et seq. , and the Electronic Fund Transfer Act ("EFTA"), 15 U.S.C. S 1693 et seq. Plaintiff Terry Johnson, who entered into a short-term loan agreement with County Bank of Rehoboth Beach, Delaware ("Bank"), contends that the terms of the loan violated both the TILA and the EFTA. He seeks to bring a class action suit against both the Bank and Tele-Cash, Inc., which acted as the Bank's agent for the loan transaction. The Defendants respond that the dispute belongs in an arbitral forum, as the loan agreement signed by Johnson contains an arbitration clause. This appeal presents the question, one of first impression in the Courts of Appeals, whether claims under the TILA and the EFTA can be referred to arbitration under an arbitration clause when a plaintiff seeks to bring a claim on behalf of multiple claimants.

Johnson submits that compelling arbitration is precluded by an "irreconcilable conflict" between the arbitration clause and the purposes of the TILA and the EFTA. He argues that Congress consciously inserted language into the statutes

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with the intent of encouraging district court judges to certify class actions under Fed. R. Civ. P. 23. He further maintains that in the legislative history of amendments to the TILA, Congress communicated that class action remedies play a central role in the TILA and EFTA enforcement schemes. Rather than simply provide restitution, Johnson asserts, such litigation is meant to serve public policy goals through plaintiffs who act as private attorneys general, for the class action device is necessary to ensure meaningful deterrence to creditors who might violate the acts.

The District Court agreed with Johnson that there was an "inherent conflict" between compelling arbitration and the TILA and the EFTA and denied the Defendants' motion to compel arbitration under the agreement. We will reverse. Though there may be some tension between the purposes of the debtor-protection statutes and arbitration, we are not persuaded that the two are so at odds as to preclude arbitration in this context. The Supreme Court has made clear that the presumption in favor of arbitration established by the Federal Arbitration Act ("FAA"), 9 U.S.C. S 1 et seq., is a powerful one. Because neither the TILA nor the EFTA explicitly precludes the selection of arbitration instead of litigation, a party who agrees to arbitrate, but then asserts that his or her statutory claim cannot be vindicated in an arbitral forum, faces a heavy burden. That burden has not been met here.

As a predicate to this conclusion, we note our belief that the public interest purposes behind the civil penalty provisions of the statutes are not in conflict with arbitration, even if arbitration clauses may prevent the bringing of class actions. To the extent that class actions serve public interest goals, those goals are also met by other provisions of the laws, which allow for enforcement of the statutes by federal agencies that possess sufficient sanctioning power to provide a meaningful deterrent to creditors who violate the terms of either act. Moreover, neither act grants potential plaintiffs any substantive right that cannot be vindicated in an arbitral forum. While it may be true that the benefits of proceeding as a class are unavailable in arbitration, neither statute confers upon plaintiffs the right to proceed as a class. Instead, the right is merely a procedural one, arising under Fed. R. Civ. P. 23, that may be waived by agreeing to an arbitration clause. In sum, because we can discern no congressional intent to preclude the enforcement of arbitration clauses in either statute's text, legislative history, or purpose, we hold that such clauses are effective even though they may render class actions to pursue statutory claims under the TILA or the EFTA unavailable.


Johnson applied for and received a short-term loan for $250 from the Bank on July 10, 1998. The loan agreement disclosed an annual percentage rate of 917%, stemming from finance charges of $88 for the two-week loan. Thus, under the agreement, Johnson had to repay the loan by making one payment of $338 two weeks after receiving his $250. The loan agreement also contained the following arbitration clause:

You and we agree that any claim, dispute, or controversy between us . . . and any claim arising from or relating to this Note, no matter by whom or against whom . . . including the validity of this Note and of this agreement to arbitrate disputes as well as claims alleging fraud or misrepresentation shall be resolved by binding arbitration by and under the Code of Procedure of the National Arbitration Forum . . . . This arbitration agreement is made pursuant to a transaction involving interstate commerce and shall be governed by the Federal Arbitration Act, 9 U.S.C. [SS] 1-16.

App. 20. The loan agreement further provided:

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By signing and sealing below, you agree to all of the terms of this Note, including the agreement to arbitrate disputes.

Id. at 20.

Johnson filed suit on behalf of a putative class in the District Court for the District of Delaware, alleging that the Bank and Tele-Cash, Inc., the bank's agent for the loan transaction, violated both the TILA and the EFTA by failing to properly disclose the high rate of interest, and by requiring loan applicants to open accounts from which they were required to irrevocably preauthorize electronic fund transfers to pay the loan.

The Defendants moved to stay the proceedings and compel arbitration. Concluding that arbitration was at odds with the purposes of the TILA and the EFTA, the District Court denied a motion to compel arbitration and stay the proceedings or dismiss the case. The District Court did, however, dismiss Johnson's claim that the arbitration clause was unconscionable. The Defendants timely appealed. The District Court had jurisdiction to hear Johnson's action under 28 U.S.C. S 1331. Though the District Court's refusal to compel arbitration was interlocutory, such refusals are immediately appealable under the FAA. See 9 U.S.C. S 16(a) ("An appeal may be taken from . . . an order . . . refusing a stay of any action under section 3 of this title [or] denying a petition under section 4 of this title to order arbitration to proceed."). The question whether the TILA and the EFTA preclude arbitration when the plaintiff seeks to assert claims on behalf of a class presents a question of law over which our review is plenary.


Whether a court can compel arbitration of TILA claims when the parties' loan agreement contains an arbitration clause but the plaintiff seeks to bring claims on behalf of multiple claimants is a question of first impression for this court. No other federal appellate court has squarely addressed the issue either. A number of district courts have ruled on the subject. Most of these rulings favor the view that the TILA does not preclude the pre-dispute selection by the parties of an arbitral forum should any controversy arise. Compare Thompson v. Illinois Title Loans, Inc., No. 99- C-3952, 2000 WL 45493 (N.D. Ill. Jan. 11, 2000); Sagal v. First USA Bank, N.A., 69 F.Supp.2d 627 (D. Del. 1999); Stout v. Byrider, 50 F.Supp.2d 627 (N.D. Ohio 1999); Randolph v. Green Tree Fin. Corp., 991 F.Supp. 1410 (M.D. Ala. 1997), rev'd on other grounds, 178 F.3d 1149 (11th Cir. 1999), cert. granted, 120 S.Ct. 1552 (Apr. 3, 2000); Lopez v. Plaza Fin. Co., No. 95-C-7567, 1996 WL 210073 (N.D. Ill. April 25, 1996); Meyers v. Univest Home Loan, Inc., No. C- 93-1783 MHP, 1993 WL 307747 (N.D. Cal. Aug. 4, 1993), with Lozada v. Dale Baker Oldsmobile, Inc., 91 F.Supp.2d 1087 (W.D. Mich. 2000).

In general, nothing prevents contracting parties from including a provision in their agreements that refers statutory claims arising under the contract to arbitration. See Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20, 26...

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