McNulty v. H&R BLOCK, INC.

• Decision Date: 26 February 2004
• Citation: 2004 Pa. Super. 45,843 A.2d 1267
• Parties: Erin M. McNULTY and Brian J. Erzar, on behalf of themselves and all others similarly situated, Appellees, v. H&R BLOCK, INC.; H&R Block Group, Inc.; H&R Block Services, Inc.; H&R Block Tax Services, Inc.; H&R Block Eastern Tax Services, Inc.; H&R Block Eastern Tax Company, LLC; H&R Block Eastern Enterprises, Inc.; and H&R Block Eastern Support Services, LLC, Appellants.
• Court: Pennsylvania Superior Court

843 A.2d 1267

2004 Pa. Super. 45

Erin M. McNULTY and Brian J. Erzar, on behalf of themselves and all others similarly situated, Appellees, v. H&R BLOCK, INC.; H&R Block Group, Inc.; H&R Block Services, Inc.; H&R Block Tax Services, Inc.; H&R Block Eastern Tax Services, Inc.; H&R Block Eastern Tax Company, LLC; H&R Block Eastern Enterprises, Inc.; and H&R Block Eastern Support Services, LLC, Appellants.

Superior Court of Pennsylvania.

Argued December 9, 2003.

Filed February 26, 2004.

N. Louise Ellingsworth, Kansas City, MO, for appellants.

Todd J. O'Malley, Scranton, Peter D. Winebrake, Philadelphia and Gerard Langan, Scranton, for appellees.

Before: KLEIN, BENDER and OLSZEWSKI, JJ.

KLEIN, J.

¶ 1 Plaintiffs, Erin McNulty and Brian Erzar, filed this class action lawsuit alleging that defendants ("Block") charged its clients millions of dollars in unnecessary fees for filing their tax returns electronically ("e-filing"). They further allege that Block deceptively said that the e-filing fee was a necessary and required component of standard tax preparation, when in fact it cost Block next to nothing to file electronically, as compared to filing traditional paper returns.

¶ 2 Block filed preliminary objections to the complaint claiming that an arbitration provision in a separate contract with Household Bank requires these claims to be arbitrated individually and not tried in court as a class action.¹ The trial court determined that the arbitration provision did not cover the present claims because the e-filing fee was too removed from the loan application contract that contained the arbitration provision. After careful review of the parties' submissions, relevant case law, statutes, regulations and the record, we affirm, both on the rationale of the lower court and additional grounds.

¶ 3 In reviewing a ruling on preliminary objections, we must accept as true all well pled, material allegations in the complaint. DeFazio v. Gregory, 2003 PA Super 418, 836 A.2d 935. Further, in determining the propriety of a denial of a preliminary objection in the nature of a petition to compel arbitration, we examine the trial court's ruling for abuse of discretion or error of law. Pittsburgh Logistics Systems, Inc. v. Professional Transportation and Logistics, Inc., 803 A.2d 776 (Pa.Super.2002). Our scope of review is plenary. Huegel v. Mifflin Construction Company, Inc., 796 A.2d 350 (Pa.Super.2002).

¶ 4 Block raises three issues on appeal:

(1) The trial court improperly determined the claims presented are subject to judicial determination rather than allowing the arbitration panel to decide the issue;

(2) the trial court erred in determining the claims did not involve the "relationship" between the parties, as described in the arbitration provision; and

(3) the trial court erred in concluding the claims were not "intermeshed" with the application for the loan.

¶ 5 Because many of the facts necessary to resolve this appeal apply to multiple issues, we will address the issues as a whole. Before we address the merits, a review of the factual background is necessary.

Background

¶ 6 Block is a well-known, nationwide tax preparation service. One of the services offered by Block is known as "e-filing." The client's tax return is prepared on computer and is transmitted to the Internal Revenue Service electronically, rather than by the traditional paper return. In general, an electronic return is processed by the government faster than a paper return. A refund check, if the taxpayer is so entitled, is sent out in a shorter period of time. It is alleged by plaintiffs that Block charged McNulty a $37.00 fee to file electronically in both 2001 and 2002. Erzar was allegedly charged a $34.00 electronic filing fee in 2000.

¶ 7 Another option offered is a refund anticipation loan ("RAL").² This is a separate agreement (not with Block) from the actual filing of the tax return and there is no requirement that the client obtain an RAL. A taxpayer can obtain a loan, in this case from Household Bank, using the promise of a tax refund as security for the loan. While a refund processed through electronic filing will reach the taxpayer usually within two weeks, the RAL provides cash within one to four days. This service requires a separate contract with Household. The contract states that Block is the electronic return originator (ERO), typically as either tax preparer and/or filer. The contract also makes clear that Block has no other connection to the loan, specifically denying Block status as a fiduciary or agent. ¶ 8 Thus, Block is not an actual party to the loan—it provides no money to the client, is not responsible for the repayment of the RAL, nor does it process the loan. Block's connection to the loan process is that it may have filled out the tax form and it sent the form to the IRS.³ The loan amount Household is willing to provide is presumably based upon the amount of the anticipated tax refund.

¶ 9 Although not a party to the contract itself, the contract also contains an arbitration clause that includes Block as a beneficiary to the clause. Household requires that the RAL applicant file electronically with Block and, apparently for that reason, includes Block in the arbitration clause. In certain circumstances this makes a certain amount of sense as a complaint about the loan may include some allegation against Block. The arbitration clause has, at least partially, the purpose of guaranteeing all claims regarding the loan be heard together.

¶ 10 The arbitration clause contains very broad language regarding the scope and application of the clause. Specifically, the clause states:

By signing this RAL application or the Loan Agreement (collectively the "Documents"), I hereby agree that any claim, dispute or controversy, whether in contract, tort (intentional or otherwise), whether pre-existing, present or future, and including constitutional, statutory, common law, regulatory and equitable claims with HB (as defined at the end of this paragraph) in any way relating to (a) the Documents or a similar documents [sic] for prior years... and/or (c) the relationships of the parties, including the validity, scope and enforceability of this Arbitration Provision...shall be resolved...by binding arbitration.

Loan application, para. 11.⁴

Issues

¶ 11 The trial court determined that despite the broad language of the arbitration clause, that provision applied only to the loan transaction itself and not to any other service Block may have provided. The trial court concluded that the electronic fee charged for filing the tax form was a separate and distinct transaction from the application for a loan, and thus was not covered by the arbitration provision. The trial court pointed out that filing a tax return does not obligate one to obtain a loan; the administrative or processing charges incurred in filing a tax return will be incurred independent from any other transaction a customer may have with Household. Additionally, we note there is no indication at all in the record that Household in any way benefits from the e-filing fee or has any input as to the fee in any way.

¶ 12 In essence, the trial court found that charging a fee to push the "send" button (basically the equivalent of putting a stamp on an envelope) was too attenuated to the loan application process and so was exempt from the arbitration clause.

¶ 13 Block claims error in this determination for a number of reasons. First, it claims once the existence of an executed arbitration clause is established, that the arbitration clause clearly states that virtually any dispute regarding the arbitration provision must be arbitrated. There is certainly no doubt that plaintiffs executed RAL applications, all of which contain the arbitration provision. Thus, Block contends, all other considerations must be determined by a panel of arbitrators.

¶ 14 Block bases this argument at least partially on the Federal Arbitration Act (FAA), 9 U.S.C. §§ 1-16, which governs arbitration provisions that involve interstate commerce. Specifically, the FAA states:

[a] written provision in any maritime transaction or contract involving interstate commerce to settle by arbitration a controversy thereafter arising out of such contract or transaction, or the refusal to perform the whole or any part thereof, or an agreement in writing to submit to arbitration an existing controversy arising out of such a contract or transaction or refusal, shall be valid and irrevocable, and enforceable, save upon grounds as exist as law or in equity for the revocation of any contract.

9 U.S.C. § 2. The FAA represents a declaration of a liberal federal policy favoring arbitration, and so any doubts regarding the scope of arbitral issues should be resolved in favor of arbitration. Moses H. Cone Memorial Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 24-25, 103 S.Ct. 927, 74 L.Ed.2d 765 (1983).

¶ 15 In essence, Block contends the combination of the expansive language of the arbitration provision—any disputes regarding the relationships of the parties, past, present or future is subject to arbitration—and the liberal policy favoring arbitration required the trial court to grant the transfer to arbitration once the existence of the provision was established. We believe that Block's interpretation is too broad.

¶ 16 First, as a matter of practicality, Block's interpretation would produce absurd and inequitable results. Imagine a situation where a customer goes to Block and has his taxes prepared. While on Block's premises as a business invitee, he falls due to the negligence of Block and breaks his arm. The next year the same customer returns to Block to have his taxes prepared and additionally to obtain an RAL. He signs the RAL application with Household that contains the arbitration provision. He then files a court action to recover damages for the injuries he suffered when he fell and broke his arm. Because the...