Community State Bank v. Strong

Decision Date27 April 2007
Docket NumberNo. 06-11582.,06-11582.
Citation485 F.3d 597
PartiesCOMMUNITY STATE BANK, Cash America Financial Services, Inc., Cash America International, Inc., Georgia Cash America, Inc., Daniel R. Feehan, Petitioners-Appellants, v. James STRONG, Respondent-Appellee.
CourtU.S. Court of Appeals — Eleventh Circuit

John G. Parker, Paul, Hastings, Janofsky & Walker, LLP, Christopher J. Willis, Daniel D. Zegura, Richard H. Sinkfield, Rogers & Hardin, LLP, Atlanta, GA, for Petitioners-Appellants.

Jennifer Auer Jordan, Roy E. Barnes, John Raymond Bevis, The Barnes Law Group, Marietta, GA, for Respondent-Appellee.

Appeal from the United States District Court for the Northern District of Georgia.

Before CARNES and MARCUS, Circuit Judges, and JORDAN,* District Judge.

MARCUS, Circuit Judge:

At issue today is whether the district court erred in dismissing, for lack of subject matter jurisdiction, the petition of a bank and its servicing affiliates to compel arbitration under the Federal Arbitration Act, 9 U.S.C. § 4. After thorough review, we conclude that the district court did indeed have subject matter jurisdiction. Under the binding law of this circuit, a district court has federal question jurisdiction over a § 4 petition to compel arbitration if the underlying dispute to be arbitrated itself states a federal question. Because at least one of the claims petitioners seek to arbitrate states a federal question, the district court had federal question jurisdiction over the petition to compel arbitration. Accordingly, we reverse and remand to the district court for further proceedings consistent with this opinion.

I. Background

This action arises out of a "payday" loan — a small, high-interest loan due to be repaid within a few weeks, usually on the borrower's next pay day. Many states, including Georgia, have various usury laws that generally prohibit such high-interest loans. Thus, no one doubts that when so-called "payday stores" extend loans directly to Georgia residents — that is, without the involvement of any out-of-state bank — they may not charge interest in excess of that permitted under Georgia law. However, Section 521 of the Depository Institutions Deregulation and Monetary Control Act of 1980, 12 U.S.C. § 1831d ("DIDA"), codified as Section 27 of the Federal Depository Insurance Act ("FDIA") (hereinafter "Section 27"), expressly permits state-chartered, FDIC-insured banks to export the favorable interest rates of the state in which they are located to borrowers in other states, "notwithstanding any State constitution or statute which is hereby preempted for the purposes of this section."1 Some states, such as South Dakota, place no limitation on the amount of interest such banks can charge.2 Thus, none of the parties appears to doubt that when an FDIC-insured bank chartered in South Dakota extends loans directly to Georgia residents, it may charge whatever interest rates it wishes, notwithstanding Georgia law to the contrary.

The legal gray area occurs when such out-of-state banks "partner" with Georgia payday stores to extend loans to Georgians. Such partnerships have been the subject of much litigation, not only in Georgia, but in other states with usury laws. Generally speaking, the banks and the payday stores argue that the payday store merely markets, services, and collects local loans on behalf of the out-of-town bank, which, they say, is the true lender. As a result, they say, the loans are extended by the bank, and their high interest rates are protected by Section 27. Not surprisingly, borrowers, consumer advocacy groups, and some states argue to the contrary that this alleged agency relationship is a sham, and that the local payday stores, which do not enjoy the protection of Section 27, are the true lenders. Therefore, they conclude, the interest rates on the loans issued by the payday stores are governed by state law, under which they are usurious.

On February 6, 2004, respondent James E. Strong ("Strong"), a Georgia resident, visited one of seventeen payday stores owned and operated by petitioner Georgia Cash America, Inc., a Georgia corporation. Georgia Cash America is an affiliate of petitioners Cash America Financial Services, Inc., a Delaware corporation, and Cash America International, Inc., a Texas corporation. Petitioner Daniel Feehan is the Chief Executive Officer of all three Cash America entities (collectively, "Cash America"). According to petitioners, Cash America markets, services, and collects payday loans on behalf of petitioner Community State Bank ("the bank"), an FDIC-insured bank chartered by the state of South Dakota. Strong took out a loan for $200, which he promised to repay by March 3, 2004, along with a $36 "finance charge." As the promissory note he signed disclosed, the finance charge is the equivalent of an annual percentage rate of 252.692%. The note also stated that the contract involved interstate commerce and was subject to the Federal Arbitration Act ("FAA"), and that by signing, Strong acknowledged that "[a]ny controversy or claim" between himself and either the bank or Cash America "arising out of or in any way relating to" the loan "shall be settled by binding [individual] arbitration . . . with the sole exception of collection actions by [the bank]." Pet. Ex. B at 2. Finally, the note clearly identified the bank as the lender, and stated that Strong, by signing, acknowledged that the bank had contracted with Cash America to assist with the loan, but that Cash America was not "owned by, operated by, or affiliated with" the bank and had no authority to make or renew loans. Id.

Nevertheless, instead of repaying his loan, Strong commenced what he characterized as a class action lawsuit against Georgia Cash America, Cash America International, and Feehan ("state defendants") — but not the bank or Cash America Financial Services — in Georgia state court (the "state court action"). See Strong v. Ga. Cash Am., Inc., No.2004A7104-6 (Ga.St.Ct.).3 The state court complaint broadly asserted six causes of action arising under Georgia statutory and common law,4 all essentially alleging that the loan is usurious and therefore unenforceable. Strong's theory, as alleged in his state court complaint, was that the bank had "little involvement" in the transaction "other than lending its name," that Cash America was thus the "de facto lender," and that Cash America's partnership with the bank was a "mere subterfuge" designed to allow Cash America to skirt Georgia's usury laws. Pet. Ex. A ¶¶ 25-26. The complaint also asserted that the arbitration provision was "unconscionable" and "unenforceable." Id. ¶ 40. The state court complaint specifically averred that it did not raise any federal causes of action, including an action arising under the FDIA; did not state any cause of action against any bank; and did not seek recovery in excess of $75,000.

In response, the state defendants (Georgia Cash America, Cash America International, and Feehan) — along with the bank — served Strong with a Notice of Intent to Arbitrate pursuant to the terms of the agreement. The letter referred to Strong's state lawsuit challenging the loan as void and unenforceable, and claimed that the loan was indeed lawful. Specifically, the letter said that contrary to Strong's allegations, the loan was made by the bank, not by Cash America, and thus that the legality of the interest was governed by Section 27 of the FDIA, not by Georgia usury law. The letter then demanded that Strong dismiss his state court lawsuit and participate in individual, binding arbitration. Strong, through counsel, responded that he believed the contract he entered into with Cash America was "unconscionable and unenforceable," and thus that he intended to pursue his class action suit in state court. Pet. Ex. D at 1.

On September 7, 2004, Strong's opponents took two actions in response. First, the state court defendantsGeorgia Cash America, Cash America International, and Feehan — removed that action to the United States District Court for the Northern District of Georgia, basing removal jurisdiction on the theory that Section 27 completely preempts Strong's Georgia usury claims, and thus that Strong's state court complaint necessarily stated a federal question. See Strong v. Ga. Cash Am., Inc., No. 04-2611 (N.D.Ga.). Strong moved to remand for lack of subject matter jurisdiction, claiming that removal had been improvidently granted. While that motion was pending, the defendants moved, under the FAA, to stay the proceedings and compel arbitration of "the claims of Plaintiff James E. Strong." Strong opposed that motion and moved for expedited discovery as to the enforceability of the arbitration agreement. After hearing both sets of motions, the district court granted Strong's motion for remand, holding that Section 27 does not completely preempt Strong's Georgia usury claims against Cash America, and thus that Strong's state court complaint did not state a federal question and was not removable.5

Second, the state court defendants — along with both the bank and Cash America Financial Services — commenced the instant independent action in the same United States district court by filing a Verified Petition to Compel Arbitration and Stay Judicial Proceedings, under §§ 36 and 47 of the FAA. See Cmty. State Bank v. Strong, No. 04-2608 (N.D.Ga.). The petition alleges that the promissory note Strong signed includes an arbitration provision, under which all claims and disputes with respect to the loan must be individually resolved through binding arbitration; that Strong and the petitioners dispute "whether [the] loan . . . is governed by Section 27 . . . as opposed to state law," Pet. at 1-2; that petitioners Community State Bank, Georgia Cash America, Cash America International, and Feehan demanded that Strong arbitrate all disputes arising out of the loan, but that Strong refused; and that Strong's refusal to arbitrate threatens petitio...

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