Hayes v. Delbert Servs. Corp.

• Decision Date: 02 February 2016
• Docket Number: 15–1217.,Nos. 15–1170,s. 15–1170
• Citation: 811 F.3d 666
• Parties: James HAYES; Debera Grant; Herbert White, on behalf of themselves and others similarly situated, Plaintiffs–Appellants, v. DELBERT SERVICES CORPORATION, Defendant–Appellee. National Consumer Law Center; National Association of Consumer Bankruptcy Attorneys ; Center for Responsible Lending, Amici Supporting Appellants. James Hayes; Debera Grant; Herbert White, Plaintiffs–Appellees, v. Delbert Services Corporation, Defendant–Appellant. National Consumer Law Center; National Association of Consumer Bankruptcy Attorneys ; Center for Responsible Lending, Amici Supporting Appellees.
• Court: U.S. Court of Appeals — Fourth Circuit

811 F.3d 666

James HAYES; Debera Grant; Herbert White, on behalf of themselves and others similarly situated, Plaintiffs–Appellants,

v.DELBERT SERVICES CORPORATION, Defendant–Appellee.

National Consumer Law Center; National Association of Consumer Bankruptcy Attorneys ; Center for Responsible Lending, Amici Supporting Appellants.

James Hayes; Debera Grant; Herbert White, Plaintiffs–Appellees,

v.Delbert Services Corporation, Defendant–Appellant.

National Consumer Law Center; National Association of Consumer Bankruptcy Attorneys ; Center for Responsible Lending, Amici Supporting Appellees.

Nos. 15–1170

15–1217.

United States Court of Appeals, Fourth Circuit.

Argued: Dec. 9, 2015.

Decided: Feb. 2, 2016.

ARGUED:Matthew W.H. Wessler, Gupta Wessler PLLC, Washington, D.C., for Appellants/Cross–Appellees. Brian Jason Fischer, Jenner & Block LLP, New York, New York, for Appellee/Cross–Appellant. ON BRIEF:Deepak Gupta, Jonathan E. Taylor, Gupta Beck PLLC, Washington, D.C.; Jennifer D. Bennett, Leah M. Nicholls, Public Justice, P.C., Washington, D.C.; James W. Speer, Virginia Poverty Law Center, Richmond, Virginia; Dale W. Pittman, the Law Office of Dale W. Pittman, P.C., Petersburg, Virginia; Leonard A. Bennett, Susan M. Rotkis, Consumer Litigation Associates, P.C., Newport News, Virginia; Kristi C. Kelly, Andrew J. Guzzo, Kelly & Crandall, PLC, Fairfax, Virginia, for Appellants/Cross–Appellees. Barry Levenstam, Daniel T. Fenske, Chicago, Illinois, Katya Jestin, Neil M. Barofsky, New York, New York, Julie M. Carpenter, R. Trent McCotter, Jenner & Block LLP, Washington, D.C., for Appellee/Cross–Appellant. Tara Twomey, National Association of Consumer Bankruptcy Attorneys, San Jose, California; Geoff Walsh, National Consumer Law Center, Boston, Massachusetts; Ellen Harnick, Center for Responsible Lending, Durham, North Carolina, for Amici Curiae.

Before WILKINSON, KEENAN, and HARRIS, Circuit Judges.

Reversed and remanded by published opinion. Judge WILKINSON wrote the opinion, in which Judge KEENAN and Judge HARRIS joined.

WILKINSON, Circuit Judge:

James Hayes, the lead plaintiff-appellant in this case, received a payday loan from a lender called Western Sky Financial, LLC. Defendant-appellee Delbert Services Corporation later became the servicing agent for Hayes's loan. Because Delbert's debt collection practices allegedly violated federal law, Hayes initiated a putative class action against Delbert. Claiming that Hayes and his fellow plaintiffs agreed to arbitrate any disputes related to their loans, Delbert moved to compel arbitration under the Federal Arbitration Act ("FAA"), 9 U.S.C. § 4. The district court granted Delbert's motion.

We both respect and appreciate the support of Congress and the Supreme Court for an arbitration procedure that reduces the costs and delays of civil litigation. Our review of the record leads us to conclude, however, that the arbitration agreement in this case is unenforceable. The agreement purportedly fashions a system of alternative dispute resolution while simultaneously rendering that system all but impotent through a categorical rejection of the requirements of state and federal law. The FAA does not protect the sort of arbitration agreement that unambiguously forbids an arbitrator from even applying the applicable law. We therefore reverse the district court's order compelling arbitration and remand for further proceedings.

I.

This case originates with the lending practices of Western Sky. Western Sky was an online lender owned by Martin Webb. Webb was a member of the Cheyenne River Sioux Tribe, and Western Sky's offices were located on the Cheyenne River Indian Reservation in South Dakota. From its base on the Reservation, Western Sky issued payday loans to consumers across the country.

Hayes's loan typifies Western Sky's lending scheme. Western Sky issued Hayes a $2,600.00 loan, $75.00 of which consisted of an origination fee. Hayes thus received $2,525.00 in cash. Western Sky charged interest on the $2,525.00 at an annual rate of 139.12%. This rate compelled Hayes to make monthly payments of $294.46 over the four-year life of the loan. All told, Hayes was set to pay $14,093.12 for his $2,525.00. J.A. 152–53. The other named plaintiffs in this case received loans with terms that were just as bad or worse—one of the loans came with an annual interest rate of 233.84%. J.A. 159, 166.

No one appears to seriously dispute that Western Sky's payday loans violated a host of state and federal lending laws. Indeed, a quick glance at Western Sky's loan agreement suggests that Western Sky was keenly aware of the dubious nature of its trade. The agreement provides that it is "subject solely to the exclusive laws and jurisdiction of the Cheyenne River Sioux Tribe. " J.A. 152 (emphasis in original). It later states that "no other state or federal law or regulation shall apply to this Loan Agreement." J.A. 152.

Despite Western Sky's best efforts, the law—or at least the threat of the law—caught up with it. A stream of private litigation and public enforcement actions seems to have led Western Sky to stop issuing new loans in 2013.

Unfortunately, however, the financial and legal problems wrought by Western Sky persisted. After issuing a loan, Western Sky's practice was to transfer the loan to an assortment of allied servicing and collection firms. In this case, Western Sky transferred Hayes's loan to WS Funding, LLC, which then named its corporate parent, CashCall, Inc., as the servicing agent. Sometime later, WS Funding transferred Hayes's loan to an entity called Consumer Loan Trust, which in turn named Delbert as the servicing agent. The loans issued to the other named plaintiffs in this case followed a similar path. While Western Sky was owned by a tribal member, Delbert claimed no tribal ownership or affiliation.

Delbert's debt-collection operation raised questions of its own. The plaintiffs claim that Delbert sent them collection notices without disclosing its identity as a debt collector or the identity of the actual creditor. They also allege that Delbert used an automatic dialing system to make several calls a week and sometimes multiple calls a day to their homes.

Hayes filed a putative class action in the Eastern District of Virginia to obtain relief from Delbert's allegedly unlawful collection practices. Specifically, Hayes claimed that Delbert's notices and phone calls violated the Fair Debt Collection Practices Act, 15 U.S.C. §§ 1692 –1692p, and the Telephone Consumer Protection Act, 47 U.S.C. § 227. Hayes also sought declaratory relief to the effect that the loan agreement's forum selection and arbitration provisions were unenforceable.

The loan agreement contains a number of notable provisions. Most pertinent to this case, the agreement names a tribal forum and then purports to disavow the authority of all state or federal law. As noted above, the agreement provides:

This Loan Agreement is subject solely to the exclusive laws and jurisdiction of the Cheyenne River Sioux Tribe, Cheyenne River Indian Reservation. By executing this Loan Agreement, you, the borrower, hereby acknowledge and consent to be bound to the terms of this Loan Agreement, consent to the sole subject matter and personal jurisdiction of the Cheyenne River Sioux Tribal Court, and that no other state or federal law or regulation shall apply to this Loan Agreement, its enforcement or interpretation. J.A. 152 (emphasis in original).

Another section confirms the disavowal of state and federal law. That section, titled "GOVERNING LAW ," states in pertinent part:

Neither this Agreement nor Lender is subject to the laws of any state of the United States of America. By executing this Agreement, you hereby expressly agree that this Agreement is executed and performed solely within the exterior boundaries of the Cheyenne River Indian Reservation, a sovereign Native American Tribal Nation. You also expressly agree that this Agreement shall be subject to and construed in accordance only with the provisions of the laws of the Cheyenne River Sioux Tribe, and that no United States state or federal law applies to this Agreement. J.A. 154.

Much of the rest of the loan document concerns the arbitration agreement between Western Sky, the loan servicer, and the borrowers. The main provision of that agreement states that "any dispute [the borrower] ha[s] with Western Sky or anyone else under this loan agreement will be resolved by binding arbitration." J.A. 154. Another provision says that the arbitration will be "conducted by the Cheyenne River Sioux Tribal Nation by an authorized representative in accordance with its consumer dispute rules and the terms of this Agreement." J.A. 155. Moreover, the arbitration agreement states that it covers "any claim based upon marketing or solicitations to obtain the loan and the handling or servicing of [the borrower's] account whether such Dispute is based on a tribal, federal or state constitution, statute, ordinance, regulation, or common law, and including any issue concerning the validity, enforceability, or scope of this loan or the Arbitration agreement." J.A. 155.

Other provisions of the arbitration agreement mirror portions of the underlying loan agreement in that they purport to disavow the application of all state and federal law. One provision states that the agreement "IS MADE PURSUANT TO A TRANSACTION INVOLVING THE INDIAN COMMERCE CLAUSE OF THE CONSTITUTION OF THE UNITED STATES OF AMERICA, AND SHALL BE GOVERNED BY THE LAW OF THE CHEYENNE RIVER SIOUX TRIBE. The arbitrator will apply the laws of the Cheyenne River Sioux Tribal Nation and the terms of this Agreement." J.A. 156. Another provision of the arbitration agreement confirms that the arbitrator will not apply "any law other than the law of the Cheyenne River Sioux Tribe of Indians to this Agreement." J.A. 155.

A final noteworthy provision of the arbitration agreement says that the borrower "shall have the right to select" the American Arbitration...