In re Frascella Enterprises, Inc.

• Decision Date: 17 July 2006
• Docket Number: Adversary No. 06-0101.,Bankruptcy No. 06-10322DWS.
• Citation: 349 B.R. 421
• Parties: In re FRASCELLA ENTERPRISES, INC., dba Cash Today, Debtor. Lawrence Turner, Linda Davis, Demryi Hill, on behalf of themselves and all others similarly situated, Plaintiffs, v. Frascella Enterprises, Inc., dba Cash Today, David W. Frascella, Jr., Larry D. Frascella, Defendants.
• Court: U.S. Bankruptcy Court — Eastern District of Pennsylvania

349 B.R. 421

In re FRASCELLA ENTERPRISES, INC., dba Cash Today, Debtor.

Lawrence Turner, Linda Davis, Demryi Hill, on behalf of themselves and all others similarly situated, Plaintiffs, v. Frascella Enterprises, Inc., dba Cash Today, David W. Frascella, Jr., Larry D. Frascella, Defendants.

Bankruptcy No. 06-10322DWS.

Adversary No. 06-0101.

United States Bankruptcy Court, E.D. Pennsylvania.

July 17, 2006.

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

Edmond M. George, Obermayer Rebmann Maxwell and Hippel, LLP, Philadelphia, PA, for Debtor.

MEMORANDUM OPINION

DIANE WEISS SIGMUND, Chief Judge.

Before the Court are (1) Defendants' Motion to Dismiss Plaintiffs' Complaint for Lack of Subject Matter Jurisdiction and to Enforce a Mandatory Agreement to Arbitrate all Disputes ("Dismissal Motion") and (2) Plaintiffs' Motion to Sever and Remand ("Sever/Remand Motion") (together the "Motions"). The month prior to the filing of this bankruptcy case, Lawrence Turner, Linda Davis and Demryi Hill, on behalf of themselves and all others similarly situated, commenced a consumer class action (the "Class Action") in the Court of Common Pleas of Philadelphia County ("State Court") against Frascella Enterprises, Inc. d/b/a Cash Today ("Debtor") and its principals David Frascella and Larry Frascella ("Frascella Brothers"). In bankruptcy, the Debtor utilized its statutory authority to remove the Class Action from State Court to this Court. 28 U.S.C. § 1452 and Fed.R.Bankr.P. 9027. Having done so, it now seeks an Order from this Court dismissing the removed Class Action so that it may be referred to an arbitrator. Plaintiffs parry by asking this Court to remand to the State Court that part of the removed Class Action that seeks relief against the Frascella Brothers only.

The underlying issue in both these motions is which court, state or bankruptcy, will decide the threshold issue of the enforceability of the arbitration clause in the contracts the consumers signed to secure "pay day" loans from the Debtor. By removing the Class Action to this Court, the Debtor seeks to have me decide that issue in favor of arbitration — but not to have me adjudicate the Class Action. The Plaintiffs want the State Court to decide the threshold issue of arbitratability but recognize that their claims against the Debtor are core proceedings and that option is presently foreclosed against the Debtor. Instead the Plaintiffs seek to sever and remand the Class Action as to the Frascella Brothers on the grounds that this Court has no subject matter jurisdiction over these defendants or alternatively, on equitable grounds under 28 U.S.C. § 1452(b). If successful, the threshold issue of the enforcement of the arbitration clause as to the claims against the Frascella Brothers would then be decided by the State Court. Without commenting on the potential of inconsistent views on this subject which could arise by the dual adjudication, Plaintiffs rather seek to defer this Court's determination of the Dismissal Motion as premature. Their respective strategies are based on their common view that each would more likely obtain a favorable result in the forum it has selected. For the reasons that follow, the Motions are denied.¹

BACKGROUND

The Class Action seeks redress for certain allegedly usurious short term loans made to consumers by the Frascella Brothers through the Debtor and another entity that they own and control. Because the loans are usually come due on the borrower's next pay day, they are referred to as "payday loans." Of relevance to the Dismissal Motion is a provision in the standard form loan document (the "Note") that the borrowers sign whereby they agree to submit all claims and disputes to "binding individual (and not class) arbitration by and under the Code of Procedure of the National Arbitration Forum (`NAF') in effect at the time." In addition to this arbitration clause, the Note contains a separate agreement "not to bring, join or participate in class actions." Finally the Note also has a choice of law provision that designates Delaware law as controlling. Exhibit F to Complaint.

The Complaint asserts six counts, only one of which is relevant to this contested matter.² Count VI entitled "Declaration of Contractual Unconscionability" challenges the foregoing Note provisions as unconscionable. It alleges that the contracts are essentially adhesion contracts, the borrowers being even more desperate than the average consumer as evidenced by their need for such costly financing and thus lacking any bargaining power to negotiate any material changes to the contract's terms. Complaint ¶¶ 142-143. It alleges that by precluding the class action which is the only economically feasible vehicle to pursue the consumer's claims, Defendants are effectively immunizing themselves from liability. Id. ¶ 145. It further alleges that the designation of Delaware law insulates Defendants from accountability to Pennsylvania consumers under Pennsylvania law. Id. ¶ 146. Finally, and most significantly for these purposes, they allege that it would be unfair to require consumers to arbitrate their claims against Defendants with NAF as the exclusive forum because (a) its economic dependancy on its corporate clients renders it not neutral; (b) NAF does not allow a litigant to have input on the selection of the arbitrator; (c) NAF arbitrators (as opposed to other arbitrators) tend to be creditor lawyers, not neutrals; (d) NAF shifts costs to a losing consumer in violation of Pennsylvania law; (e) NAF rules limit allowable discovery to an amount "commensurate with the value of the claim" effectively allowing very little discovery in these matters; (f) NAF rules prohibit class actions; (g) NAF rules prohibit joinder of claims without creditor consent effectively allowing the creditor to veto the joinder of multiple consumers in a non-class action. Id. ¶ 147. Plaintiffs conclude that these provisions are procedurally and substantively unconscionable and should be declared unenforceable as violative of Pennsylvania public policy. Id. ¶ 148.

DISCUSSION

A. Dismissal Motion³

I.

A motion to enforce an arbitration agreement is typically reviewed under the standard for summary judgment found in Federal Rule Civil Procedure 56(c). Par-Knit Mills, Inc. v. Stockbridge Fabrics Co., 636 F.2d 51, 54 n. 9 (3d Cir.1980). The court must consider all the evidence presented by the party opposing arbitration and construe all reasonable inferences in that party's favor. Ostroff v. Alterra Healthcare Corp., 433 F.Supp.2d 538, 540-41 (E.D.Pa.2006). If the court concludes that there is a question of fact as to whether the arbitration agreement is enforceable, an evidentiary hearing would be required. In this case, the motion to enforce the arbitration agreement is presented in the form of a motion to dismiss the Complaint. An answer to the Complaint has not been filed nor have the parties presented affidavits to support their factual contentions. As such, it appears appropriate to use a Rule 12(b)(6) standard in adjudicating this contested matter.

The Third Circuit Court of Appeals has stated that in considering a Fed.R.Civ.P. 12(b)(6) motion to dismiss, a court must accept all allegations in the complaint, and all reasonable inferences that can be drawn therefrom, as true and view them in the light most favorable to the non-moving party. See Rocks v. City of Philadelphia, 868 F.2d 644, 645 (3rd Cir.1989) (citations omitted); Angelastro v. Prudential-Bache Securities, Inc., 764 F.2d 939, 944 (3rd Cir.1985), cert. denied, 474 U.S. 935, 106 S.Ct. 267, 88 L.Ed.2d 274 (1985). A complaint must not be dismissed for failing to state a claim unless it appears beyond reasonable doubt that plaintiffs can prove no set of facts in support of their claim that would entitle them to relief. See City of Philadelphia v. Lead Industries Ass'n, Inc., 994 F.2d 112, 118 (3d Cir.1993) (citing Conley v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99, 102, 2 L.Ed.2d 80 (1957)).

II.

Notwithstanding the parties' jurisdictional preferences, there are some settled principles concerning the enforcement of arbitration provisions in consumer contracts, whether the court be federal or state. First, it is clear that notwithstanding the well accepted notion that the Federal Arbitration Act ("FAA"), 9 U.S.C. § § 1-10, requires the enforcement of written agreements to arbitrate disputes by federal courts, Mintze v. American General Financial Services, Inc. (In re Mintze), 434 F.3d 222, 229 (3d Cir.2006),⁴ generally applicable contract defenses, such as fraud, duress or unconscionability, may be applied to invalidate an arbitration agreement. Doctor's Associates, Inc. v. Casarotto, 517 U.S. 681, 687, 116 S.Ct. 1652, 134 L.Ed.2d 902 (1996). A court cannot direct parties to arbitration unless the arbitration agreement is valid. Ostroff 433 F.Supp.2d 538, 541-42. The power of a court to declare an arbitration provision unenforceable by reason of the same type of defense that would be applicable to the enforcement of any contract does not contradict the FAA or its policy underpinnings which strongly favor arbitration. Id.

Most recently in Buckeye Check Cashing, Inc. v. Cardegna, ___ U.S. ___, 126 S.Ct. 1204, 163 L.Ed.2d 1038 (Feb. 21, 2006), the United States Supreme Court revisited the principles it had enunciated in Prima Paint Corp. v. Flood & Conklin Mfg., 388 U.S. 395, 87 S.Ct. 1801, 18 L.Ed.2d 1270 (1967) and Southland Corp. v. Keating, 465 U.S. 1, 104 S.Ct. 852, 79 L.Ed.2d 1 (1984). It distinguished the challenges to an arbitration agreement as either (1) specifically to the validity of the agreement to arbitrate or (2) to the contract as a whole either on a ground that directly affects the entire agreement or on the ground that the illegality of one of the contract's provisions renders the entire contract invalid. Prima Paint addressed the question of who — court or arbitrator — decides these two types of...