Kaneff v. Delaware Title Loans, Inc.

• Decision Date: 24 November 2009
• Docket Number: No. 08-1007.,08-1007.
• Citation: 587 F.3d 616
• Parties: Tia L. KANEFF, Appellant v. DELAWARE TITLE LOANS, INC.
• Court: U.S. Court of Appeals — Third Circuit

587 F.3d 616

Tia L. KANEFF, Appellant v. DELAWARE TITLE LOANS, INC.

No. 08-1007.

United States Court of Appeals, Third Circuit.

Argued January 15, 2009.

Filed November 24, 2009.

Robert F. Salvin (Argued), Community Impact Legal Services, Inc., Chester, PA, for Appellant.

Mark J. Levin (Argued), Ballard, Spahr, Andrews & Ingersoll LLP, Philadelphia, PA, for Appellee.

Before: SLOVITER, BARRY, and SILER,^* Circuit Judges.

OPINION OF THE COURT

SLOVITER, Circuit Judge.

Appellant asks us to confront what has become a vexing issue in our current economy here and elsewhere — the extent to which low income borrowers may have access to legal remedies that they waived in a desperate attempt to borrow needed cash. Because many of the lending contracts contain an arbitration provision, there are often issues relating to the permissible scope of the arbitration and the role of the arbitrator. These are the principal issues in the appeal before us. In deciding this appeal, we must balance the rights and legitimate expectations of the parties, but only in terms of deciding whether the arbitration provision should be enforced.

I. The Operative Facts¹

The Appellant, Tia Kaneff, is representative of a low income borrower. She separated from her husband in September 2005, and moved into an apartment in Plymouth Meeting, Pennsylvania, with her two children. Plymouth Meeting is approximately 30 miles from the border between Pennsylvania and Delaware. According to the complaint, Kaneff drives a 1994 Buick Park Avenue with 90,000 miles on it that is valued at about $3,000. She works as a Frozen Food Manager at a Giant Supermarket in Plymouth Meeting, Pennsylvania. Her car is her sole means of transportation to her job.

In November 2005, Kaneff realized she would not have enough money to pay rent for December. She tried to get a loan from a bank but was turned down. She then sought a car title loan from appellee Delaware Title Loans, Inc. ("DTL"), which is located in Claymont, Delaware, less than a mile from the border with Pennsylvania.

After driving a short distance to DTL's office, Kaneff sought a loan for $500. To get this amount, Kaneff was first ordered to pay a $5 fee to the Department of Motor Vehicles for recording the lien on her car and a $45 fee to Continental Car Club for an unknown purpose (the contract provides that DTL can retain a portion of these fees, and Kaneff noted in her affidavit that she believed the car club fee was for "the purchase of some sort of insurance"). App. at 50. These fees brought the total amount financed to $550. DTL charged an annual interest rate of 300.01%. The finance charge for the $550 borrowed by Kaneff was $135.62 for the month-long term of the loan, resulting in a total expected payment at the end of the month of $685.62.

Kaneff claims that she did not understand that her loan was only for a month, and instead believed that she would have six months of $136 monthly payments (for a total payoff amount of $816). In fact, that $136 ($135.62) was merely what she owed in interest for one month. Her single payment of $685.62 was due on December 23, 2005. Believing that her total monthly payment was $136, Kaneff paid as follows:

$136 on December 30, 2005 (this first payment was made after the loan was already scheduled to be paid in full)

$136 on January 20, 2006

$145 on February 25, 2006 (made late)

$125.50 on March 31, 2006 (also made late, and for below the payment amount, possibly because she believed it was offset by the prior month)²

$150 on April 23, 2006

$150 on May 22, 2006

In June 2006, the month after Kaneff made the sixth payment, she called DTL to learn what her balance was, and was told she now owed $783. Thus, Kaneff had paid DTL a total of $842.50 within six months of borrowing $550 and was far from finished. Kaneff refused to pay any more, and DTL began calling Kaneff "incessantly, one or more times a day, demanding payment." App. at 53. The company also called Kaneff on her cell phone and at work, despite Kaneff telling them not to do so. Finally, on September 21, 2006, DTL repossessed Kaneff's car. Kaneff received a letter on September 29, 2006, stating that she would need to pay $1415.60 to get her car back, as otherwise it would be sold sometime after October 8, 2006.

Kaneff filed a putative class action against DTL in Pennsylvania state court, which included a request for a temporary restraining order and a preliminary injunction seeking the return of her car, which she needed to continue working.

The state court granted Kaneff's motion for a preliminary injunction and directed DTL to return Kaneff's car. DTL then removed the action to the United States District Court for the Eastern District of Pennsylvania under the Class Action Fairness Act of 2005, 28 U.S.C. § 1332(d)(2). The District Court granted DTL's motion to compel arbitration, and later dismissed the case with prejudice. Kaneff appeals these decisions.

II. The Contract

The contract Kaneff signed with DTL states, "[t]his agreement shall be construed, applied and governed by the laws of the State of Delaware. The unenforceability or invalidity of any portion of this Agreement shall not render unenforceable or invalid the remaining portions hereof." App. at 38. The contract's arbitration clause requires both parties to arbitrate any disputes, but there is a significant exception to the parties' requirement to arbitrate. DTL, the lender, is not required to enter arbitration before seeking repossession of the vehicle through judicial process or self-help.³

If the borrower seeks arbitration the borrower must pay the first $125 of the filing fee, after which the lender agrees to pay the remaining arbitration costs. Additionally, "[t]he parties agree to be responsible for their own expenses, including fees for attorneys, experts and witnesses." App. at 38. There are block letters at the bottom of the agreement that reiterate that the borrower has waived all rights to litigate any claim in court and that the borrower also waives the right to participate in any class action or class-wide arbitration unless the claim has already been certified by the date of the agreement.⁴

III. Jurisdiction and Standard of Review

The District Court had jurisdiction under 28 U.S.C. § 1332(d)(2). DTL met the $5 million threshold for jurisdiction under the Class Action Fairness Act by claiming that, under Kaneff's theory of liability, it had received $3,846,481 in interest from Pennsylvania residents over the four years prior to the suit, and faced potential treble damage liability. This court has jurisdiction under 28 U.S.C. § 1291.

A district court decides a motion to compel arbitration under the same standard it applies to a motion for summary judgment. Par-Knit Mills, Inc. v. Stockbridge Fabrics Co., Ltd., 636 F.2d 51, 54 (3d Cir.1980). The party opposing arbitration is given "the benefit of all reasonable doubts and inferences that may arise." Id. On appeal, a "question concerning the applicability and scope of an arbitration agreement" is subject to de novo review. Harris v. Green Tree Fin. Corp., 183 F.3d 173, 176 (3d Cir.1999).

IV. Discussion

In the case before us, Kaneff challenges both the arbitration provision and the contract as a whole. Her challenge to the contract is not one of alleged procedural unconscionability, such as whether the type was too small to be legible. Instead, her claim is one of substantive unconscionability, similar to the one raised in Buckeye Check Cashing, Inc. v. Cardegna, 546 U.S. 440, 126 S.Ct. 1204, 163 L.Ed.2d 1038 (2006), where the borrowers claimed that the contract violated state lending and consumer-protection laws and was therefore unenforceable.

In Buckeye, the borrowers brought a putative class action against their lender in Florida state court, alleging that the lender charged usurious interest rates. Id. at 443, 126 S.Ct. 1204. The lender moved to compel arbitration based on an arbitration clause in the contracts. Id. at 442-43, 126 S.Ct. 1204. The Court noted that there are two types of challenges to an arbitration agreement:

One type challenges specifically the validity of the agreement to arbitrate. The other challenges the contract as a whole, either on a ground that directly affects the entire agreement (e.g., the agreement was fraudulently induced), or on the ground that the illegality of one of the contract's provisions renders the whole contract invalid. Respondents' claim is of this second type.

Id. at 444, 126 S.Ct. 1204 (citation and footnote omitted). In considering the case before it, the Court stated, that "[t]he crux of the complaint is that the contract as a whole (including its arbitration provision) is rendered invalid by the usurious finance charge." Id. The Court explained that plaintiffs' allegations that the lender charged usurious interest rates and that the agreement violated various Florida lending and consumer-protection laws related to the entire contract, rather than specifically to the arbitration provision. Id. at 446, 126 S.Ct. 1204. As a result, the Court held that the challenge was one that must go to the arbitrator. Id. at 446, 449, 126 S.Ct. 1204.

It reiterated, referring to its prior opinions in Prima Paint Corp. v. Flood & Conklin Mfg. Co., 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), "unless the challenge is to the arbitration clause itself, the issue of the contract's validity is considered by the arbitrator in the first instance." Buckeye, 546 U.S. at 447, 126 S.Ct. 1204. It also reiterated, referring to Howsam v. Dean Witter Reynolds, 537 U.S. 79, 84, 123 S.Ct. 588, 154 L.Ed.2d 491 (2002), "a gateway dispute about whether the parties are bound by a given arbitration clause raises a `question of arbitrability' for a court to decide."

In making the determination of arbitrability, we must first consider whether to apply Pennsylvania law...