McCarthy v. Providential Corp.

• Decision Date: 20 August 1997
• Docket Number: No. 94-16384,94-16384
• Citation: 122 F.3d 1242
• Parties: 97 Cal. Daily Op. Serv. 6619, 97 Daily Journal D.A.R. 10,786 Mary McCARTHY; Perry Williams; Eunice Williams, Plaintiffs-Appellants, v. PROVIDENTIAL CORPORATION; Providential Home Income Plan, Inc.; William J. Texido; Feroze A. Waheed, Defendants-Appellees.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 1242

122 F.3d 1242

97 Cal. Daily Op. Serv. 6619, 97 Daily Journal

D.A.R. 10,786

Mary McCARTHY; Perry Williams; Eunice Williams Plaintiffs-Appellants, v. PROVIDENTIAL CORPORATION; Providential Home Income Plan Inc.; William J. Texido; Feroze A. Waheed Defendants-Appellees.

No. 94-16384.

United States Court of Appeals Ninth Circuit.

Argued and Submitted Dec. 6, 1995.

Decided Aug. 20, 1997.

Edward M. Gergosian, Barrack, Rodos & Bacine, San Diego, California, for plaintiffs-appellants.

David S. Steuer, Sarah A. Good, Wilson, Sonsini, Goodrich & Rosati, Palo Alto, California, for defendants-appellees.

Appeal from the United States District Court for the Northern District of California; Fern M. Smith, District Judge, Presiding. D.C. No. CV-94-00627-FMS.

Before: PREGERSON, BRUNETTI, and T.G. NELSON, Circuit Judges.

Opinion by Judge BRUNETTI; Dissent by Judge PREGERSON.

BRUNETTI, Circuit Judge:

The plaintiffs in this case are a group of senior citizen homeowners who entered into "reverse mortgage" loan agreements with the defendants. Alleging that the defendants misrepresented several key terms of the agreements, the plaintiffs filed a class-action lawsuit asserting Truth in Lending Act and various state-law claims. The district court, finding that the loan agreements contained valid arbitration provisions, ordered the individual plaintiffs to separately submit their claims to arbitration, and dismissed the plaintiffs' complaint. We hold that Congress has eliminated our jurisdiction to review this case under the Federal Arbitration Act. See 9 U.S.C. § 16(b). Thus, we dismiss this appeal without prejudice to a later timely, appeal.

BACKGROUND

Defendants/Appellees, collectively referred to as "Providential," sell reverse mortgage loans to qualifying senior citizen homeowners. These loans are made in monthly installments, and are meant to supplement the senior citizen's income. Repayment of the principal and interest is deferred for as long as the borrower remains in his or her home. In exchange, the homeowner conveys to Providential a deed of trust for equity in the home equal to the amount borrowed plus interest. The reverse mortgage agreements consist of a deed of trust, a loan agreement, and a note. Providential also provided customers with other documents, including a Truth in Lending Act disclosure statement and promotional materials.

Plaintiffs/Appellants are or represent individuals who "bought" Providential's reverse mortgage loans. Because Appellants allege to have incurred substantial costs in their dealings with Providential that were not disclosed in (or were contrary to) the terms of the loan documents, they filed a class action lawsuit on behalf of themselves and all similarly situated senior citizen homeowners, alleging causes of action for violations of the Truth in Lending Act, 15 U.S.C. §§ 1601 et seq. ("TILA"), fraud, negligent misrepresentation, and state-law statutory violations.

Asserting that the deeds of trust executed by Appellants contain an enforceable arbitration provision, Providential filed a motion to compel arbitration on an individual basis pursuant to section 4 of the Federal Arbitration Act ("FAA"), 9 U.S.C. § 4. The district court granted Providential's motion, ordering Appellants to submit their claims to arbitration on an individual basis. Because the court concluded that it did not have the power to order the arbitration to proceed on a consolidated or class-wide basis, it declined to make such an order and dismissed Appellants' pending class certification motion as moot. Furthermore, because the court concluded that none of Appellants' claims remained to be resolved by the court, it decided to dismiss, rather than stay, the action.

Appellants contend that the district court's ruling was erroneous because: (I) they did not agree to arbitrate their claims; (II) any arbitration agreement that was formed is voidable under the contract doctrines of fraud, adhesion, unconscionability, and illegality; and (III) the district court does have the power to order arbitration to proceed on a consolidated or class-wide basis. However, because we dismiss this appeal on a jurisdictional basis, we do not reach these issues.

STANDARD OF REVIEW

Decisions regarding the validity and scope of arbitration agreements are reviewed de novo. Three Valleys Mun. Water Dist. v. E.F. Hutton & Co., 925 F.2d 1136, 1139 (9th Cir.1991).

DISCUSSION

Appellants contend that we have jurisdiction over this appeal under both 9 U.S.C. § 16(a)(3), as "a final decision" compelling arbitration, and as a final judgment appealable pursuant to 28 U.S.C. § 1291. However, as the appellees correctly state, Congress has set forth special rules governing appeals from a district court's arbitration order. Here, they argue, 9 U.S.C. § 16(b)(2) prohibits review of the district court's decision.

Section 16(b)(2), inter alia, prohibits appeals from interlocutory orders compelling arbitration to proceed under section 4. Thus, section 16(b)(2) bars review of the district court's decision unless the court's order can be characterized as a "final decision" pursuant to section 16(a)(3) or falls within one of the exceptions found in 16(a)(1) or (2).

When examining a district court's order compelling arbitration and dismissing the case under section 16, we must first determine whether the case involves an "independent" or "embedded" motion. Prudential Ins. Co. of America v. Lai, 42 F.3d 1299, 1302 (9th Cir.1994). As we stated in Prudential:

[I]f the motion to compel arbitration in a given case is the only claim before the district court, a decision to compel arbitration is deemed to dispose of the entire case, and permit appellate review under 9 U.S.C. § 16(a)(3). On the other hand, if the motion to compel arbitration is "embedded" in a substantive suit pending before that court, the district court's decision to compel arbitration of some or all of the claims before it is not considered to be final, and therefore not reviewable.

Prudential, 42 F.3d at 1302 (citations omitted) (holding that federal action to compel arbitration in state court sexual harassment and discrimination claims was independent proceeding).

Although Prudential set forth the framework for analyzing this type of claim, it did not consider the precise issue presented here. However, the Eighth Circuit has considered a case nearly identical to ours. See Gammaro v. Thorp Consumer Discount Co., 15 F.3d 93 (8th Cir.1994). In Gammaro, the panel held that it lacked jurisdiction over an appeal from an order compelling arbitration in a suit alleging Truth in Lending Act violations. ¹ Id. at 95-97. The court held that such an order was interlocutory and could not be reviewed directly by the appellate courts. Id. The court also held that because such an order is not a "final decision" under section 16(a)(3), it also is not an appealable final decision under 28 U.S.C. § 1291. Id.

Here, the plaintiffs' Truth in Lending Act claim constituted the primary suit and, as in Gammaro, the defendant's motion to compel arbitration was an embedded proceeding. The reasoning presented in Gammaro is consistent with our holding in Prudential and we elect to follow the Eighth Circuit's decision. ² Consequently, we deem this appeal to be interlocutory for the purposes of section 16(b)(2) and hold that we lack jurisdiction to consider it.

This analysis has been followed by the majority of courts examining the issue of interlocutory appeals under section 16. See, e.g., F.C. Schaffer & Assocs. Inc. v. Demech Contractors, Ltd., 101 F.3d 40, 42-3 (5th Cir.1996) (dismissing appeal from district court's order compelling arbitration for lack of jurisdiction); American Cas. Co. of Reading, Pennsylvania v. L-J, Inc., 35 F.3d 133, 135-39 (4th Cir.1994) (same); Filanto, S.P.A. v. Chilewich Int'l Corp., 984 F.2d 58, 60 (2d Cir.1993). But see Armijo v. Prudential Ins. Co. of America, 72 F.3d 793, 797 (10th Cir.1995) (holding that dismissal as a result of order to compel arbitration presents an appealable final decision); Arnold v. Arnold Corp., 920 F.2d 1269, 1276 (6th Cir.1990) (same). It is also supported by a plain reading of the statute and the attached practice commentary. See 9 U.S.C. § 16.

The dissent argues that our reliance on the above cases is misplaced because those cases involved stays rather than dismissals of actions. However, we reject this distinction because it is irrelevant to the ultimate disposition of the cases and ignores the clear dictates of the FAA. As the Second Circuit noted in Gammaro:

Although the district court's dismissal of the class allegations may evade review if Gammaro does not later seek such review [of the arbitrator's decision], this situation does not differ significantly from that of a litigant seeking to represent a class in any other type of litigation. An order denying class certification routinely forced individuals to litigate their individual claims before arriving at a final decision subject to review.

15 F.3d at 96; see also Coopers & Lybrand v. Livesay, 437 U.S. 463, 98 S.Ct. 2454, 57 L.Ed.2d 351 (1978). Here, as in Gammaro, the plaintiffs must arbitrate their claims before seeking review. Our action today certainly does not deprive the plaintiffs of any review which they may later seek.

The dissent eloquently articulates the procedural differences between stays and dismissals, but this interpretation adopts a rigid and formulaic interpretation of a statute which makes no distinction between the two. The dissent ignores the clear language of section 16 prohibiting review of orders compelling arbitration. Further, distinguishing between stays and dismissals for purposes of appellate review would condition the result upon the district court's decision. If circumstances compelled the court to stay the action, the case would proceed to an arbitrator; if the court dismissed all claims the case could be appealed immediately. We do not...