Ryan v. Delbert Servs. Corp.
| Decision Date | 08 September 2016 |
| Docket Number | No. 5:15-cv-05044,5:15-cv-05044 |
| Parties | JENNIFER RYAN, Plaintiff, v. DELBERT SERVICES CORPORATION, Defendant. |
| Court | U.S. District Court — Eastern District of Pennsylvania |
Defendant's Motion to Dismiss or Compel Arbitration, ECF No. 5 - Denied
This case involves a dispute over whether Defendant Delbert Service Corporation violated federal or state law while attempting to collect on an internet payday loan that Plaintiff Jennifer Ryan borrowed. The matter at hand is whether Delbert may enforce either an arbitration clause or a forum selection clause in the loan agreement to compel Ryan to either submit to arbitration or bring her claims in a different forum. It may not.
In 2012, Ryan obtained a payday loan for $2,525 over the internet from a company called Western Sky Financial, LLC.1 The loan came with a startlingly high interest rate of 139.12%. Aside from the interest rate, the written loan agreement has a number of other unusual features. It contains a forum selection and choice of law provision that provides that the parties agreed to submit to "the sole subject matter and personal jurisdiction of the Cheyenne River Sioux Tribal Court" and that the agreement is governed "solely [by] the exclusive laws . . . of the Cheyenne River Sioux Tribe [of the] Cheyenne River Indian Reservation." If there was any doubt, the agreement makes clear that "no other state or federal law or regulation shall apply to [the agreement], its enforcement or interpretation."
The agreement also contains an arbitration clause that applies to "any controversy or claim between [Ryan] and Western Sky or the holder or servicer of the [loan]," including any claim based on "the handing and servicing of [the borrower's] account" as well as "any issue concerning the validity, enforceability, or scope of [the] loan or the Arbitration agreement." Picking up where the forum selection and choice of law provisions left off, the arbitration clause provides that the arbitration "shall be conducted by the Cheyenne River Sioux Tribal Nation by an authorized representative in accordance with its consumer dispute rules"—though the agreement goes on to state that Ryan would have the right to select either the American Arbitration Association or JAMS to "administer the arbitration."2 The clause goes on to state that "[t]he arbitrator will apply the laws of the Cheyenne River Sioux Tribal Nation" and will not apply "any law other than the law of the Cheyenne River Sioux Tribe of Indians."
The explanation for these provisions is that Western Sky, according to the agreement, is "a lender authorized by the laws of the Cheyenne River Sioux Tribal Nation and the Indian Commerce Clause of the Constitution of the United States of America."
Ryan claims that the interest rate she is being charged violates Pennsylvania law, but she is not suing Western Sky. Rather, Ryan is targeting Delbert, which has been attempting to collect on the loan. See Am. Compl. ¶ 14. She claims that by attempting to collect on a loan that violates Pennsylvania law—and by making false statements to her about her obligation to repay the loan—Delbert violated federal and state law.
Delbert contends that Ryan must arbitrate these claims. Because the arbitration clause applies to "any controversy or claim" Ryan might have against not only Western Sky but also "the holder or servicer" of the loan, including any claims based on "the handling and servicing" of Ryan's account, Delbert asserts that Ryan must arbitrate. Ryan contends that this arbitration clause is unenforceable,3 but because the clause provides that even disputes over "the validity, enforceability, or scope" of the arbitration agreement must be arbitrated, Delbert contends Ryan must arbitrate that issue too. Even if some or all of Ryan's claims are found to not be subject to arbitration, Delbert claims that they cannot be brought here. Because of the loan agreement's forum selection clause, Delbert contends that the proper place for Ryan's claims is the Cheyenne River Sioux Tribal Court. At the very least, Delbert asserts that Ryan must exhaust that option first before bringing her claims here because of the doctrine of "tribal exhaustion."
These arguments cover well-trodden ground. Western Sky and its loan servicers have been subject to a "stream of private litigation and public enforcement actions" over high-interest payday loans. See Hayes v. Delbert Servs. Corp., 811 F.3d 666, 669 (4th Cir. 2016). In Hayes, the Fourth Circuit rejected each of the arguments that Delbert is making now to avoid facing Ryan'sclaims. Following Hayes, these same arguments were rejected again by this Court. See Smith v. Western Sky Fin., LLC, No. 15-3639, 2016 WL 1212697 (E.D. Pa. Mar. 4, 2016), appeal dismissed (3d Cir. Apr. 19, 2016). Both courts concluded that this arbitration clause is unenforceable, and both courts concluded that neither the forum selection clause in the loan agreement nor the doctrine of tribal exhaustion required the borrowers to bring their claims in tribal court. See Hayes, 811 F.3d at 676 & n.3; Smith, 2016 WL 1212697, at *4-6.4
Both opinions are well reasoned, and the Court adopts their reasoning here. However, one topic that Hayes and Smith discussed in passing warrants a closer examination: whether this Court may determine if the arbitration clause is enforceable, or whether, under the terms of the loan agreement, that is an issue that Ryan must present to an arbitrator. See Hayes, 811 F.3d at 671 n.1; Smith, 2016 WL 1212697, at *7.
The notion that Ryan could be forced to arbitrate her contention that she is not bound by the arbitration clause (often referred to as a dispute over "arbitrability") is counterintuitive, but in effect it is no different from the principle that a party who objects to a particular court's jurisdiction must make that argument to that court. Many arbitration organizations, such as the American Arbitration Association, provide in their rules that an arbitrator has "the power to rule on his or her own jurisdiction."5
But unlike judicial jurisdiction, arbitration is a matter of contract, and so whether a particular issue must be arbitrated depends upon whether the two parties agreed to arbitrate it. See First Options of Chi., Inc. v. Kaplan, 514 U.S. 938, 944 (1995). Because it would likely surprise a party to learn that they may be forced to submit to arbitration even if they contend that the arbitration clause is invalid, "[c]ourts should not assume that the parties agreed to arbitrate arbitrability unless there is 'clea[r] and unmistakabl[e]' evidence that they did so." Id. (alterations in original) (quoting AT & T Techs. Inc. v. Commc'ns Workers of Am., 475 U.S. 643, 649 (1986)).
The arbitration clause at issue here expressly provides that any dispute over "the validity, enforceability, or scope of . . . the Arbitration agreement" shall be resolved through arbitration. Courts often find that when a written agreement contains one of these so-called delegation provisions, that amounts to clear and unmistakable evidence that the parties intended that they would arbitrate threshold disputes over the arbitration clause's own validity. See, e.g., Parnell v.CashCall, Inc., 804 F.3d 1142, 1147 (11th Cir. 2015). Assuming that is correct,6 that suggests that Ryan must take her arguments about the arbitration clause's validity to arbitration.
However, no arbitration agreement—including an agreement to arbitrate threshold arbitrability disputes—may be enforced if the agreement is invalid under "grounds [that] exist at law or in equity for the revocation of any contract." See 9 U.S.C. § 2; Rent-A-Center, W., Inc. v. Jackson, 561 U.S. 63, 70 (2010). That means that a party may challenge the validity of a delegation provision like this one and will not be bound by it if the clause is unenforceable under ordinary contract law principles. See Rent-A-Center, 561 U.S. at 71-72. The key, however, is that the party must show that the delegation provision itself is unenforceable, not just that the delegation provision is part of an arbitration clause (or larger contract) that cannot be enforced. See id. at 72. This is so because a delegation provision is treated as a "mini-arbitration agreement" of its own, id. at 85 (Stevens, J., dissenting), and under the Federal Arbitration Act, "an arbitration provision is severable from the remainder of the contract." See id. at 70-71 (majority opinion) (quoting Buckeye Check Cashing, Inc. v. Cardegna, 546 U.S. 440, 445 (2006)).
As the Fourth Circuit concluded in Hayes, there is little question that the overall arbitration clause, which contains the delegation provision, is unenforceable. According to the loan agreement, the arbitrator who would hear Ryan's claims would only "apply the laws of the Cheyenne River Sioux Tribal Nation." That means that her claims against Delbert under the Fair Debt Collection Practices Act, see Am. Compl. ¶¶ 30-31, would automatically fail, and that cannot be done. An arbitration clause that "purports to renounce wholesale the application of any federal law to [a plaintiff's] federal claims . . . is simply unenforceable." See Hayes, 811 F.3d at 673-74. While parties have "the freedom to structure arbitration in the way they choose," which can include imposing procedural requirements that may make it more difficult for a party to pursue a claim, one party cannot prevent another "from effectively vindicating her federalstatutory rights." Id. at 674 (quoting Am. Express Co. v. Italian Colors Rest., 133 S. Ct. 2304, 2311 (2013)). This principle is a "judge-made exception to the [Federal Arbitration Act]," which "finds its origin in the desire to prevent 'prospective waiver of a party's right to pursue statutory remedies.'" Am. Express...
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