Source: http://va.findacase.com/research/wfrmDocViewer.aspx/xq/fac.20200109_0000026.EVA.htm/qx
Timestamp: 2020-08-07 16:21:04
Document Index: 568360306

Matched Legal Cases: ['§ 1961', '§ 6', '§ 1962', '§ 1962', '§ 1962', '§ 1962', '§ 1962', '§ 6', '§ 1962', '§ 1962', '§ 1962', '§ 1962', '§ 2', '§ 2', '§ 2', '§ 2', '§ 2', '§ 2', '§ 2', '§ 2']

FindACase™ | Hengle v. Asner
Hengle v. Asner
GEORGE HENGLE, et al., on behalf of themselves and all individuals similarly situated, Plaintiffs,
SCOTT ASNER, et al., Defendants.
DAVID J. NOVAK UNITED STATES DISTRICT JUDGE.
Plaintiffs George Hengle ("Hengle"), Sharon Blackburn ("Blackburn"), Willie Rose ("Rose"), Elwood Bumbray ("Bumbray"), Tiffani Myers ("Myers"), Steven Pike ("Pike"), Sue Collins ("Collins") and Lawrence Mwethuku ("Mwethuku") (collectively, "Plaintiffs") bring this action on behalf of themselves and all individuals similarly situated against Scott Asner ("Asner"), Joshua Landy ("Landy"), Sherry Treppa, Tracey Treppa, Kathleen Treppa, Iris Picton, Sam Icay, Aimee Jackson-Penn and Amber Jackson (collectively, "Defendants"), alleging that Defendants issued usurious loans to Plaintiffs in the name of Golden Valley Lending, Inc. ("Golden Valley"), Silver Cloud Financial, Inc. ("Silver Cloud"), Mountain Summit Financial, Inc. ("Mountain Summit"), and Majestic Lake Financial, Inc. ("Majestic Lake") (collectively, the "Tribal Lending Entities") - four entities formed under the laws of the Habematolel Pomo of Upper Lake (the "Tribe"), a federally recognized Native American tribe. Plaintiffs seek to enjoin Sherry Treppa, Tracey Treppa, Kathleen Treppa, Iris Picton, Sam Icay, Aimee Jackson-Penn and Amber Jackson (collectively, the "Tribal Officials") from collecting on the allegedly usurious loans issued by the Tribal Lending Entities and to prevent the Tribal Lending Entities from issuing usurious loans to Virginia consumers in the future. Plaintiffs also seek monetary relief against Asner and Landy for violations of the Racketeer Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C. §§ 1961 et seq., Virginia's usury and consumer finance statutes and Virginia common law. This matter comes before the Court on Asner and Landy's Renewed Motion to Compel Arbitration (ECF No. 57) and Renewed Motion to Dismiss (ECF No. 59) and the Tribal Officials' Motion to Compel Arbitration (ECF No. 62) and Motion to Dismiss (ECF No. 64).[1]
For the reasons set forth below, the Court DENIES Defendants' Motions to Compel Arbitration (ECF Nos. 57, 62), GRANTS IN PART and DENIES IN PART the Tribal Officials' Motion to Dismiss (ECF No. 64) and DENIES Asner and Landy's Renewed Motion to Dismiss (ECF No. 59). The Court DISMISSES WITHOUT PREJUDICE Count Five of Plaintiffs' Amended Complaint and Count Seven to the extent that it seeks to enjoin future lending activities by the Tribal Lending Entities and to the extent that Bumbray, Blackburn and Collins seek to enjoin future collection of any outstanding loans.[2]
In considering Defendants' Motions to Compel Arbitration, the Court may consider materials outside of the pleadings, including all relevant, admissible evidence submitted by the parties. Nicosia v. Amazon.com, Inc., 834 F.3d 220, 229 (2d Cir. 2016) (citations omitted). "In doing so, the court must draw all reasonable inferences in favor of the non-moving party." Id. (citations omitted). To the extent that Defendants challenge the plausibility of Plaintiffs' claims pursuant to Federal Rule of Civil Procedure 12(b)(6), the Court will accept Plaintiffs' well-pleaded factual allegations as true, though the Court need not accept Plaintiffs' legal conclusions. Ashcroft v. Iqbah 556 U.S. 662, 678 (2009). Similarly, to the extent that Defendants challenge the Court's personal jurisdiction over them "on the basis only of motion papers[J ... the court must construe all relevant pleading allegations in the light most favorable to [Plaintiffs], assume credibility, and draw the most favorable inferences for the existence of jurisdiction," Combs v. Bakker, 886 F.2d 673, 676 (4th Cir. 1989), though the Court need not consider only Plaintiffs' proof of personal jurisdiction to decide which inferences it will make, Mylan Labs., Inc. v. Akzo, N.V., 2 F.3d 56, 62 (4th Cir. 1993). And to the extent that Defendants raise substantive challenges to the Court's jurisdiction over the subject matter of Plaintiff s Amended Complaint, the Court may consider facts outside of the Amended Complaint and need not accept the allegations in the Amended Complaint as true. Kerns v. United States, 585 F.3d 187, 192 (4th Cir. 2009). Based on these standards, the Court accepts the following facts.
A. Origins of the Tribe's Lending Businesses
Plaintiffs are consumers residing in either this Division or District. (Am. Compl. (ECF No. 54) ¶¶ 11-18.) Asner resides in Kansas City, Missouri, and served as the owner and manager of National Performance Agency, LLC ("NPA"), Nagus Enterprises and Edison Creek. (Am. Compl. ¶ 20.) Landy resides in Kansas and served as an owner of NPA. (Am. Compl. ¶ 19.) Sherry Treppa, Tracey Treppa, Kathleen Treppa and Iris Picton serve respectively as the chairperson, vice chairperson, treasurer and secretary of the Tribe's Executive Council. (Am. Compl. ¶¶ 21-24.) Sam Icay, Aimee Jackson-Perm and Amber Jackson serve as members-at-large on the same Council. (Am. Compl. ¶¶ 25-27.)
As early as 2008, the Tribe retained Rosette, LLP, a law firm that advertises itself as a majority-Native-American firm that represents tribal governments and entities, including tribes interested in starting payday lending operations. (Am. Compl. ¶¶ 38-41, 47.) The Tribe's Executive Council engaged Rosette, LLP, in its capacity as the Tribe's governing body, "'responsible for acting in all matters that concern the general welfare of the Tribe.'" (Am. Compl. ¶ 51 (quoting Aff. of Sherry Treppa in Supp. of Tribal Defs.' Mot. to Dismiss & Mot. to Compel Arbitration ("Treppa Aff.") (ECF No. 44) ¶ 44).)
Out of this engagement, in August 2012, the Tribe established Golden Valley, which provided short-term loans of up to $1, 000.00 to approved consumers. (Am. Compl. ¶¶ 55-56.) Soon thereafter, in June 2013, Defendants began issuing identical loans through Silver Cloud, a separate lending entity. (Am. Compl. ¶ 59.) And, in January 2014, Defendants began offering loans through Mountain Summit. (Am. Compl. ¶ 61.) All three entities advertised that they were wholly owned by the Tribe and based out of the Tribe's reservation in Upper Lake, California. (Am. Compl. ¶¶ 57-58, 60, 62.)
Despite the Tribal Lending Entities' representations regarding their ownership and operations, "nearly all activities performed on behalf of Golden Valley, Silver Cloud, and Mountain Summit were performed by owners and employees of non-tribal companies, primarily [NPA] and its affiliated companies, including National Processing of America and Nagus Enterprises." (Am. Compl. ¶ 67.) These non-tribal businesses operated out of Overland Park, Kansas, at the same address now used by Upper Lake Processing Services, Inc. ("ULPS"), a tribal entity created after the merger between NPA and Clear Lake TAC G (a tribal entity) and Nagus Enterprises and Clear Lake TAC S (a tribal entity). (Am. Compl. ¶¶ 3, 5, 68.)
The Tribal Lending Entities distributed the vast majority of the revenues received from their operations to NPA, Edison Creek, Nagus Enterprises and Cobalt Hills (the "Non-Tribal Entities"), companies owned and operated by Asner, Landy and other unknown individuals. (Am. Compl. ¶¶ 71-74.) In his capacity as an owner and operator of the Non-Tribal Entities, Landy supervised dozens of employees and had signatory authority on bank accounts opened by each entity. (Am. Compl. ¶¶ 75-76.) Similarly, Asner signed multiple documents on behalf of NPA and Nagus Enterprises, including the documents effectuating the merger between those companies and Clear Lake TAC G and Clear Lake TAC S. (Am. Compl. ¶¶ 77-78.)
B. Events Leading to the Merger of the Non-Tribal and Tribal Entities
Soon after the Tribal Lending Entities began operating, in August 2013, the New York State Department of Financial Services ("NYDFS") issued a cease and desist letter to thirty-five online lending companies, including Golden Valley, after discovering that those companies offered payday loans to New York consumers with annual interest rates as high as 1, 095 percent, in violation of New York law. (Am. Compl. ¶¶ 80-81.) In response, several other tribal lending entities and the respective tribes that formed them sued NYDFS, seeking declaratory and injunctive relief to prevent the enforcement of New York law against them as sovereign tribes. (Am. Compl. ¶ 85 (citing Otoe-Missouria Tribe of Indians v. New York State Dep't of Fin. Servs., 974 F.Supp.2d 353, 361 (S.D.N.Y. 2013), affd, 769 F.3d 105 (2d Cir. 2014)).) The Southern District of New York denied the tribal plaintiffs' request for relief, finding that the tribes' loans were not exempt from New York's nondiscriminatory usury laws. (Am. Compl. ¶¶ 87-88 (citing Otoe-Missouria Tribe of Indians, 974 F.Supp.2d at 361).)
Soon after losing their lawsuit in the Southern District of New York, two tribal lending enterprises, Western Sky Financial, LLC, and CashCall, Inc., entered into a settlement with the New York Attorney General, agreeing to refund borrowers who paid more than the legal rate of interest and to pay $1.5 million in penalties. (Am. Compl. ¶¶ 89-90.) The federal government also intervened, with the Department of Justice launching "Operation Choke Point" in 2013 and the Consumer Financial Protection Bureau ("CFPB") filing a lawsuit against CashCall, Inc., in December 2013. (Am. Compl. ¶ 91 (citing CFPB v. CashCall, Inc., No. 1:13cv 13167, ECF No. 1 (D. Mass. Dec. 16, 2013)).)
Following these actions by state and federal regulators, Defendants, Rosette, LLP, and other industry members decided to sell the Non-Tribal Entities to newly created tribal entities, Clear Lake TAC G and Clear Lake TAC S. (Am. Compl. ¶¶ 94-96.) Defendants effectuated these mergers in August 2014. (Am. Compl. ¶ 97.) Hours before NPA merged with Clear Lake TAC G, NPA acquired several other companies involved in the Tribe's lending practices, including Cobalt Hills, American Consumer Credit, Community Credit Services, Dynamic Marketing and National Opportunities Unlimited. (Am. Compl. ¶ 98.) Similarly, before merging with Clear Lake TAC S, Nagus Enterprises acquired several other companies, including Darden Creek and Rockstar Wagamama. (Am. Compl. ¶ 99.) Soon after merging with NPA and Nagus Enterprises, Clear Lake TAC G and Clear Lake TAC S dissolved and ULPS acquired the entities' assets. (Am. Compl. ¶ 100.) ULPS employs many of the same employees from before the merger, none of whom are members of the Tribe, and operates out of Overland Park, Kansas. (Am. Compl. ¶¶ 69, 101-03.) Plaintiffs allege that non-tribal entities and individuals continue to receive most of the revenue from the Tribe's lending practices. (Am. Compl. ¶ 104.)
C. Plaintiffs' Loans from the Tribal Lending Entities
The Tribal Lending Entities market, issue and collect on loans throughout the United States, including Virginia. (Am. Compl. ¶ 105.) The loans issued by the Tribal Lending Entities charge interest rates that exceeded the usury cap in many of the states in which the Entities operate. (Am. Compl. ¶ 107.) For example, Hengle obtained three loans from Majestic Lake with an annual percentage rate ("APR") of 636, 722 and 763 percent, respectively, which exceed Virginia's 12-percent usury cap. (Am. Comp. ¶ 108 (citing Va. Code § 6.2-303(A)).) Similarly, Rose obtained a loan from Silver Cloud with an APR of 727 percent; Pike obtained a loan from Golden Valley with an APR of 744 percent; Mwethuku obtained a loan from Golden Valley with an APR of 919 percent; Bumbray obtained a loan from Majestic Lake with an APR of 543 percent; and, Myers obtained a loan from Mountain Summit with an APR of 565 percent. (Am. Compl. ¶ 109.) Plaintiffs obtained their loans while residing in Virginia and used their Virginia addresses to apply for the loans. (Am. Compl. ¶¶ 110-11.) The Tribal Lending Entities have not obtained a consumer finance license to issue loans in excess of Virginia's 12-percent usury cap. (Am. Compl. ¶ 113.)
In total, Hengle paid at least $1, 127.65 in connection with his loans, while Blackburn paid at least $4, 161.75, Rose paid at least $1, 439.00, Bumbray paid at least $1, 561.00, Pike paid at least $1, 725.00, Myers paid at least $635.50, Collins paid at least $1, 032.50 and Mwethuku paid at least $499.50. (Am. Compl. ¶¶ 116-23.) Plaintiffs paid these amounts while residing in Virginia using money withdrawn from bank accounts maintained in Virginia. (Am. Compl. ¶ 124.) Asner and Landy received part of the revenue from these payments through their ownership interest and participation in the Tribe's lending practices. (Am. Compl. ¶ 125.)
D. Plaintiffs' Amended Complaint
On July 12, 2019, Plaintiffs filed their First Amended Class Action Complaint (ECF No. 54), raising seven counts for relief based on the above allegations.[3] In Count One, Plaintiffs allege that Asner and Landy violated § 1962(c) of RICO by participating in the affairs of an enterprise engaged in the collection of unlawful debts. (Am. Compl. ¶¶ 139-43.) Plaintiffs assert Count One on behalf of themselves and a class of "[a]ll Virginia residents who entered into a loan agreement with Golden Valley, Silver Cloud, Mountain Summit and/or Majestic Lake" (the "§ 1962(c) Class"). (Am. Compl. ¶ 132.) Relatedly, in Count Two, Plaintiffs assert a claim on behalf of themselves and a class of "[a]ll Virginia residents who entered into a loan agreement with Golden Valley, Silver Cloud, Mountain Summit and/or Majestic Lake" (the "§ 1962(d) Class"), alleging that Asner and Landy violated § 1962(d) of RICO by conspiring to violate § 1962(c). (Am. Compl. ¶¶ 146, 153.)
In Count Three, Plaintiffs assert a claim on behalf of the same class, alleging that Asner and Landy violated Virginia's usury statute, Va. Code § 6.2-303(A), through their role in the alleged RICO enterprise. (Am. Compl. ¶¶ 162-63.) In Count Four, Plaintiffs assert a claim on behalf of the "Unjust Enrichment Class," which they define the same as in the preceding counts, alleging that the Class's payments on the usurious loans issued by the Tribal Lending Entities unjustly enriched Asner and Landy. (Am. Compl. ¶¶ 156, 173.)
In Count Five, Plaintiffs allege that the Tribal Officials violated and continue to violate § 1962(c) by participating in the affairs of an enterprise engaged in the collection of unlawful debts and violated and continue to violate § 1962(d) by conspiring to participate in such an enterprise. (Am. Compl. ¶¶ 182-94.) Plaintiffs further allege that the Tribal Officials violated and continue to violate § 1962(a) by using and reinvesting income derived from their collection of unlawful debts and violated and continue to violate § 1962(b) by acquiring and maintaining interests in an enterprise engaged in the collection of unlawful debts. (Am. Compl. ¶¶ 195, 199.) Plaintiffs bring Count Five on behalf of the "Tribal Council RICO Class," which they define in the same manner as in the preceding counts. (Am. Compl. ¶ 176.) Plaintiffs limit the relief requested in Count Five to only prospective, injunctive relief against the Tribal Officials. (Am. Compl. ¶ 203.)
In Count Six, Plaintiffs seek a declaratory judgment against the Tribal Officials, declaring the loans issued to the "Declaratory Judgment Class" null and void. (Am. Compl. ¶¶ 205-16.) Plaintiffs define the "Declaratory Judgment Class" as "[a]ll Virginia residents who entered into a loan agreement with [the Tribal Lending Entities] and who have outstanding balances on the loans." (Am. Compl. ¶ 205.) Finally, in Count Seven, Plaintiffs seek to enjoin the Tribal Officials from continuing to collect on the loans issued to Plaintiffs and a class of similarly situated Virginia residents, because those loans violate Virginia law. (Am. Compl. ¶¶ 225, 232-35.) Plaintiffs also seek to enjoin the Tribal Officials from "making any loans in Virginia in excess of 12% interest (or 36% if the Tribal Lending Entities obtain a consumer finance license)." (Am. Compl. ¶ 235.)
E. Asner and Landy's Motions
In response to Plaintiffs' Amended Complaint, on August 9, 2019, Asner and Landy filed their renewed Motion to Compel Arbitration (ECF No. 57) and Motion to Dismiss (ECF No. 59). In support of their Motion to Compel Arbitration, Asner and Landy argue that all Plaintiffs except Mwethuku[4] are bound by the arbitration language (the "Arbitration Provision") in the Consumer Loan and Arbitration Agreement that each of them signed in connection with the loans that they obtained from the Tribal Lending Entities. (Mem. in Supp. of Defs. Scott Asner & Joshua Landy's Renewed Mot. to Compel Arbitration ("A/L Arb. Mem.") (ECF No. 58) at 1.) Pursuant to the Federal Arbitration Act, 9 U.S.C. § 2, Asner and Landy contend that the Court must enforce the Arbitration Provision and compel arbitration of Plaintiffs' claims, dismissing Mwethuku's claims for other reasons. (A/L Arb. Mem. at 1 n.1.) Asner and Landy assert that the Arbitration Provision unequivocally requires an arbitrator to determine arbitrability issues, so the Court should compel arbitration regardless of Plaintiffs' challenges to the Provision. (A/L Arb. Mem. at 2-3, 10-14.) And Asner and Landy argue that the Arbitration Provision requires arbitration of the claims against them, even though they are not signatories to the loan agreements, because the agreements apply to "related third parties." (A/L Arb. Mem. at 3, 15-17.)
Alternatively, Asner and Landy move to dismiss Plaintiffs' claims against them for lack of personal jurisdiction, untimeliness, failure to join indispensable parties and failure to state a claim. (Mem. in Supp. of Defs. Scott Asner & Joshua Landy's Renewed Mot. to Dismiss ("A/L MTD Mem.") (ECF No. 60) at 6-30.) First, Asner and Landy argue that the Court should dismiss Plaintiffs' claims against them as untimely for either falling outside of the statute of limitations or the time period during which Asner and Landy were involved in the alleged RICO enterprise. (A/L MTD Mem. at 6-9.) Indeed, Asner and Landy note that one of the Tribal Lending Entities, Majestic Lake, did not begin operating until after they sold their businesses to the Tribe. (A/L MTD Mem. at 28.) Asner and Landy contend that Plaintiffs' allegation regarding their continued involvement as executives of the Tribal Lending Entities fails to mend the timeliness problem, because such an allegation lacks factual support, conflicts with the assertions in the affidavit of Sherry Treppa that the Tribe's Executive Council controls the Tribal Lending Entities and cannot be pled based on "information and belief." (A/L MTD Mem. at 9-13.)
Asner and Landy also contend that the choice-of-law provisions in Plaintiffs' loan agreements render their loans lawful under the Tribe's laws. (A/L MTD Mem. at 14-15.) And Asner and Landy argue that the Tribal Lending Entities constitute indispensable parties, requiring dismissal of Plaintiffs' claims pursuant to Federal Rules of Civil Procedure 12(b)(7) and 19. (A/L MTD Mem. at 15-16.)
As for Plaintiffs' state-law claims, Asner and Landy contend that they cannot be held liable for their alleged violations of Virginia law, because corporate liability principles protect them. (A/L MTD Mem. at 16-18.) Asner and Landy further contend that they do not constitute "lenders" within the meaning of Virginia's consumer finance statutes, nor did they receive the payments on Plaintiffs' loans, precluding Plaintiffs' claims against them. (A/L MTD Mem. at 18-20.) And Asner and Landy assert that Plaintiffs' unjust enrichment claim must fail, because Plaintiffs fail to sufficiently allege that Asner and Landy received and accepted any direct benefit from Plaintiffs. (A/L MTD Mem. at 20-22.)
Asner and Landy further argue that the Court should dismiss Plaintiffs' RICO claims, because: (1) the loans at issue do not constitute unlawful debts; (2) Plaintiffs fail to allege any involvement by Asner and Landy in the issuing or collection of loans after August 2014; (3) Plaintiffs fail to allege that Asner and Landy had sufficient involvement in the alleged RICO enterprise; and, (4) Plaintiffs fail to allege that Asner and Landy agreed to violate RICO with knowledge of the alleged conspiracy's criminal objective. (A/L MTD Mem. at 23-28.)
Asner and Landy also challenge the Court's personal jurisdiction over them, arguing that because their RICO claims fail, Plaintiffs cannot rely on RICO's nationwide service of process provision and must therefore fall back on Virginia's long-arm statute and the Due Process Clause of the Fourteenth Amendment, under which Plaintiffs fail to allege sufficient contacts between Asner and Landy and Virginia. (A/L MTD Mem. at 28-29.) Based on these arguments, Asner and Landy contend that the Court should dismiss Plaintiffs' claims with prejudice, because Plaintiffs have already taken advantage of the opportunity to amend with sufficient notice of the deficiencies pointed out in Asner and Landy's first motion to dismiss, rendering futile any further amendments to Plaintiffs' allegations. (A/L MTD Mem. at 29-30.)
On September 16, 2019, Plaintiffs filed their Memoranda in Opposition to Asner and Landy's Motions, (Pls.' Opp. to Scott Asner & Joshua Landy's Renewed Mot. to Compel Arbitration ("Pls.' A/L Arb. Resp.") (ECF No. 97); Mem. in Opp. to Defs. Scott Asner & Joshua Landy's Renewed Mot. to Dismiss ("Pls.' A/L MTD Resp.") (ECF No. 99)), and, on October 4, 2019, Asner and Landy filed their Replies to Plaintiffs' Memoranda, (Reply in Supp. of Defs. Scott Asner & Joshua Landy's Renewed Mot. to Compel Arbitration ("A/L Arb. Reply") (ECF No. 103); Reply in Supp. of Defs. Scott Asner & Joshua Landy's Renewed Mot. to Dismiss ("A/L MTD Reply") (ECF No. 104)), rendering both Motions now ripe for review.
F. Tribal Officials' Motions
Separately from Asner and Landy, on August 9, 2019, the Tribal Officials filed a Motion to Compel Arbitration (ECF No. 62) and a Motion to Dismiss (ECF No. 64). In support of their Motion to Compel Arbitration, like Asner and Landy, the Tribal Officials argue that the Arbitration Provision binds all Plaintiffs except Mwethuku, requiring those Plaintiffs to arbitrate their claims against the Tribal Officials. (Mem. in Supp. of Tribal Defs.' Mot. to Compel Arbitration ("Tribe Arb. Mem.") (ECF No. 63) at 1, 4-8.) Like Asner and Landy, the Tribal Officials maintain that the validity and scope of the Arbitration Provision should be determined by an arbitrator pursuant to the terms of the Provision. (Tribe Arb. Mem. at 2, 14-18.) Should the Court decide to resolve questions of arbitrability, the Tribal Officials assert that the Arbitration Provision proves enforceable even though the Provision precludes Plaintiffs' class claims. (Tribe Arb. Mem. at 2-3, 19-25.) And the Tribal Officials move to dismiss Mwethuku's claims, because Mwethuku's decision to opt out of the Arbitration Provision invoked language requiring that he bring any claims through a prescribed administrative process, with appeals to the American Arbitration Association (the "AAA"). (Tribe Arb. Mem. at 3, 25-26.)
Alternatively, the Tribal Officials move to dismiss Plaintiffs' claims against them, arguing that the loans are lawful, because the Tribe's laws govern the validity of the loans pursuant to the loan agreements' choice-of-law provision. (Mem. in Supp. of Tribal Defs.' Mot. to Dismiss ("Tribe MTD Mem.") (ECF No. 65) at 5-10.) The Tribal Officials also assert that sovereign immunity precludes the Court from exercising jurisdiction over Plaintiffs' claims, because those claims are really against the Tribe and because Plaintiffs' decision to seek only prospective, injunctive relief against the Tribal Officials does not overcome the Officials' sovereign immunity. (Tribe MTD Mem. at 11-24.) And, like Asner and Landy, the Tribal Officials move for dismissal pursuant to Rules 12(b)(7) and 19 for Plaintiffs' failure to join the Tribal Lending Entities as indispensable parties. (Tribe MTD Mem. at 25-27.) Finally, the Tribal Officials contend that Plaintiffs lack standing to seek an injunction against future lending and that Bumbray, Blackburn and Collins lack standing to enjoin the collection of outstanding debts, because they have already paid off their loans. (Tribe MTD Mem. at 28-30.)
On September 16, 2019, Plaintiffs filed their Memoranda in Opposition to the Tribal Officials' Motions, (Pls.' Opp. to Tribal Officials' Mot. to Compel Arbitration ("Pls.' Tribe Arb. Resp.") (ECF No. 96); Pls.' Opp. to Tribal Officials' Mot. to Dismiss ("Pls.' Tribe MTD Resp.") (ECF No. 98)), and the Tribal Officials filed their Replies to Plaintiffs' Memoranda on October 4, 2019, (Reply in Supp. of Tribal Defs.' Mot. to Compel Arbitration ("Tribe Arb. Reply") (ECF No. 105); Reply in Supp. of Tribal Defs.' Mot. to Dismiss ("Tribe MTD Reply") (ECF No. 106)), rendering the Tribal Officials' Motions now ripe for review.
Because Defendants' Motions to Compel Arbitration determine the proper forum to consider the merits of Plaintiffs' claims, the Court will first address those Motions. See Docs Billing Sols., LLC v. GENETWORx LLC, 2018 WL 4390786, at *2 (E.D. Va. Aug. 30, 2018) (noting that jurisdictional challenges - in that case, a motion to remand pursuant to a forum selection clause - should take precedence over other motions (citing Bartels v. Saber Healthcare Grp., LLC, 880 F.3d 668, 680 (4th Cir. 2018)). Only if Plaintiffs' claims survive Defendants' Motions to Compel Arbitration will the Court address Defendants' Motions to Dismiss.
II. MOTIONS TO COMPEL ARBITRATION
Because both Motions to Compel Arbitration rely on the same Arbitration Provision, the Court will consider the Motions together.
Section 2 of the Federal Arbitration Act ("FAA") provides that "a contract... to settle by arbitration a controversy thereafter arising out of such contract... shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract." 9 U.S.C. § 2. Congress enacted the FAA "to reverse the longstanding judicial hostility to arbitration agreements that had existed at English common law and had been adopted by American courts, and to place arbitration agreements upon the same footing as other contracts." Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20, 24 (1991) (citations omitted). Thus, there exists a "strong federal policy in favor of enforcing arbitration agreements." Hayes v. Delbert Servs. Corp., 811 F.3d 666, 671 (4th Cir. 2016) (citations omitted).
Relevant here, as well as agreeing to arbitrate the merits of a dispute, parties to an arbitration agreement may also agree to arbitrate certain "'gateway' questions of 'arbitrability,' such as whether the parties have agreed to arbitrate or whether their agreement covers a particular controversy." Rent-A-Center, West, Inc. v. Jackson, 561 U.S. 63, 68-69 (2010) (citations omitted). However, "whether the parties have submitted a particular dispute to arbitration, i.e. the 'question of arbitrability," is 'an issue for judicial determination [u]nless the parties clearly and unmistakably provide otherwise.'" Howsam v. Dean Witter Reynolds, Inc., 537 U.S. 79, 83 (2002) (emphasis supplied) (quoting AT&T Techs., Inc. v. Commc'ns Workers, 475 U.S. 643, 649 (1986)). And the additional agreement to delegate gateway issues to an arbitrator must survive § 2 of the FAA, which subjects such agreements to legal and equitable defenses. Rent-A-Center, 561 U.S. at 70. If a delegation provision both clearly and unmistakably delegates gateway issues to an arbitrator and proves valid under § 2, a court may not decide the merits of any arbitrability issues and must submit such questions to the arbitrator consistent with the parties' agreement, even if the argument for arbitration proves "wholly groundless." Henry Schein, Inc. v. Archer & White Sales, Inc., 139 S.Ct. 524, 529-30 (2019).
In deciding the validity of arbitration agreements, including delegation provisions, courts apply federal law. Smith Barney, Inc. v. Critical Health Sys., 212 F.3d 858, 860-61 (4th Cir. 2000). The FAA also "preserves state law contract defenses unless such defenses 'rely on the uniqueness of an agreement to arbitrate' and are applied 'in a fashion that disfavors arbitration.'" Dillon v. BMO Harris Bank, N.A., 856 F.3d 330, 334 (4th Cir. 2017) (quoting AT&T Mobility LLC v. Conception, 563 U.S. 333, 341-42 (2011)). "Consistent with these contract principles, the Supreme Court has recognized that arbitration agreements that operate 'as a prospective waiver of a party's right to pursue statutory remedies' are not enforceable because they are in violation of public policy." Id. (quoting Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614, 637 n.19 (1985)).
B. The Arbitration Provision
Relevant here, the Tribal Lending Entities issued each loan to Plaintiffs pursuant to a contract titled "Consumer Loan and Arbitration Agreement." (Ex. 1 to A/L Arb. Mem. ("Agreement") (ECF No. 58-1) at 1.) Each Agreement included an Arbitration Provision.[5](Agreement at 5-6.) The Arbitration Provision explained the general concept of arbitration in a section titled "Resolving Disputes; Waiver of Jury Trial and Arbitration Provision." (Agreement at 5.) The Arbitration Provision then explained that the relevant Tribal Lending Entity issued each loan as an "economic arm, instrumentality, and corporation owned by the Tribe," claiming the same sovereign immunity as the Tribe. (Agreement at 5.) Based on these representations, the Provision asked each consumer to acknowledge and agree that:
1. For purposes of this Agreement, the words "dispute" and "disputes" are given the broadest possible meaning and include, without limitation, (a) all claims, disputes, or controversies arising from or relating directly or indirectly to the signing of this Arbitration Provision, the validity and scope of this Arbitration Provision and any claim or attempt to set aside this Arbitration Provision; (b) all tribal, federal or state law claims, disputes or controversies, arising from or relating directly or indirectly to this Agreement, the information You gave Us before entering into this Agreement, including the customer information application, and/or any past agreement or agreements between You and Us; (c) all counterclaims, cross-claims and third-party claims; (d) all common law claims, based upon contract, tort, fraud, or other intentional torts; (e) all claims based upon a violation of any tribal, state or federal constitution, statute or regulation; (f) all claims asserted by Us against You, including claims for money damages to collect any sum We claim You owe Us; (g) all claims asserted by You individually against Us and/or any of Our employees, agents, directors, officers, shareholders, governors, managers, members, parent company or affiliated entities (hereinafter collectively referred to as "related third parties"), including claims for money damages and/or equitable or injunctive relief; (h) all claims asserted on Your behalf by another person; (i) all claims asserted by You as a private attorney general, as a representative and member of a class of persons, or in any other representative capacity, against Us and/or related third parties (hereinafter referred to as "Representative Claims"); and/or (j) all claims from or relating directly or indirectly to the disclosure by Us or related third parties of any non-public personal information about You.
2. You acknowledge and agree that by entering into this Arbitration Provision: (a) YOU ARE GIVING UP YOUR RIGHT TO HAVE A TRIAL BY JURY TO RESOLVE ANY DISPUTE ALLEGED AGAINST U.S. OR RELATED THIRD PARTIES; (b) YOU ARE GIVING UP YOUR RIGHT TO HAVE A COURT RESOLVE ANY DISPUTE ALLEGED AGAINST U.S. OR RELATED THIRD PARTIES; and (c) YOU ARE GIVING UP YOUR RIGHT TO SERVE AS A REPRESENTATIVE, AS A PRIVATE ATTORNEY GENERAL, OR IN ANY OTHER REPRESENTATIVE CAPACITY, AND/OR TO PARTICIPATE AS A MEMBER OF A CLASS OF CLAIMANTS, IN ANY LAWSUIT FILED AGAINST U.S. AND/OR RELATED THIRD PARTIES.
4. Any party to a dispute, including related third parties, may send the other party written notice by certified mail return receipt requested of their intent to arbitrate and setting forth the subject of the dispute along with the relief requested, even if a lawsuit has been filed. Regardless of who demands arbitration, You shall have the right to select any of the following arbitration organizations to administer the arbitration: the American Arbitration Association ... or JAMS .... The parties to such dispute will be governed by the laws of the [Tribe] and such rules and procedures used by the applicable arbitration organization applicable to consumer disputes, to the extent those rules and procedures do not contradict the express terms of this Arbitration Provision or the law of the [Tribe], including the limitations on the arbitrator below. You may obtain a copy of the rules and procedures by contacting the arbitration organization listed above.
You have the right to request that the arbitration take place within thirty (30) miles of Your residence or some other mutually agreed upon location, provided, however, that such election to have binding arbitration occur somewhere other than on Tribal land shall in no way be construed as a waiver of sovereign immunity or allow for the application of any other law other than the laws of the [Tribe].
5. Regardless of who demands arbitration, We will advance Your portion of the arbitration expenses ... at Your request. Throughout the arbitration, each party shall bear his or her own attorneys' fees and expenses, such as witness and expert witness fees The arbitrator may decide, with or without a hearing, any motion that is substantially similar to a motion to dismiss for failure to state a claim or a motion for summary judgment. If allowed by statute or applicable law, the arbitrator may award statutory damages and/or reasonable attorneys' fees and expenses. If the arbitrator does not render a decision or an award in Your favor resolving the dispute, then the arbitrator shall require You to reimburse Us for the Arbitration Fees We have advanced less any Arbitration Fees You have previously paid The arbitrator's award is binding and not appealable.
6. All parties, including related third parties, shall retain the right to enforce an arbitration award before the applicable governing body of the [Tribe] ("Tribal Forum"). Both You and We expressly consent to the jurisdiction of the Tribal Forum for the sole purposes of enforcing the arbitration award. The Tribe does not waive sovereign immunity.
7. This Arbitration Provision is made pursuant to a transaction involving both interstate commerce and Indian commerce under the United States Constitution and other federal and tribal laws. Thus, any arbitration shall be governed by the FAA and subject to the laws of the [Tribe]. If a final non-appealable judgment of a court having jurisdiction over this transaction and the parties finds, for any reason, that the FAA does not apply to this transaction, then Our agreement to arbitrate shall be governed by the laws of the [Tribe].
8. This Arbitration provision is binding upon and benefits You, Your respective heirs, successors and assigns ... If any of this Arbitration Provision is held invalid, the remainder shall remain in effect.
(Agreement at 5-6.)
C. Delegation of Arbitrability Issues
Defendants first argue that the Arbitration Provision clearly and unmistakably reflects the parties' intent to delegate disputes regarding arbitrability to an arbitrator, requiring the Court to compel arbitration of Plaintiffs' challenges to the validity and scope of the Arbitration Provision. (A/L Arb. Mem. at 12-13; Tribe Arb. Mem. at 15-18.) Plaintiffs respond that the language in the Arbitration Provision that delegates arbitrability issues to an arbitrator (the "Delegation Clause") proves unenforceable, because the choice-of-law and forum selection clauses in the Provision and the loan agreements prospectively waive the application of federal and state law and therefore preclude defenses to arbitrability that arise under federal and state law, making delegation an exercise in futility. (Pls.' Tribe Arb. Resp. at 24-25; Pls.' A/L Arb. Resp. at 24-25.) Plaintiffs add that the Arbitration Provision's prospective waiver of their right to seek statutory remedies while simultaneously requiring arbitration of gateway issues renders the Delegation Clause unconscionable. (Pls.' Tribe Arb. Resp. at 25; Pls.' A/L Arb. Resp. at 25.) Plaintiffs also argue that the Court should void the Arbitration Provision, because the loan agreements themselves are void under Virginia's usury statute. (Pls.' Tribe Arb. Resp. at 25-26; Pls.' A/L Arb. Resp. at 26.)
Should the Court find the Delegation Clause enforceable, Plaintiffs argue that the Court should nonetheless avoid delegation, because the issue of whether the Arbitration Provision violates the prospective waiver doctrine can be easily determined without referral to an arbitrator. (Pls.' Tribe Arb. Resp. at 26-27; Pls.' A/L Arb. Resp. at 27-28.) And Plaintiffs argue that the Court cannot enforce the Arbitration Provision without the offending clauses, because those clauses go to the essence of the Provision. (Pls.' Tribe Arb. Resp. at 27-28; Pls.' A/L Arb. Resp. at 28-29.)
1. The Arbitration Provision Clearly and Unmistakably Delegates to an Arbitrator Arbitrability Disputes.
As mentioned, "whether the parties have submitted a particular dispute to arbitration, i.e. the 'question of arbitrability, '' is 'an issue for judicial determination [u]nless the parties clearly and unmistakably provide otherwise.'" Howsam, 537 U.S. at 83 (emphasis supplied) (quoting AT&T Techs., Inc., 475 U.S. at 649). "[W]hen the parties disagree whether they have delegated [the authority to determine arbitrability issues] to an arbitrator, that question of arbitrability must be answered by the court." Novic v. Credit One Bank, N.A., 757 Fed.Appx. 263, 265 (4th Cir. 2019) (citations omitted). To that end, whether a delegation clause "clearly and unmistakably" delegates arbitrability issues is an "exacting" standard, "and ... a general agreement to arbitrate disputes ... will not suffice to establish the parties' intent concerning questions of arbitrability." Id. Rather, "to meet the 'clear and unmistakable' standard, an agreement must contain language specifically and plainly reflecting the parties' intent to delegate disputes regarding arbitrability to an arbitrator." Id. at 265-66 (citing Peabody Holding Co. v. United Mine Workers of Am., 665 F.3d 96, 103 (4th Cir. 2012) and Carson v. Giant Food, Inc., 175 F.3d 325, 329 (4th Cir. 1999)). A party may challenge the validity of a delegation clause, including whether its terms are clear and unmistakable; "[h]owever, absent a challenge to the validity of such delegation, courts will not intervene in interpreting the parties' agreement... [and] a party's challenge to a different contract provision, or to the contract as a whole, will not prevent a court from submitting to the arbitrator the question of arbitrability." Id. at 266 (citations omitted).
Here, the Delegation Clause provides that the disputes subject to arbitration under the Arbitration Provision include "all claims, disputes, or controversies arising from or relating directly or indirectly to the signing of this Arbitration Provision, the validity and scope of this Arbitration Provision and any claim or attempt to set aside this Arbitration Provision." (Agreement at 5.) This language clearly and unmistakably delegates arbitrability issues to an arbitrator by requiring that any challenge to the validity or scope of the Arbitration Provision - and not merely the loan agreement generally - be determined by an arbitrator. This precise language proves distinguishable from more general language that the Fourth Circuit has rejected under the "clear and unmistakable" standard, see, e.g., Peabody, 665 F.3d at 103 (rejecting clause requiring arbitration of "[a]ny dispute alleging a breach of this" contract); Carson, 175 F.3d at 329 (rejecting clause requiring arbitration of "'any grievance or dispute aris[ing] between the parties regarding the terms of this Agreement' and any 'controversy, dispute or disagreement ... concerning the interpretation of the provisions of this Agreement'"), and resembles delegation language that the Fourth Circuit has enforced, see, e.g., Novic, 757 Fed.Appx. at 266 (upholding clause that required arbitration of claims regarding "the application, enforceability or interpretation o/[the cardholder agreement], including this arbitration provision" (emphasis supplied)). Accordingly, unless the Delegation Clause proves unenforceable under § 2 of the FAA, the Court must compel arbitration of Plaintiffs' challenges to the arbitrability of their claims.
2. The Delegation Clause is Unenforceable.
Plaintiffs argue that the Delegation Clause is unenforceable, in part, because it delegates questions of arbitrability to an arbitrator who cannot apply federal or state law pursuant to the Arbitration Provision's choice-of-law clauses, meaning the arbitrator could not apply the prospective waiver doctrine or other federal and state defenses to arbitrability. (Pls.' Tribe Arb. Resp. at 24-25; Pls.' A/L Arb. Resp. at 24-25.) Plaintiffs also argue that the Court should avoid delegation of arbitrability issues, because the Arbitration Provision unambiguously waives Plaintiffs' rights under federal and state law. (Pls.' A/L Arb. Resp. at 27-29.) Specifically, because no doubt remains as to whether the Arbitration Provision's choice-of-law and forum-selection clauses prospectively waive their federal statutory rights, Plaintiffs contend that the Court can refuse to enforce the Delegation Clause and find the Arbitration Provision wholly unenforceable under the prospective waiver doctrine. (Pls.' A/L Arb. Resp. at 27.) Plaintiffs assert that the Court should especially avoid delegation in cases such as this, in which enforcement of the Arbitration Provision would effectively preclude federal judicial review of an arbitrability decision, because the Provision reserves jurisdiction to enforce an arbitrator's award in an ill-defined "Tribal Forum." (Pls.' A/L Arb. Resp. at 28; Agreement at 6 ¶ 6.) Plaintiffs maintain that the choice-of-law and tribal review clauses prove inseverable from the Arbitration Provision such that the Court cannot cure the prospective waiver problem. (Pls.' A/L Arb. Resp. at 28-29.)
Defendants respond that the choice-of-law language in the Arbitration Provision does not prevent an arbitrator from considering federal or state defenses to arbitrability, because '"[t]he Supreme Court has ... squarely rejected the argument that a federal court should read a contract's general choice of law provision ... as displacing federal arbitration law.'" (Tribe Arb. Reply at 6 (quoting Porter Hayden Co. v. Century Indem. Co., 136 F.3d 380, 382 (4th Cir. 1998) (citing Mastrobuono v. Shearson Lehman Hutton, Inc., 514 U.S. 52 (1995))).) Defendants contend that the Arbitration Provision expressly provides that the FAA governs any arbitration in addition to the Tribe's laws. (Tribe Arb. Reply at 7; Agreement at 6 ¶¶ 5, 7.)
In support of their argument, Plaintiffs rely primarily on the Fourth Circuit's holdings in Hayes v. Delbert Services Corporation, 811 F.3d 666 (4th Cir. 2016), and Dillon v. BMO Harris Bank, N.A., 856 F.3d 330 (4th Cir. 2017). In Hayes, the Fourth Circuit considered an arbitration provision contained in a payday loan obtained by the plaintiffs from Western Sky, a lender operated by the Cheyenne River Sioux Tribe. 811 F.3d at 668. The plaintiffs' loan agreements included a forum selection clause that subjected the agreement "solely to the exclusive laws and jurisdiction of the Cheyenne River Sioux Tribe," further providing that "no other state or federal law or regulation shall apply to this Loan Agreement, its enforcement or interpretation." Id. at 669 (emphasis removed) (internal quotations and citations omitted). The agreements also contained a section titled "GOVERNING LAW," which further disavowed the application of federal or state law. Id. at 669-70. The agreements required arbitration of any disputes - including disputes concerning the validity and enforceability of the arbitration provision - before an authorized representative of the Cheyenne River Sioux Tribe, with the arbitrator limited to applying only the tribe's laws. Id. at 670. However, the agreements later allowed consumers to select from two, well-regarded arbitration organizations (the AAA or JAMS) to "administer the arbitration." Id. The district court found that the non-tribal servicer of the plaintiffs' loans could enforce the arbitration provision, and the plaintiffs appealed. Id. at 670-71.
On appeal, the plaintiffs argued that the arbitration provision provided a "hollow arbitral mechanism," because, despite the tribe's representations in the loan agreements, the Cheyenne River Sioux Tribe had no authorized representative to conduct arbitrations, no method for selecting an authorized arbitrator and no established arbitration procedures. Id. at 672. The plaintiffs further maintained that the additional option to select the AAA or JAMS to "administer" arbitrations under the loan agreements failed to improve the tribe's arbitration process, noting that the language of the arbitration provision still required an authorized representative of the tribe to conduct the arbitration. Id. at 673.
The Fourth Circuit avoided answering the plaintiffs' arguments, finding instead that the arbitration provision failed "for the fundamental reason that it purports to renounce wholesale the application of any federal law to the plaintiffs' federal claims." Id. The Fourth Circuit noted that "[w]ith one hand, the arbitration agreement offers an alternative dispute resolution procedure in which aggrieved persons may bring their claims, and with the other, it proceeds to take those very claims away." Id. at 673-74. The Fourth Circuit took particular issue with the loan agreements' choice-of-law clause, which "[i]nstead of selecting the law of a certain jurisdiction to govern the agreement, as is normally done with a choice of law clause," was used by the tribe to "waive all of a potential claimant's federal rights," rendering the clause a "choice of no law clause [that]... flatly and categorically renounce[d] the authority of the federal statutes to which [the loan agreement] is and must remain subject." Id. at 675. Because the choice-of-law and forum selection clauses went to the "essence" of the arbitration provision, the Fourth Circuit found the provision inseverable from the offending clauses and thus voided the provision, reversing the district court. Id. at 675-76.
A year later, in Dillon, the Fourth Circuit considered a similar arbitration provision in a payday loan issued to the plaintiff James Dillon by Great Plains, a lender owned by the Otoe-Missouria Tribe of Indians. 856 F.3d at 332. As with the agreement in Hayes, the loan agreement signed by Dillon included choice-of-law provisions in both the underlying agreement and the accompanying arbitration agreement that disclaimed the application of state and federal law, subjecting the loan agreement and any arbitration solely to the laws of the Otoe-Missouria Tribe. Id. If a borrower opted out of the arbitration provision, the loan agreement provided that the tribe's laws would still govern the loan and that the borrower had to bring any disputes within the tribe's court system. Id. Further, in a third provision, the loan agreement explicitly prohibited the application of federal or state law to both the agreement and the tribe. Id. at 333. The district court denied the defendant BMO Harris Bank's motion to compel arbitration, likening the Great Plains loan agreements to the Western Sky agreements at issue in Hayes, and BMO Harris appealed. Id.
On appeal, the Fourth Circuit held that a choice-of-law provision will not automatically void an arbitration provision under the prospective waiver doctrine and that "[w]hen there is uncertainty whether the foreign choice of law would preclude otherwise applicable federal substantive statutory remedies, the arbitrator should determine in the first instance whether the choice of law provision would deprive a party of those remedies." Id. at 334 (citing Vimar Segurosy Reaseguros, S.A. v. M/V Sky Reefer, 515 U.S. 528, 540-41 (1995) and Aggarao v. MOL Ship Mgmt. Co., 675 F.3d 355, 371-73 (4th Cir. 2012)). "In such a case, the prospective wavier issue would not become ripe for final determination until the federal court is asked to enforce the arbitrator's decision." Id. (citations omitted). BMO Harris argued that the Great Plains loan agreement presented such an uncertain situation, requiring the district court to postpone the prospective-waiver determination until it was asked to enforce the arbitrator's decision. Id. at 335.
The Fourth Circuit disagreed with BMO Harris's position, finding that the Great Plains agreement included many of the same provisions that proved unenforceable in Hayes. Id. Because the arbitration provision in the context of the entire loan agreement unambiguously functioned to prospectively waive Dillon's federal statutory rights, the Fourth Circuit found the arbitration provision "unenforceable as a matter of law." Id. at 335-36. The Fourth Circuit further refused to sever the offending choice-of-law provisions from the arbitration agreement, finding that Great Plains did not act in good faith when it "drafted the choice of law provisions in the arbitration agreement to avoid the application of state and federal consumer protection laws." Id. at 336. Accordingly, the Fourth Circuit affirmed the district court's order denying BMO Harris's motion to compel arbitration. Id. at 337.
In response to Plaintiffs' arguments, Defendants contend that the Supreme Court's recent decision in Henry Schein, Inc. v. Archer and White Sales, Inc., 139 S.Ct. 524 (2019), overturns the holdings in Hayes and Dillon to the extent that they permit district courts to decide the prospective waiver issue before enforcing a valid delegation clause. (Tribe Arb. Reply at 8-9 n.4.) In Schein, the Supreme Court addressed a frequent practice among some federal courts of deciding arbitrability questions despite the enforceability of a delegation clause when the argument for arbitration of a dispute proved to be "wholly groundless." 139 S.Ct. at 527-28. The Court held that the so-called "wholly groundless" exception ran counter to the FAA's mandate, which, based on Supreme Court precedent, treats delegation clauses as "additional, antecedent agreement[s]" that should be enforced like any other contract. Id. at 529. Thus, "(j]ust as a court may not decide a merits question that the parties have delegated to an arbitrator, a court may not decide an arbitrability question that the parties have delegated to an arbitrator." Id. at 530. That said, the Supreme Court reiterated that, "[t]o be sure, before referring a dispute to an arbitrator, the court determines whether a valid arbitration agreement exists." Id. (citing 9 U.S.C. § 2).
Although the Fourth Circuit has yet to revisit its holdings in Hayes and Dillon since the Supreme Court handed down its opinion in Schein, a court in this District has interpreted Schein as preserving within the purview of the federal courts questions concerning the validity of a delegation clause, including under the prospective waiver doctrine. Gibbs v. Stinson (Gibbs II), 2019 WL 4752792, at *12 (E.D. Va. Sept. 30, 2019) (Lauck, J.), appeal filed, No. 19-2113 (4th Cir. Oct. 10, 2019). The Court agrees with Judge Lauck's reasoning in Gibbs II and will likewise proceed to consider whether the Delegation Clause proves unenforceable under the prospective waiver doctrine.
Indeed, a delegation clause that "require[s] an arbitrator to determine whether a valid and enforceable arbitration agreement exists absent the federal and state law tools necessary to do so" results in the '"sort of farce'" that Congress did not intend to create in enacting the FAA. Id. (quoting Hayes, 811 F.3d at 674). Of course, following the same logic, if a delegation clause provides an arbitrator with the federal and state law tools necessary to determine whether a valid and enforceable arbitration agreement exists, absent other cognizable challenges to the validity of the delegation clause, the Court should delegate prospective waiver challenges applicable only to the arbitration provision generally.
As mentioned, Defendants first argue that the choice of the Tribe's laws to govern arbitration disputes does not prospectively waive federal and state defenses to arbitrability, because Supreme Court precedent rejects '"the argument that a federal court should read a contract's general choice of law provision as ... displacing federal arbitration law.'" (Tribe Arb. Reply at 6 (quoting Porter Hayden Co., 136 F.3d at 382 (citing Mastrobuono, 514 U.S. at 52)).) However, the language at issue in Mastrobuono proves distinguishable from the choice-of-law language at issue here.
In Mastrobuono, the Supreme Court considered a contract specifying that the "entire agreement" would "be governed by the laws of the State of New York." 514 U.S. at 58-59. The contract also provided for arbitration of any disputes arising out of the transaction between the parties. Id. at 59. Under New York law, only courts - not arbitrators - could award punitive damages, so the lower courts ruled that New York law, as incorporated by the choice-of-law provision, prohibited the arbitrator from awarding punitive damages. Id. The Supreme Court disagreed, finding that the general choice-of-law provision "[a]t most, ... introduce[d] an ambiguity into an arbitration agreement that would otherwise allow punitive damages awards." Id. at 62. Because the FAA expresses a strong federal policy favoring arbitration, the Court held that the ambiguity created by the general choice-of-law provision should be '"resolved in favor of arbitration.'" Id. (quoting Volt Info. Sets., Inc. v. Bd. of Trs., 489 U.S. 468, 476 (1989)).
By comparison, the Arbitration Provision at issue here includes no such ambiguities as to the exclusive application of tribal law. For one, the Provision provides that "[t]he parties to such dispute [in arbitration] shall be governed by the laws of the [Tribe] and such rules and procedures used by the applicable arbitration organization applicable to consumer disputes, to the extent those rules and procedures do not contradict the express terms of this Arbitration Provision or the law of the [Tribe], including the limitations on the arbitrator below." (Agreement at 6 (emphasis added).) The Provision then clarifies that even if a consumer elects to hold an arbitration within thirty miles of his or her residence, "such election ... shall in no way be construed as a waiver of Tribal sovereign immunity or allow the application of any other law other than the laws of the [Tribe]" (Agreement at 6 (emphasis added).) Although the first clause could be read to, at most, create ambiguity that should be resolved in favor of arbitration, the first clause read in tandem with the second clearly evinces the Tribal Lending Entities' intent to disclaim the application of federal or state defenses to arbitrability, thereby prospectively waiving Plaintiffs' federal statutory remedies under § 2 of the FAA in violation of public policy. Specifically, because the first clause allows the application of rules promulgated by the AAA or JAMS so long as those rules do not contradict "the limitations on the arbitrator below" and then - in the second clause written "below" - clarifies that only the laws of the Tribe shall apply to arbitrations to the exclusion "of any other law," the two provisions function to limit the application of defenses provided under "any other law," including the FAA. Thus, if compelled to arbitrate their arbitrability challenges, Plaintiffs could not raise any federal or state law defenses to arbitration provided under the FAA.
Defendants also contend that the Arbitration Provision "eliminate[s] any doubt" as to the applicability of federal arbitration law by "expressly providing for the application of the [FAA]." (Tribe Arb. Reply at 7 (citing Agreement at 6 ¶¶ 5, 7).) Indeed, below the first and second clauses described above, the Arbitration Provision includes two additional clauses stating that: 1) "the arbitrator shall apply applicable substantive Tribal law consistent with the [FAA];" and, (2) "any arbitration shall be governed by the FAA and subject to the laws of the [Tribe]." (Agreement at 6 ¶¶ 5, 7.) However, these clauses do not mend the prospective waiver issue as Defendants hope. For one, the clause providing that the arbitrator shall apply "applicable substantive Tribal law consistent with the [FAA]," interpreted by its plain language, simply allows for the application of the Tribe's laws. The words "consistent with the [FAA]" merely assert that the application of substantive Tribal law proves consistent with the FAA's requirements; they do not require that the Tribe's laws be consistent with the FAA or that the FAA should be applied in lieu of the Tribe's laws.
As for the clause stating that "any arbitration shall be governed by the FAA and subject to the laws of the [Tribe]," the Court again finds nothing in the language of the clause that reverses the prospective waiver of Plaintiffs' arbitrability defenses. In the context of the paragraph in which the clause resides, the clause merely affirms that the FAA governs the enforceability of the Arbitration Provision, because the transaction giving rise to the Provision falls within the jurisdictional bounds of the Act. Specifically, the paragraph reads:
This Arbitration Provision is made pursuant to a transaction involving both interstate commerce and Indian commerce under the United States Constitution and other federal and tribal laws. Thus, any arbitration shall be governed by the FAA and subject to the laws of the [Tribe]. If a final non-appealable judgment of a court having jurisdiction over this transaction and the parties finds, for any reason, that the FAA does not apply to this transaction, then Our agreement to arbitrate shall be governed by the laws of the [Tribe].
(Agreement at 6 ¶ 7 (emphasis added).) The use of the word "thus" to introduce the clause in question clearly serves to confirm the assertion in the preceding sentence that the Arbitration Provision falls under the FAA's jurisdictional requirement that an arbitration provision be part of "any maritime transaction or a contract evidencing a transaction involving commerce" for a court to enforce it. 9 U.S.C. § 2. Indeed, the sentence following the clause in question clarifies that should the loan transaction giving rise to the Provision not involve interstate or Indian commerce as asserted, the laws of the Tribe will determine the validity of the Arbitration Provision, including the Delegation Clause.
Ultimately, the Court must read the Arbitration Provision to give effect to all of its terms and render them consistent with each other. Mastrobuono, 514 U.S. at 63. The most harmonious reading of the "governed by the FAA" clause and the preceding clauses that require any arbitrated disputes to be "governed by the laws of the [Tribe]" and disclaim "the application of any other law other than the laws of the [Tribe]" would be to read the "governed by the FAA" clause as asserting that the Arbitration Provision falls within the purview of the FAA and should be enforced by a court pursuant to that Act, while, following enforcement of the Provision by a court of competent jurisdiction, an arbitrator must apply only the laws of the Tribe to the exclusion of Plaintiffs' potential federal and state statutory rights, including defenses to arbitrability arising under federal and state law. To read the clauses otherwise would create an impermissible and illogical conflict between the terms of the Arbitration Provision by, on the one hand, excluding the application of "any other law" during arbitration and, on the other, permitting the application of federal and state law to arbitrability disputes. Clearly, the Delegation Clause in tandem with the choice-of-law and forum selection clauses in the Arbitration Provision serves to prospectively waive Plaintiffs' right to pursue statutory remedies.
The question then becomes whether the Court can sever the offending clauses from the Delegation Clause such that the Court can enforce the Delegation Clause without contravening public policy. To that end, the Fourth Circuit in Hayes instructed that "[i]t is a basic principle of contract law that an unenforceable provision cannot be severed when it goes to the 'essence' of the contract." 811 F.3d at 675-76 (internal quotations and citations omitted). In Dillon, the Fourth Circuit clarified that "[u]nlawful portions of a contract may be severed only if: (1) the unlawful provision is not central or essential to the parties' agreement; and (2) the party seeking to enforce the remainder negotiated the agreement in good faith." 856 F.3d at 336 (emphasis supplied). Applying these principles, in Hayes, the Fourth Circuit found that the offending terms of the arbitration agreement at issue went to the "essence" of the agreement, because "the animating purpose of the arbitration agreement was to ensure that Western Sky and its allies could engage in lending and collection practices free from the strictures of any federal law." 811 F.3d at 676. Likewise, in Dillon, the Fourth Circuit found that "Great Plains purposefully drafted the choice of law provisions in the arbitration agreement to avoid the application of state and federal consumer protection laws," adding that "[b]ecause these choice of law provisions were essential to the purpose of the arbitration agreement, BMO Harris'[s] consent to the application of federal law would defeat the purpose of the arbitration agreement in its entirety." 856 F.3d at 336. The Fourth Circuit also faulted BMO Harris for relying on terms that Great Plains extracted using its "superior bargaining power ... in a calculated attempt to avoid the application of state and federal law," which demonstrated an absence of good faith. 856 F.3d at 337.
Defendants argue that the Arbitration Provision "display[s] a clear intent to require arbitration regardless of which substantive law may ultimately apply" and thus the Provision proves distinguishable from the agreements at issue in Hayes and Dillon. (Tribe Arb. Mem. at 25.) Defendants highlight language providing that "[i]f any of th[e] Arbitration Provision is held invalid, the remainder shall remain in effect" as evidencing the Tribe's desire to arbitrate disputes even with the concession that federal and state statutory rights should be available to Plaintiffs. (Tribe Arb. Mem. at 24-25 (citing Agreement at 6 ¶ 8).) However, even assuming that the severability language establishes an intent to arbitrate without the restrictions of the offending clauses-a dubious contention-Defendants ignore the requirement of good faith. Dillon, 856 F.3d at 336. Clearly, the Tribal Lending Entities possessed superior bargaining power over Plaintiffs, who resorted to the triple-digit, high-interest payday loans that the Entities offered. The Tribal Lending Entities took advantage of their superior bargaining power to extract Plaintiffs' assent to terms couched in an Arbitration Provision that plainly functioned to violate public policy by depriving Plaintiffs of statutory remedies otherwise available to them. Accordingly, the Delegation Clause proves inseverable from the offending provisions and, therefore, unenforceable as a matter of law.
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;D. The Arbitration Provision Prospectively Waives Plaintiffs' Statutory Rights in ...