Court Opinion

ID: 857853
Source: CourtListenerOpinion
Date Created: 2013-04-11 19:17:50.365054+00
Date Added: 2024-06-11T12:38:13.128789
License: Public Domain

UNPUBLISHED

                   UNITED STATES COURT OF APPEALS
                       FOR THE FOURTH CIRCUIT

                               No. 12-1304

COMMUNITY   STATE  BANK;   COMPUCREDIT CORPORATION; VALUED
SERVICES, LLC; VALUED SERVICES OF NORTH CAROLINA, LLC;
FORESIGHT MANAGEMENT COMPANY, LLC,

                 Plaintiffs – Appellants,

           and

VALUED SERVICES AQUISITIONS COMPANY, LLC; VALUED SERVICES
FINANCIAL HOLDINGS, LLC; VALUED SERVICES HOLDINGS, LLC;
FIRST AMERICAN HOLDING, LLC; FIRST AMERICAN MANAGEMENT,
INC.; LARRY A. KUGLER; JAMES E. SCOGGINS; ROBERT P. MANNING,

                 Plaintiffs,

           v.

TOMMY KNOX; VELMA KNOX; KERRY GORDON; WILLIE PATRICK,

                 Defendants – Appellees.

Appeal from the United States District Court for the Middle
District of North Carolina, at Greensboro. James A. Beaty, Jr.,
Chief District Judge. (1:05-cv-00226-JAB-LPA)

Argued:   January 30, 2013                   Decided:   April 11, 2013

Before TRAXLER, Chief Judge, and GREGORY and DUNCAN, Circuit
Judges.

Affirmed by      unpublished opinion. Judge Duncan wrote the
opinion, in      which Chief Judge Traxler and Judge Gregory
concurred.
ARGUED: Jonathan Michael Watkins, MOORE & VAN ALLEN, PLLC,
Charlotte, North Carolina, for Appellants.     J. Jerome Hartzell,
HARTZELL   &   WHITEMAN,   LLP,   Raleigh,  North   Carolina,   for
Appellees.    ON BRIEF: Jennifer K. Van Zant, BROOKS PIERCE,
MCLENDON, HUMPHREY & LEONARD, LLP, Greensboro, North Carolina,
for Appellant Community State Bank; Thomas D. Myrick, Mark A.
Nebrig, MOORE & VAN ALLEN, PLLC, Charlotte, North Carolina; J.
Allen Maines, Tameka Phillips, PAUL HASTINGS LLP, Atlanta,
Georgia,   for    Appellants    Compucredit  Corporation,    Valued
Services, LLC, Valued Services of North Carolina, LLC, and
Foresight Management Company, LLC. Leslie A. Bailey, Amy Radon,
PUBLIC JUSTICE, Oakland, California; Carlene McNulty, NORTH
CAROLINA JUSTICE CENTER, Raleigh, North Carolina; Mallam J.
Maynard, FINANCIAL PROTECTION LAW CENTER, Wilmington, North
Carolina; Mona Lisa Wallace, John Hughes, WALLACE & GRAHAM, PA,
Salisbury, North Carolina; Richard A. Fisher, RICHARD FISHER LAW
OFFICE, Cleveland, Tennessee, for Appellees.

Unpublished opinions are not binding precedent in this circuit.

                                2
DUNCAN, Circuit Judge:

       This appeal arises from the district court’s dismissal of a

petition to compel arbitration of state-law claims brought by

borrowers       against    payday       loan    servicers        in     state    court   (the

“Petition”).       We agree with the district court that neither the

loan       servicers    nor     the    state-chartered           bank     that    allegedly

issued the loans (collectively, “Petitioners”) has satisfied the

requirements       of     the   Federal        Arbitration        Act    (the    “FAA”),   9

U.S.C. § 4, to bring the Petition in federal court, and affirm.

                                               I.

                                               A.

        Tommy   Knox,     Velma       Knox,    and    Kerry      Gordon    (collectively,

“Knox”) obtained short-term, or “payday” loans 1 from entities in

North      Carolina     operating       under       the   name    First    American      Cash

Advance (collectively, the “loan servicers”).                             Asserting harm

       1
       “Payday lending” generally refers to transactions wherein
a borrower writes a personal check to the lender for a small
amount in exchange for cash in the amount of the check, less a
fee, coupled with the lender’s promise that the check will not
be presented until a date in the near future. Often the lender
is aware that the borrower’s bank account does not have
sufficient funds to cover the amount stated on the check, but
nevertheless approves the transaction. In particular, the “fee”
charged may be exorbitant, translating to a loan at an annual
interest rate of over 300 percent.    Because of the dangers to
consumers and potential for predatory lending practices, many
states   have   undertaken  to   regulate   or  eliminate   such
transactions.

                                               3
from those transactions, Knox filed suit in state court against

the loan servicers.      See Knox v. First Southern Cash Advance,

No. 05-CVS-0445 (New Hanover County, N.C., filed Feb. 8, 2005)

(“Knox”).

     The    Knox   complaint   contains   various   factual   allegations

against the loan servicers, including improper deferred check

presentment practices, solicitation of customers to write checks

supported by insufficient funds, and charging illegal fees and

interest rates.     According to the complaint, by purporting to do

business as agents for Community State Bank (“CSB”), an out-of-

state, state-chartered bank, the loan servicers were either (1)

the “true lenders” on the loans issued to Knox, in which case

they violated applicable North Carolina lending and usury laws;

or (2) not the true lenders, in which case they engaged in

unfair and deceptive trade practices, illegal efforts to evade

state law, and activities as loan brokers in contravention of

state law.     The Knox complaint also contains a “limitation of

claims” section, which specifies that Knox does not assert any

claims under federal law, or against CSB or any other bank.

                                    B.

     On March 2, 2005, counsel for the loan servicers sent Knox

a request to submit to arbitration of the Knox claims.          Knox did

not respond to the demand letter.         Meanwhile, the loan servicers

attempted to remove the Knox action to federal court in the

                                    4
Eastern District of North Carolina, asserting as the basis for

federal      jurisdiction      that     Knox’s     state-law        usury      claims     were

completely preempted by the National Bank Act (the “NBA”), 12

U.S.C.       §§    85,   86,   and    Section       27     of    the     Federal      Deposit

Insurance Act (the “FDIA”), 12 U.S.C. § 1831d. 2                               See Knox v.

First Southern Cash Advance, No. 05-CV-43 (E.D.N.C. 2005), J.A.

265-68.

       The     district    court      remanded       the    case        to    state     court,

holding that the FDIA does not apply to Knox’s claims against

the non-bank loan servicers, even if CSB actually issued the

loans.       Id.    In that remand order, the eastern district reviewed

the        well-pleaded        complaint          rule,         which        controls      the

determination of whether federal question jurisdiction exists.

That rule provides that an action is not removable under 28

U.S.C. § 1441(b) unless a federal question is apparent from the

face of the complaint.            See id. at 266 (citing Caterpillar, Inc.

v.    Williams,      482   U.S.      386,   392    (1987)).            However,    complete

preemption is an exception to the well-pleaded complaint rule.

“If Congress has expressed a clear intention to permit removal

of all state law claims arising within an area of law, courts

will construe those state claims to arise under federal law.”

       2
       Because Petitioners do not assert the NBA as a basis for
jurisdiction in this case, we omit further discussion of it.

                                             5
J.A. 266.        As the court also noted, complete preemption is an

“extraordinary result” that the Supreme Court has applied only

three times.      Id.

       Turning     to   the     loan    servicers’         arguments,        the        court

determined       that   state-law      usury        claims    are   not      completely

preempted by the FDIA merely because a state-chartered bank was

the named lender in the loans at issue, where the claims were

not    brought    against      that    bank.         Consequently,        the      eastern

district found no federal question presented on the face of the

Knox complaint, and remanded the action to state court for lack

of subject-matter jurisdiction.

                                         C.

       The loan servicers, joined now by CSB, subsequently filed

this Petition under § 4 of the FAA in the Middle District of

North Carolina, asking that court to order arbitration of Knox’s

claims.    See Community State Bank v. Knox, 850 F. Supp. 2d 586,

603 (M.D.N.C. 2012).          Knox moved to dismiss the Petition.

       Section 4 of the FAA authorizes a federal district court to

entertain a petition to compel arbitration brought by a party

“aggrieved” by another’s resistance to arbitration, if the court

would have jurisdiction, “save for [the arbitration] agreement,”

over    “the     subject      matter   of       a   suit     arising    out        of     the

controversy      between      the   parties.”         9    U.S.C.   §   4.         As    the

district court below noted, although § 4 allows an aggrieved

                                            6
party to file such a petition in any district court which would

have      subject-matter                   jurisdiction              over      the     underlying

controversy,            it    does    not    itself       bestow       federal       jurisdiction;

rather,      it    requires          that    an    independent             jurisdictional      basis

over the parties’ dispute exist for access to the federal forum.

See Vaden v. Discover Bank, 556 U.S. 49, 59 (2009).                                   As relevant

here,        to         determine           whether          an       adequate        independent

jurisdictional basis exists, the court “may look through a § 4

petition          [to        the     underlying          substantive           controversy]      to

determine         whether       it    is    predicated          on    an    action    that    arises

under    federal             law.”      Id.       at    62     (internal       quotation       marks

omitted).

       The    court           looked       through       the      Petition      to    the     stated

underlying controversy between the parties--the Knox complaint.

Although Knox asserted only state-law claims against non-diverse

loan    servicers,             Petitioners             argued        that    the     Knox     action

nonetheless supplies a basis for federal jurisdiction because

its claims are completely preempted by the FDIA.                                        Thus, the

district      court           below    was     faced         with      essentially      the    same

argument already rejected by the eastern district in remanding

the Knox case to state court.

       Addressing Petitioners’ preemption argument, the district

court below examined our opinion in Discover Bank v. Vaden, 489

F.3d 594 (4th Cir. 2007) (“Vaden I”) (holding that the FDIA

                                                    7
completely preempts state usury laws that hold state-chartered

banks to a different maximum permissible interest rate), noting

that the Supreme Court reversed and remanded that decision on

other grounds in Vaden v. Discover Bank, 556 U.S. 49 (2009)

(“Vaden II”).        The district court expressed doubt as to whether

the Supreme Court’s decision left intact Vaden I’s holding with

respect to FDIA preemption, but reasoned that, even if the FDIA

completely     preempts      state-law    usury      claims    asserted     against

state-chartered banks, the Knox claims do not qualify as such.

      The district court discussed the loan servicers and CSB

separately.       As to the former, the court explained that the loan

servicers,    as     non-bank   entities,      have    no     basis   for   seeking

protection under the FDIA, which applies only to banks.                     Nor did

the court accept CSB, a state-chartered bank to which the FDIA

does apply, as the “real party in interest” in the Knox action,

reasoning     that    the    Knox   complaint     asserts      state-law     claims

against     the    loan     servicers     “separate      from     any   potential

unasserted claims against [CSB],” 850 F. Supp. 2d at 601, and

that, “[a]s a result, the state-law claims in the Knox case are

simply state law claims against non-bank entities,” id. at 601.

The   court   further       reasoned    that   the    remand    order     from   the

eastern district is entitled to preclusive effect on this issue.

      Finally, the district court turned to CSB’s arguments that

it may bring a petition to compel Knox to arbitrate any claims

                                         8
that   Knox    might    assert   against    CSB,    which   would    present   a

federal question.         Having already rejected the premise that the

Knox action should be viewed as properly brought against CSB,

the    court    further    concluded    that   no     underlying    controversy

exists between Knox and CSB.           Specifically, the court considered

the facts that: (1) the Knox complaint disclaims any allegations

against CSB; (2) CSB has ceased its “payday loan” activities in

North Carolina, and the statute of limitations has run on any

potential      claims   that   could   have    been    asserted    against   CSB

raising any of the theories being litigated in the Knox action;

and (3) under the agreement between the loan servicers and CSB,

the servicers are obligated to indemnify CSB for any potential

liability, meaning that CSB has no monetary stake in the outcome

of the Knox action.

       Finding that there is no controversy between Knox and CSB

subject to arbitration, the district court concluded that CSB is

not a “party aggrieved” under § 4 of the FAA.               “According to the

plain text of the FAA, Petitioners must allege that Respondents

refused to arbitrate, as well as that an underlying controversy

exists between the parties apart from the refusal to arbitrate.”

850 F. Supp. 2d at 602 (citing Klay v. United Healthgroup, Inc.,

376 F.3d 1092, 1110 n.19 (11th Cir. 2004) (“[I]f a party makes a

motion to compel arbitration under 9 U.S.C. § 4, a district

court must determine if there exists a case or controversy in

                                        9
order for it to exercise its jurisdiction over that motion to

compel.”)).

       The   district    court   accordingly      dismissed        the    Petition.

Petitioners timely appealed.

                                       II.

       The primary issue in this appeal is whether the district

court correctly concluded that no federal question provides a

basis for jurisdiction over the Petition.               We review de novo the

district     court’s     determination       of   its     own      subject-matter

jurisdiction.     See Taylor v. Kellogg Brown & Root Servs., Inc.,

658 F.3d 402, 408 (4th Cir. 2011); Lontz v. Tharp, 413 F.3d 435,

439 (4th Cir. 2005).

                                       A.

       Turning first to the loan servicers’ arguments, we find

that the Knox claims against the non-bank loan servicers fall

squarely outside the scope of the FDIA.                 Put briefly, the FDIA

allows a state-chartered bank to charge interest rates permitted

in its home state on loans made outside of that state, even if

that interest rate would be illegal in the state where the loan

is made.     12 U.S.C. § 1831d; see also West Virginia v. CashCall,

Inc., 605 F. Supp. 2d 781, 784-85 (S.D.W. Va. 2009).                      Although

we decline to apply collateral estoppel to bar relitigation of

this    issue,   we     nevertheless    conclude,       as   did    the    eastern

                                       10
district and the district court below, that the Knox claims are

substantively aimed at the loan servicers to the exclusion of

CSB.     Thus, the claims have no connection to an out-of-state

state-chartered bank, and the FDIA cannot apply.

       Petitioners rely heavily on our opinion in Vaden I, 489

F.3d    at    601,    in   which     a     loan   servicer       sued     to    collect

outstanding     credit     card    debt,    and    the    debtor     in   turn      filed

counterclaims and defenses which asserted violations of state

usury law against the servicer.                 On these facts, we found that

the    debtor’s      state-law     usury    claims       were   properly       asserted

against the bank, not the servicer, because the bank was the

“real party in interest.”            Id.        Even if this analysis remains

intact after the Supreme Court’s reversal, see Vaden II, 556

U.S. 49, we would not reach the same result in the present case.

       The Knox claims do not merely challenge certain terms of

the loans, but instead specifically target several practices of

the    loan   servicers.         Unlike    the    borrower      in   Vaden     I,   Knox

disputes that CSB had authority over the loan terms and was the

“real lender.”        Even so, pleading in the alternative, the Knox

complaint makes clear that, if CSB was in fact the actual lender

in the loans at issue, Knox still asserts claims against the

                                           11
loan servicers only. 3           For this reason, and because unpaid debts

are not at issue, determination of which party controlled the

loan       terms   is      far   less     integral      here     than     in     Vaden   I.

Furthermore,         the     indemnification        arrangement      in   this    case   is

reversed from that in Vaden I--the loan servicers have agreed to

indemnify      CSB    against     potential         claims,    not   vice      versa.    We

consequently decline Petitioners’ invitation to treat the Knox

claims as properly brought against CSB so as to bring those

claims within the scope of the FDIA.

       Accordingly, no federal subject-matter jurisdiction exists

over the Knox claims, and no independent jurisdictional basis

supports the loan servicers’ Petition.

                                               B.

       Likewise,        we     find     that    the    district      court       correctly

dismissed the Petition as brought by CSB.                       Because there is no

existing or potential substantive conflict between Knox and CSB

that Knox has refused to arbitrate, CSB has failed to satisfy

the requirements of § 4 of the FAA.

       As the district court explained, Knox has not filed any

claims against CSB, in the Knox case or in any other forum.                              The

       3
       Specifically, Knox asserts unfair and deceptive trade
practices, illegal efforts to evade state law, and activities as
loan brokers in contravention of state law.    We note that most
of these claims could not plausibly be asserted against CSB.

                                               12
Knox complaint specifically disclaims any future action by Knox

against CSB, and the district court found that Knox would now be

time-barred      from      filing      any    claims       related            to    the      Knox

allegations     against      CSB. 4     Nevertheless,             CSB    argues          that    an

underlying      dispute      with     Knox    exists.         In        CSB’s       view,       the

Petition    does     not    confine     the       underlying       dispute          to     claims

asserted in the Knox action, but rather asks the court to find

federal question jurisdiction based on other potential claims.

We reject these arguments for the reasons that follow.

     First,     we   reiterate        that    CSB    has     no    stake       in     the    Knox

action.         Consequently,          we     cannot         find        an        independent

jurisdictional       basis    for     CSB’s       Petition    in    the        Knox      claims.

Second, we fail to see any other underlying dispute between CSB

and Knox upon which CSB may base its request for arbitration,

and reject CSB’s invitation to invent one or allow a purely

hypothetical future claim to support the Petition.

     The underlying controversy between the parties in this case

is concretely defined by the Knox claims.                         The Petition itself

makes    this   clear      enough,    asking       the   district        court        to    order

arbitration of “the disputes raised in” the Knox action and stay

     4
       To support this point, Knox has filed a motion for
judicial notice, which proffers CSB’s “Motion for Voluntary
Dismissal” filed in a separate action proceeding in a different
federal venue.    We deny the motion for judicial notice as
unwarranted and unnecessary to our determination.

                                             13
those state proceedings.              J.A. 25.        Although the Petition also

attempts       to   frame    the    underlying        dispute    as   one      “centering

around the question of whether the loans made to [Knox] are

governed by [the FDIA], as opposed to state law,” J.A. 12, this

inaccurate characterization is just the sort of artful dodge

proscribed by Vaden II.             See 556 U.S. at 67 (“Artful dodges by a

§ 4 petitioner . . . divert us from recognizing the actual

dimensions      of    that    controversy.”).           Petitioners      do     not   seek

arbitration of the question of FDIA preemption; to the contrary,

they are currently seeking adjudication of that issue by federal

courts.        Even   if     they    desired       arbitration   on     that    point,   a

preliminary jurisdictional issue such as this one could not be

passed on to an arbitrator in any event.

       Accordingly, we decline to be diverted by the Petition’s

clever     framing,        recognizing        instead    that     the     Knox    action

comprises the actual controversy between the parties.                          Cf. Vaden

II, 556 U.S. at 67-68 (“The text of § 4 instructs federal courts

to determine whether they would have jurisdiction over ‘a suit

arising out of the controversy between the parties’; it does not

give   §   4    petitioners         license    to     recharacterize      an     existing

controversy, or manufacture a new controversy, in an effort to

obtain a federal court’s aid in compelling jurisdiction.”).

       Notably, the Eleventh Circuit recently reached the opposite

result, in Community State Bank v. Strong, 651 F.3d 1241 (11th

                                              14
Cir. 2011).         In that case, Strong, a payday lendee, brought a

putative class action against Georgia loan servicers, alleging

violations of state usury and licensing laws, as well as the

“Georgia RICO” statute, and renouncing any claims under federal

law or against any state-chartered bank.                     Id. at 1249-50.     After

the loan servicer defendants, together with a non-named state-

chartered      bank    (also    CSB),    notified      Strong     of    an   intent    to

arbitrate and received a rejection in reply, the loan servicers

and CSB filed a petition to compel arbitration under § 4 in

federal court.         Id. at 1250.

        The    Eleventh       Circuit     affirmed       the     district      court’s

dismissal      of     the    loan   servicers’       petition     for     reasons     not

pertinent to this appeal, but determined that jurisdiction was

proper    as   to     CSB    because    “no    preexisting      litigation     has    yet

defined the contours of the controversy between Strong and the

Bank.     The Bank’s FAA petition is, in other words, what we will

call ‘freestanding’--that is, it does not arise out of pending

litigation between the parties.”                   Id. at 1245.        Thus apparently

freed from the Supreme Court’s focus on existing litigation to

define the actual controversy between the parties in Vaden II,

Strong surveyed any number of plausible claims that could be

filed    against      CSB,    and   ultimately       found    federal     jurisdiction

proper based on a hypothetical Federal Racketeer Influenced and

                                              15
Corrupt Organizations (“RICO”) claim, 18 U.S.C. §§ 1961-1962.

Id. at 1259-60.

       We       cannot   reach     the    same    result         on   the   facts    presented

here.           Although     it    is    true    that      no     preexisting       litigation

defines the controversy between Knox and CSB, this is so because

there is no controversy between Knox and CSB.                                    Although the

Petition posits that Knox could allege RICO claims against CSB,

this is pure speculation.                 Not only has Knox specified, both in

the state court complaint and in sworn affidavits in the present

action,         that   the   Knox       plaintiffs        will    not   bring     any   claims

against CSB, but CSB has also never asked Knox to arbitrate a

RICO claim.            In fact, unlike in Strong, here CSB had not asked

Knox       to    arbitrate        any   claims       at    all    prior     to    filing   the

Petition. 5

       To the extent the Petition describes the real controversy

that Petitioners seek to have arbitrated, that controversy is

       5
       At oral argument, Petitioners conceded that the March 2,
2005 letter from the loan servicers to Knox constitutes the only
demand for arbitration contained in the record, and that CSB was
not a party to any pre-Petition attempt to request arbitration.
This fact alone might be fatal to CSB’s ability to petition
under § 4 of the FAA. See 9 U.S.C. § 4 (describing a party who
may bring a petition thereunder as one “aggrieved by the alleged
failure, neglect, or refusal of another to arbitrate”); cf.
Strong, 651 F.3d at 1256 (“After all, FAA § 4 is only triggered
when one party has expressed a ‘refusal’ to arbitrate, and the
other party has been thereby ‘aggrieved.’” (quoting 9 U.S.C. §
4)).

                                                16
embodied in the Knox claims.             Those claims were not brought

against CSB, are distinct from any claims that could be made

against CSB, and do not implicate any interest on CSB’s part

that could be compelled to arbitration by a federal court.                We

decline to reach beyond the existing litigation in search of a

basis for federal jurisdiction over the Petition.             Accordingly,

we   conclude   that   the   district   court   properly   focused   on   the

actual underlying controversy between the parties in dismissing

the Petition.

                                   III.

      For the foregoing reasons, the judgment of the district

court is

                                                                 AFFIRMED.

                                    17