48 F.4th 136
3rd Cir.2022Background
- Zirpoli borrowed from OneMain under a loan agreement containing a broad arbitration clause that expressly covered disputes over "the arbitrability of any Claim" and extended to OneMain’s "past, present or future respective ... assignees."
- OneMain sold (charged-off) Zirpoli’s delinquent account to Midland Funding, which lacked a Pennsylvania CDCA license and did not obtain prior Secretary-of-Banking approval.
- Midland sued Zirpoli to collect, later dismissed, then allegedly hurt his credit; Zirpoli filed a class action alleging unlawful collection because the assignment was unlawful under the CDCA.
- Midland moved to compel arbitration; the District Court ordered limited discovery, found no Secretary approval and that Midland was unlicensed, and denied the motion to compel.
- On appeal, the Third Circuit held the district court erred: the arbitration clause contains a clear delegation clause covering arbitrability (including usury/assignment-related defenses), so the arbitrator must decide whether the assignment was enforceable; the court had jurisdiction under FAA §4 and must stay and refer the matter to arbitration.
Issues
| Issue | Plaintiff's Argument (Zirpoli) | Defendant's Argument (Midland) | Held |
|---|---|---|---|
| Whether the district court had jurisdiction under 9 U.S.C. §4 to entertain Midland’s petition | Midland is not a "party" under §4 because it lacks a valid arbitration agreement after an invalid assignment | "Party" in §4 refers to a litigant; the court has jurisdiction to hear a motion to compel | Court had jurisdiction under §4 to hear the motion |
| Who decides arbitrability when assignment validity is disputed | The court should decide because Midland never agreed to arbitrate with Zirpoli (assignment invalid) | The parties clearly delegated arbitrability to an arbitrator; assignment disputes go to arbitrator | Delegation clause is clear and unmistakable; arbitrator decides arbitrability (court erred by deciding it) |
| Whether a challenge to the assignment’s legality is a formation challenge that courts must decide | Assignment illegality means no agreement between Zirpoli and Midland; this is a formation issue for the court | The challenge targets enforceability of the contract as a whole and thus must go to the arbitrator under severability/Buckeye | The assignment challenge concerns enforceability, not formation; it must be decided by the arbitrator |
| Whether the arbitration clause covers usury and enforceability defenses | Usury/assignment defenses fall outside arbitration because state law voided the assignment | The clause explicitly covers "any alleged violation ... including ... usury" and arbitrability of any claim | Clause is broad and clearly delegates such questions to the arbitrator |
Key Cases Cited
- Buckeye Check Cashing, Inc. v. Cardegna, 546 U.S. 440 (2006) (challenge to entire contract’s validity must go to arbitrator if clause delegates arbitrability)
- Henry Schein, Inc. v. Archer & White Sales, Inc., 139 S. Ct. 524 (2019) (courts must enforce clear delegation clauses and send threshold arbitrability to arbitrator)
- MZM Constr. Co., Inc. v. New Jersey Bldg. Labs. Statewide Benefit Funds, 974 F.3d 386 (3d Cir. 2020) (distinguishes formation challenges from enforceability challenges re: delegation clauses)
- Flintkote Co. v. Aviva PLC, 769 F.3d 215 (3d Cir. 2014) (two-step test: valid arbitration agreement and scope)
- Sandvik AB v. Advent Int’l Corp., 220 F.3d 99 (3d Cir. 2000) (arbitration clause severability doctrine)
- Rent-A-Center, West, Inc. v. Jackson, 561 U.S. 63 (2010) (delegation-clause enforcement rules)
- Arthur Andersen LLP v. Carlisle, 556 U.S. 624 (2009) (treating "party" language in FAA context as referring to litigants)