TERRY JOHNSON v. WEST SUBURBAN BANK; TELE-CASH INC.; COUNTY BANK OF REHOBOTH BEACH, DELAWARE
NO. 00-5047
UNITED STATES COURT OF APPEALS FOR THE THIRD CIRCUIT
August 29, 2000
2000 Decisions. Paper 180
BECKER, Chief Judge, SLOVITER and NYGAARD, Circuit Judges.
On Appeal From the United States District Court For the District of Delaware (D.C. Civ. No. 99-cv-00104). District Judge: Honorable Gregory M. Sleet. Argued July 17, 2000.
Johnson v. West Suburban Bank
Precedential or Non-Precedential:
Docket 00-5047
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Recommended Citation
“Johnson v. West Suburban Bank” (2000). 2000 Decisions. Paper 180. http://digitalcommons.law.villanova.edu/thirdcircuit_2000/180
Tele-Cash Inc.; County Bank of Rehoboth Beach, Delaware, Appellants
WALTER WEIR, JR., ESQUIRE SUSAN VERBONITZ, ESQUIRE (ARGUED) Weir and Partners, LLP 1339 Chestnut Street Suite 500, The Widener Building Philadelphia, PA 19107
Counsel for Appellants
CATHLEEN M. COMBS, ESQUIRE (ARGUED) JOHN M. BRODERICK, ESQUIRE Edelman, Combs & Latturner 120 South LaSalle Street, 18th Floor Chicago, IL 60603
WILLIAM L. O‘DAY, JR., ESQUIRE Law Office of William L. O‘Day, Jr. 2118 Kirkwood Highway Wilmington, DE 19805
Counsel for Appellee
CHRISTOPHER R. LIPSETT, ESQUIRE ERIC J. MONGILNICKI, ESQUIRE MICHAEL D. LEFFEL, ESQUIRE Wilmer, Cutler & Pickering 2445 M Street, NW Washington, DC 20037-1420
Counsel for Amici Curiae - The Delaware Retail Council; The New Jersey Retail Merchants Association; The Pennsylvania Retailers Association
Counsel for Amici Curiae - American Bankers Association, American Financial Services Association, Consumer Bankers Association, and Delaware Bankers Association
OPINION OF THE COURT
BECKER, Chief Judge.
This appeal arises under the Truth in Lending Act (“TILA“),
Johnson submits that compelling arbitration is precluded by an “irreconcilable conflict” between the arbitration clause and the purposes of the TILA and the EFTA. He argues that Congress consciously inserted language into the statutes with the intent of encouraging district court judges to certify class actions under
The District Court agreed with Johnson that there was an “inherent conflict” between compelling arbitration and the TILA and the EFTA and denied the Defendants’ motion to compel arbitration under the agreement. We will reverse. Though there may be some tension between the purposes of the debtor-protection statutes and arbitration, we are not persuaded that the two are so at odds as to preclude arbitration in this context. The Supreme Court has made clear that the presumption in favor of arbitration established by the Federal Arbitration Act (“FAA“),
As a predicate to this conclusion, we note our belief that the public interest purposes behind the civil penalty provisions of the statutes are not in conflict with arbitration, even if arbitration clauses may prevent the bringing of class actions. To the extent that class actions serve public interest goals, those goals are also met by other provisions of the laws, which allow for enforcement of the statutes by federal agencies that possess sufficient sanctioning power to provide a meaningful deterrent to creditors who violate the terms of either act. Moreover, neither act grants potential plaintiffs any substantive right that cannot be vindicated in an arbitral forum. While it may be true that the benefits of proceeding as a class are unavailable in arbitration, neither statute confers upon plaintiffs the right to proceed as a class. Instead, the right is merely a procedural one, arising under
I.
Johnson applied for and received a short-term loan for $250 from the Bank on July 10, 1998. The loan agreement disclosed an annual percentage rate of 917%, stemming from finance charges of $88 for the two-week loan. Thus, under the agreement, Johnson had to repay the loan by making one payment of $338 two weeks after receiving his $250. The loan agreement also contained the following arbitration clause:
You and we agree that any claim, dispute, or controversy between us . . . and any claim arising from or relating to this Note, no matter by whom or against whom . . . including the validity of this Note and of this agreement to arbitrate disputes as well as claims alleging fraud or misrepresentation shall be resolved by binding arbitration by and under the Code of Procedure of the National Arbitration Forum . . . . This arbitration agreement is made pursuant to a transaction involving interstate commerce and shall be governed by the Federal Arbitration Act, 9 U.S.C. [SS] 1-16.
App. 20. The loan agreement further provided:
NOTICE: YOU AND WE WOULD HAVE HAD A RIGHT OR OPPORTUNITY TO LITIGATE DISPUTES THROUGH A COURT BUT HAVE AGREED INSTEAD TO RESOLVE DISPUTES THROUGH BINDING ARBITRATION.
By signing and sealing below, you agree to all of the terms of this Note, including the agreement to arbitrate disputes.
Id. at 20.
The Defendants moved to stay the proceedings and compel arbitration. Concluding that arbitration was at odds with the purposes of the TILA and the EFTA, the District Court denied a motion to compel arbitration and stay the proceedings or dismiss the case. The District Court did, however, dismiss Johnson‘s claim that the arbitration clause was unconscionable. The Defendants timely appealed. The District Court had jurisdiction to hear Johnson‘s action under
II.
Whether a court can compel arbitration of TILA claims when the parties’ loan agreement contains an arbitration clause but the plaintiff seeks to bring claims on behalf of multiple claimants is a question of first impression for this court. No other federal appellate court has squarely addressed the issue either. A number of district courts have ruled on the subject. Most of these rulings favor the view that the TILA does not preclude the pre-dispute selection by the parties of an arbitral forum should any controversy arise. Compare Thompson v. Illinois Title Loans, Inc., No. 99-C-3952, 2000 WL 45493 (N.D. Ill. Jan. 11, 2000); Sagal v. First USA Bank, N.A., 69 F. Supp. 2d 627 (D. Del. 1999);
In general, nothing prevents contracting parties from including a provision in their agreements that refers statutory claims arising under the contract to arbitration. See Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20, 26 (1991). Arbitration of statutory claims will not be precluded absent congressional direction. “Having made the bargain to arbitrate, the party should be held to it unless Congress itself has evinced an intention to preclude a waiver of judicial remedies for the statutory rights at issue.” Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614, 628 (1985). The burden of establishing that Congress meant to preclude arbitration for a statutory claim rests with the party who seeks to avoid arbitration. See Gilmer, 500 U.S. at 26. Such intention may be found in the text, legislative history, or in an “inherent conflict” between arbitration and the statute‘s underlying purposes. Id. (citing Shearson/American Express, Inc. v. McMahon, 482 U.S. 220, 227 (1987)). “Throughout such an inquiry, it should be kept in mind that `questions of arbitrability must be addressed with a healthy regard for the federal policy favoring arbitration.’ ” Id. (quoting Moses H. Cone Mem‘l Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 24 (1983)).
It is the third category, inherent conflict, on which the District Court based its opinion. The Court concluded that an inherent conflict existed because “without the possibility of class action liability looming on a creditor‘s horizon, there is a very real possibility that these entities will not voluntarily comply with the Truth-in-Lending regulations.” Johnson v. Tele-Cash, Inc., 82 F. Supp. 2d 264, 271 (D. Del. 1999). We agree that if Johnson is to prevail, it must be on the basis of demonstrating an inherent conflict. There is nothing in either the text or the legislative history of the
A. Statutory Language
The TILA provides for civil liability for lenders who fail to give the disclosures required by the statute. See
in the case of a class action, such amount as the court may allow, except that as to each member of the class no minimum recovery shall be applicable, and the total recovery under this subparagraph in any class action or series of class actions arising out of the same failure to comply by the same creditor shall not be more than the lesser of $500,000 or 1 per centum of the net worth of the creditor.
[i]n determining the amount of award in any class action, the court shall consider, among other relevant factors, the amount of any actual damages awarded, the frequency and persistence of failures of compliance by the creditor, the resources of the creditor, the number of persons adversely affected, and the extent to which the creditor‘s failure of compliance was intentional.
Though the statute clearly contemplates class actions, there are no provisions within the law that create a right to bring them, or evince an intent by Congress that claims initiated as class actions be exempt from binding arbitration clauses. The “right” to proceed to a class action,
B. Legislative History
Johnson relies heavily on the legislative history behind several amendments to the TILA. After the law was first enacted, some courts were reluctant to certify class actions, in part due to the concern that large class awards could overwhelm lending institutions. See generally Ratner v. Chemical Bank New York Trust Co., 54 F.R.D. 412, 414 (S.D.N.Y. 1972) (refusing to certify class of TILA plaintiffs when “the allowance of thousands of minimum recoveries like plaintiff ‘s would carry to an absurd and stultifying extreme the specific and essentially inconsistent remedy Congress prescribed as the means of private enforcement“). In 1974 Congress responded by enacting the limitations on class action recovery discussed above. In so doing, it created some legislative history that bespeaks the potential role that class actions are meant to play in the enforcement of the TILA‘s substantive requirements. Johnson contends that this history demonstrates Congress‘s intent to preserve a statutory class action remedy under the TILA.
Most of the language favorable to Johnson is found in a report of the Senate Committee on Banking, Housing and Urban Affairs pertaining to the 1974 amendments. We quote from it at length.
A problem has arisen in applying these minimum liability provisions in class action suits involving millions of consumers. If each member of the class is entitled to a minimum award of $100, a creditor‘s liability can be enormous. For example, if a large national department store chain with 10 million customers fails to include a required item of information on its monthly billing statement, it can be subject to a minimum liability of $1 billion in a class action suit
. . . .
The purpose of the civil penalties section under Truth in Lending was to provide creditors with a
meaningful incentive to comply with the law without relying upon an extensive new bureaucracy. However, the Committee feels this objective can be achieved without subjecting creditors to enormous penalties for violations which do not involve actual damages and may be of a technical nature. Putting a reasonable limit on a creditor‘s maximum class action liability would seem to be in the best interest of both creditors and consumers. . . . .
. . . . The Committee believes the present ambiguities and uncertainties with respect to class action suits under Truth in Lending should be clarified. Moreover, the Committee agrees with the Federal Reserve Board that “potential class action liability is an important encouragement to the voluntary compliance which is so necessary to insure nationwide adherence to uniform disclosure” and that such remedies should not be restricted to actual damages. As the Committee pointed out in its report on similar legislation last year, “Most Truth in Lending violations do not involve actual damages and . . . some meaningful penalty provisions are therefore needed to insure compliance.”
Accordingly, the Committee again decided to place an aggregate limitation on a creditor‘s class action liability for violations not involving actual damages.
S. Rep. No. 93-278, at 14-15 (1973). The conference report for the final legislation is far less expansive, not discussing the purposes of the caps in any great detail, but stating that “[t]he limitation on class action suits was further limited to the lesser of $100,000 or 1 percent of the net worth of the creditor to protect small business firms from catastrophic judgments.” H.R. Conf. Rep. No. 93-1429 (1974), reprinted in 1974 U.S.C.C.A.N. 6148, 6153.
Several years later, the cap on class action awards was raised from $100,000 to $500,000. At the time, the Senate report, prepared by the Banking, Housing and Urban Affairs Committee, noted:
The chief enforcement tool will continue to be private actions for actual damages and civil penalties. . . .
. . . . The risk of any ceiling on class action recoveries is that, if it is too low, it acts as a positive disincentive to the bringing of such actions and thus frustrates the enforcement policy for which class actions are recognized. . . .
The Committee wishes to avoid any implication that the ceiling on class action recovery is meant to discourage use of the class action device. The recommended $500,000 limit, coupled with the 1% formula, provides, we believe, a workable structure for private enforcement. Small businesses are protected by the 1% measure, while a potential half million dollar recovery ought to act as a significant deterrent to even the largest creditor.
S. Rep. No. 94-590, at 8 (1976), reprinted in 1976 U.S.C.C.A.N. 431, 438.
Though Congress did not address the role of arbitration in the legislative history, Johnson urges that the history recited above demonstrates the centrality of class actions to the TILA‘s effective enforcement.1 Accordingly, we turn to consider whether an arbitration clause that precludes bringing a class action suit under the TILA irreconcilably conflicts with the statute.
C. Statutory Purposes
Because nothing in the legislative history or the statutory text of the TILA clearly expresses congressional intent to preclude the ability of parties to engage in arbitration, Johnson must demonstrate that arbitration irreconcilably conflicts with the purposes of the TILA. While Johnson may be correct in arguing that Congress contemplated class actions as a part of the TILA enforcement scheme, and even that class actions were self-consciously promoted by Congress in amending the statute, he falls short of
1. TILA‘s public policy goals
Johnson focuses on the ability of a class action award to act as a penalty against lenders who violate the TILA. This focus is logical. The prospect of a class action award will doubtless deter TILA violations more effectively than the prospect that debtors will pursue individual actions, either in court or in arbitration, because the damages available to individuals are generally limited. See
a. The effects of arbitration on private litigation
First, even if plaintiffs who sign valid arbitration agreements lack the procedural right to proceed as part of a class, they retain the full range of rights created by the TILA. These rights remain available in individual arbitration proceedings. The Supreme Court has made clear that when arbitration will preserve a plaintiff ‘s substantive rights, compelling arbitration in accordance with an arbitration clause will not impede a statute‘s deterrent function. “[S]o long as the prospective litigant effectively may vindicate [his or her] statutory cause of action in the arbitral forum, the statute will continue to serve both its remedial and deterrent function.” Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614, 637 (1985). Johnson does not argue that the arbitral forum selected in his agreement is somehow inadequate to vindicate any of his rights under the TILA or that arbitrators would be unable to afford him any relief that he could individually obtain in
Under the prevailing jurisprudence, when the right made available by a statute is capable of vindication in the arbitral forum, the public policy goals of that statute do not justify refusing to arbitrate. The notion that there is a meaningful distinction between vindicating a statute‘s social purposes and adjudicating private grievances for purposes of determining whether a statute precludes compelling arbitration under a valid arbitration clause was rejected by the Supreme Court in Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20 (1991). That case concerned whether claims under the Age Discrimination in Employment Act (“ADEA“) must be available in a judicial forum. The Court concluded otherwise, despite arguments based on the ADEA‘s important social policy goals. “As Gilmer contends, the ADEA is designed not only to address individual grievances, but also to further important social policies. We do not perceive any inherent inconsistency between those policies, however, and enforcing agreements to arbitrate age discrimination claims.” Id. at 27 (citation omitted). Class actions could be similarly effective in promoting the ADEA‘s social policies, and, as discussed below, that statute lends itself more easily to being construed as creating a substantive right to a class action. Gilmer therefore appears to foreclose much of Johnson‘s argument.
We also note that while arbitrating claims that might have been pursued as part of class actions potentially reduces the number of plaintiffs seeking to enforce the TILA
b. The availability of administrative enforcement mechanisms
Our conclusion that there is no irreconcilable conflict between the TILA‘s social policy goals and arbitration of claims that could have been heard as part of a class action is bolstered by the statute‘s administrative enforcement provisions. These provisions offer meaningful deterrents to violators of the TILA if private enforcement actions should
Johnson responds by invoking the portion of the legislative history that speaks to the need to avoid “relying upon an extensive new bureaucracy.” S. Rep. No. 93-278, at 14 (1973). This reference is of limited usefulness, for this snippet of legislative history does not indicate congressional intent that arbitration be precluded, or that individual actions are inadequate to serve the function of deterring violations of the TILA. It may be true that Congress saw value in maintaining the availability of class actions, but that does not translate to the conclusion that it intended to preclude private parties from contracting around their availability. Under the framework established by the Supreme Court, legislative history may be used to demonstrate congressional intent to preclude arbitration. See Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20, 26 (1991). When that history is used, as here, merely to demonstrate that the judicial remedies provided for or contemplated by a statute are important, it is of noticeably reduced value. The importance of statutory judicial remedies are always evident from their mere existence--Congress obviously enacted them for a reason. Were they
Insofar as Congress‘s intent, broadly contemplated, is concerned, we must give equal consideration to Congress‘s policy goals in enacting the FAA. The statute was intended to overcome judicial hostility to agreements to arbitrate, see Dean Witter Reynolds Inc. v. Byrd, 470 U.S. 213, 219-21 & n.6 (1985), and it reflects “a liberal federal policy favoring arbitration agreements,” see Moses H. Cone Mem‘l Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 24 (1983). See also H.R. Rep. No. 68-96, at 1 (1924) (“Arbitration agreements are purely matters of contract, and the effect of this bill is simply to make the contracting party live up to his agreement.“). Indeed, a Senate Judiciary Committee Report supporting the legislation explained that arbitration provides benefits to both consumers and businesses in speed and lower costs. “The desire to avoid the delay and expense of litigation persists. The desire grows with time and as delays and expense increase. The settlement of disputes by arbitration appeals to big business and little business alike, to corporate interests as well as to individuals.” S. Rep. No. 68-536, at 3 (1924).
Similarly, the committee found that there was general satisfaction among participants with arbitration. See id. A 1982 House of Representatives report reached similar
In short, Johnson‘s reliance on the legislative history summarized in Part II.B is fundamentally flawed. He uses it not to show that Congress intended that parties could avoid a valid arbitration clauses if they wished to litigate a TILA claim, but rather, and in a more attenuated manner, to show that class actions have important purposes under the statute. But nothing in the cited passages demonstrates that parties cannot choose to waive judicial remedies in favor of arbitration. In any case, the loss of the availability of a class action does not mean the loss of meaningful deterrence to TILA violations, insofar as the public remedies discussed above remain. It may be true that the unavailability of class actions removes an incentive for lenders to comply with the statute, but it is far from the only incentive to do so.
We similarly do not view the fact that Congress seems to have self-consciously encouraged class actions as particularly telling. In acting to ease the certification of classes, see supra Part II.B, Congress did nothing to preserve the right to a class action over arbitration or preclude opting for arbitration. Rather, it only altered the factors that judges consider in determining whether to allow the procedural right of a class action to be exercised. Notably, Congress did not add language compelling judges to recognize prospective classes under any circumstances. One can therefore look at the 1974 and 1976 amendments as efforts by Congress to place class actions on the same
2. Substantive Rights
Johnson also argues that the TILA does effectively create an unwaivable right to bring a class action. The strongest statement of this argument is as follows. Congress enacted a scheme in which the court hearing a class action could set a damage figure up to a certain amount for certain patterns of conduct. This judicial flexibility in imposing damages up to $500,000 only exists if a class action is allowed, as individual plaintiff claims are generally capped at $1,000. Therefore, a right of classes to a judicially crafted punitive remedy is lost if this court orders arbitration of Johnson‘s claims. Similarly, if class actions are precluded, arbitrators acting in lieu of courts would not have a basis for considering, in connection with a class remedy, the frequency and persistence of compliance failures by the creditors, the number of persons adversely affected, or the creditors’ intent. See
This argument is unavailing in light of Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20 (1991). The ADEA, at issue in Gilmer, presented far more powerful textual support than the TILA for concluding that there is a right to proceed collectively despite the existence of an arbitration clause. The ADEA actually provides for collective litigation. See
Johnson argues that Gilmer is taken out of context vis-a-vis the provision for class actions because the Supreme Court noted that the EEOC, in enforcing the ADEA, could still seek class-wide relief, while the FTC is not similarly capable. We do not believe that this argument carries any force. As discussed above, powerful punitive enforcement mechanisms remain available to administrative bodies under the Act even if these tools are not in the form of class actions.
Furthermore, simply because judicial remedies are a part of a law does not mean that Congress meant to preclude parties from bargaining around their availability. This is manifest in the Supreme Court‘s treatment of the availability of class actions in Gilmer. “But `even if the arbitration could not go forward as a class action or class relief could not be granted by the arbitrator, the fact that the [ADEA] provides for the possibility of bringing a collective action does not mean that individual attempts at conciliation were intended to be barred.’ ” Gilmer, 500 U.S. at 32 (quoting Nicholson v. CPC Int‘l Inc., 877 F.2d 221, 241 (3d Cir. 1989) (Becker, J., dissenting)) (alteration in the original). The same holds true for the TILA. Even if we were to conclude that the statute implies a right to proceed as a member of a class, Gilmer indicates that rights of this nature are waivable so long as the rights the statute was designed to protect may be vindicated by other means. We do not think this unfair. Only those who consent to credit agreements with binding arbitration clauses are forced to abandon this procedural avenue; those who do not consent
In sum, Johnson‘s arguments that the TILA precludes arbitration are unpersuasive. “[I]f Congress intended the substantive protection afforded by a given statute to include protection against waiver of the right to a judicial
III.
The District Court further held that compelling arbitration of claims arising under the EFTA irreconcilably conflicts with that statute as well. This ruling was based on the fact that the EFTA contains limitations on class action recovery that mirror those contained in the TILA. Compare
The order of the District Court denying the motion to stay proceedings and compel arbitration will be reversed and the
A True Copy:
Teste:
Clerk of the United States Court of Appeals for the Third Circuit
BECKER
Chief Judge