Lead Opinion
Opinion by Judge BRUNETTI; Dissent by Judge PREGERSON.
The plaintiffs in this case are a group of senior citizen homeowners who entered into “reverse mortgage” loan agreements with the defendants. Alleging that the defendants misrepresented several key terms of the agreements, the plaintiffs filed a class-action lawsuit asserting Truth in Lending Act and various state-law claims. The district court, finding that the loan agreements contained valid arbitration provisions, ordered the individual plaintiffs to separately submit their claims to arbitration, and dismissed the plaintiffs’ complaint. We hold that Congress has eliminated our jurisdiction to review this case under the Federal Arbitration Act. See 9 U.S.C. § 16(b). Thus, we dismiss this appeal without prejudice to a later timely, appeal.
BACKGROUND
Defendants/Appellees, collectively referred to as “Providential,” sell reverse mortgage loans to qualifying senior citizen homeowners. These loans are made in monthly installments, and are meant to supplement the senior citizen’s income. Repayment of the principal and interest is deferred for as long as the borrower remains in his or her home. In exchange, the homeowner conveys to Providential a deed of trust for equity in the home equal to the amount borrowed plus interest. The reverse mortgage agreements consist of a deed of trust, a loan agreement, and a note. Providential also provided customers with other documents, including a Truth in Lending Act disclosure statement and promotional materials.
Plaintiffs/Appellants are or represent individuals who “bought” Providential’s reverse mortgage loans. Because Appellants allege to have incurred substantial costs in their dealings with Providential that were not disclosed in (or were contrary to) the terms of the loan documents, they filed a class action lawsuit on behalf of themselves and all similarly situated senior citizen homeowners, alleging causes of action for violations of the Truth in Lending Act, 15 U.S.C. §§ 1601 et seq. (“TILA”), fraud, negligent misrepresentation, and state-law statutory violations.
Asserting that the deeds of trust executed by Appellants contain an enforceable arbitration provision, Providential filed a motion to compel arbitration on an individual basis pursuant to section 4 of the Federal Arbitration Act (“FAA”), 9 U.S.C. § 4. The district court granted Providential’s motion, ordering Appellants to submit their claims to arbitration on an individual basis. Because the court concluded that it did not have the power to order the arbitration to proceed on a consolidated or class-wide basis, it declined to make such an order and dismissed Appellants’ pending class certification motion as moot. Furthermore, because the court concluded that none of Appellants’ claims remained to be resolved by the court, it decided to dismiss, rather than stay, the action.
Appellants contend that the district court’s ruling was erroneous because: (I) they did not agree to arbitrate their claims; (II) any arbitration agreement that was formed is voidable under the contract doctrines of fraud, adhesion, unconscionability, and illegality; and (III) the district court does have the power to order arbitration to proceed on a consolidated or class-wide basis. However, because we dismiss this appeal on a jurisdictional basis, we do not reach these issues.
STANDARD OF REVIEW
Decisions regarding the validity and scope of arbitration agreements are reviewed de novo. Three Valleys Mun. Water Dist. v. E.F. Hutton & Co.,
DISCUSSION
Appellants contend that we have jurisdiction over this appeal under both 9 U.S.C. § 16(a)(3), as “a final decision” compelling arbitration, and as a final judgment appeal-able pursuant to 28 U.S.C. § 1291. However, as the appellees correctly state, Congress has set forth special rules governing appeals from a district court’s arbitration order. Here, they argue, 9 U.S.C. § 16(b)(2) prohibits review of the district court’s decision.
When examining a district court’s order compelling arbitration and dismissing the case under section 16, we must first determine whether the case involves an “independent” or “embedded” motion. Prudential Ins. Co. of America v. Lai,
[I]f the motion to compel arbitration in a given case is the only claim before the district court, a decision to compel arbitration is deemed to dispose of the entire case, and permit appellate review under 9 U.S.C. § 16(a)(3). On the other hand, if the motion to compel arbitration is “embedded” in a substantive suit pending before that court, the district court’s decision to compel arbitration of some or all of the claims before it is not considered to be final, and therefore not reviewable.
Prudential,
Although Prudential set forth the framework for analyzing this type of claim, it did not consider the precise issue presented here. However, the Eighth Circuit has considered a case nearly identical to ours. See Gammaro v. Thorp Consumer Discount Co.,
Here, the plaintiffs’ Truth in Lending Act claim constituted the primary suit and, as in Gammaro, the defendant’s motion to compel arbitration was an embedded proceeding. The reasoning presented in Gammaro is consistent with our holding in Prudential and we elect to follow the Eighth Circuit’s decision.
This analysis has been followed by the majority of courts examining the issue of interlocutory appeals under section 16. See, e.g., F.C. Schaffer & Assocs. Inc. v. Demech Contractors, Ltd.,
The dissent argues that our reliance on the above cases is misplaced because those cases involved stays rather than dismissals of actions. However, we reject this distinction because it is irrelevant to the ultimate disposition of the cases and ignores the clear dictates of the FAA. As the Second Circuit noted in Gammaro:
Although the district court’s dismissal of the class allegations may evade review if Gammaro does not later seek such review [of the arbitrator’s decision], this situation does not differ significantly from that of a litigant seeking to represent a class in any other type of litigation. An order denying class certification routinely forced individuals to litigate their individual claims before arriving at a final decision subject to review.
The dissent eloquently articulates the procedural differences between stays and dismissals, but this interpretation adopts a rigid and formulaic interpretation of a statute which makes no distinction between the two. The dissent ignores the clear language of section 16 prohibiting review of orders compelling arbitration. Further, distinguishing between stays and dismissals for purposes of appellate review would condition the result upon the district court’s decision. If circumstances compelled the court to stay the action, the case would proceed to an arbitrator; if the court dismissed all claims the case could be appealed immediately. We do not believe that Congress intended this arbitrary result when it barred appellate review of interlocutory orders compelling arbitration. We interpret the bar on appellate review to be just that, regardless of the terminology used by the trial court.
Finally, our interpretation of section 16 corresponds with Congress’s clear desire to promote greater use of arbitration. See Gammaro,
For the reasons stated above, we dismiss for lack of jurisdiction.
DISMISSED.
Notes
. As with this case, the arbitration agreement was not located in the disclosure statement; instead the loan agreement provided for arbitration. Id. at 95.
. This analysis is supported by the practice commentaiy to 9 U.S.C. § 16:
When for example, a decision about the arbitrability of an issue arises in an ordinary action in a U.S. district court, such as on a motion by one of the parties to stay the action and compel the arbitration of its issues, the decision in that context is merely interlocutory: the action, whichever way the court may rule on the motion, is not finally determined and the decision therefore qualifies as just an intermediate one. As such, it would not be appealable unless it fell under one of the exceptions listed in § 1292(a). Since it does not fall under any of those exceptions, an appeal from the arbitrability ruling would be barred.
Section 16 effectively addresses this "embedded” proceeding by explicitly allowing an immediate appeal from an anti-arbitration decision wile precluding an appeal when the decision is in favor of arbitration.
David D. Siegal, Practice Commentary, 9 U.S.C. § 16 at 353 (West Supp.1997).
Dissenting Opinion
dissenting.
I dissent because the majority opinion wrongly deprives the senior citizens of their right to an appeal. The majority erroneously treats a final dismissal as an interlocutory stay and concludes that this court lacks jurisdiction. In my view, the district court’s order compelling arbitration and dismissing the action was a final, appealable decision. This court therefore has jurisdiction to consider the appeal under 9 U.S.C. § 16(a)(3).
From the outset of this appeal, the parties treated the district cpurt’s decision as an appealable final order. During oral argument in December 1995, we also treated the district court’s decision as an appealable final order. Today the majority concludes that we lack jurisdiction over what originally was and still remains a final dismissal of all claims before the district court.
I. BACKGROUND
Plaintiffs in this case include Mary McCarthy, age 88, Perry and Eunice Williams, ages 90 and 84, respectively, John de Ridder, as executor of the Estate of his mother who died at age 93, and Eda Kavin, age 79. These senior citizens took out “reverse mortgages” with Providential. Their complaint alleges that Providential engaged in practices which were both unlawful and designed to deceive unsophisticated and inexperienced el
The senior citizens brought a Truth in Lending Act (“TILA”) claim, 15 U.S.C. §§ 1601-1667Í, and several state law claims in federal district court. TILA permits class actions, id. § 1640(a)(2)(B), and the senior citizens sought class certification to represent others who were allegedly victimized in Providential’s “reverse mortgage” scheme.
In response to the senior citizens’ complaint Providential filed a motion to compel arbitration on an individual basis. In July 1994, the district court issued an order that compelled the parties to submit their claims to arbitration. Relying on our decision in Weyerhaeuser Co. v. Western Seas Shipping Co.,
The district court noted that:
Normally, under 9 U.S.C. § 3 [of the Federal Arbitration Act], a court would stay proceedings pending the conclusion of the arbitration.... However, in the present case, none of plaintiffs’ claims remain to be resolved by this court, and therefore there is no reason to stay these proceedings pending the arbitrator’s decision.
Accordingly, the Clerk of the Court was ordered to close the file.
Our jurisdiction in this case arises from 28 U.S.C. § 1291, which provides that “[t]he courts of appeals ... shall have jurisdiction of appeals from all final decisions of the district courts of the United States.” As the Supreme Court stated in Catlin v. United States,
Under the proposed statute, appealability does not turn solely on the policy favoring arbitration. Appeal can be taken from final judgments, including a final judgment in an action to compel arbitration ... or a final judgment dismissing an action in deference to arbitration. These appeals preserve the general policy that appeal should be available where there is nothing left to be done in the district court.
Stedor Enters., Ltd. v. Armtex, Inc.,
II. EMBEDDED PROCEEDINGS ARE NOT NECESSARILY INTERLOCUTORY
In Prudential Insurance Co. of America v. Lay
It is well-settled that an order by the district court in an independent action to compel arbitration is a final decision for the
While orders compelling arbitration in all independent arbitrability proceedings are necessarily final decisions, it does not logically follow that orders in all embedded arbitrability proceedings are necessarily interlocutory. Admittedly, most orders in embedded proceedings are interlocutory. These orders are not interlocutory, however, simply because they are embedded. Rather, orders compelling arbitration from embedded proceedings are usually interlocutory because the FAA allows the district court to stay the action pending the outcome of arbitration. See 9 U.S.C. § 3. The district court here acknowledged that the standard practice is for a district court to grant a stay pending arbitration. When a district court follows the standard practice of staying the action pending the outcome of the ordered arbitration, that court has not made a “final decision” regarding all issues before it. Id. § 16(a)(3). Under these circumstances, the arbitration order is appropriately deemed interlocutory.
The district court in this case, however, consciously chose to depart from the standard practice of staying the action and disposed of all the issues before it with its order compelling arbitration. This order dismissed the entire action and operated “as an adjudication upon the merits.” Fed.R.Civ.P. 41(b). This court and other circuits have pointed out that the disposition of all issues before the district court and the adjudication of the merits of the action are characteristics of an appealable final decision. See Amgen, Inc. v. Kidney Ctr. of Del. County, Ltd.,
[A]n arbitrability decision arising from an independent proceeding ... resolves the sole issue before the court. Consequently, once a court conducting an independent proceeding determines that a dispute is or is not arbitrable, the court generally does not retain jurisdiction over the parties. Because in such circumstances the district court’s arbitrability decision ends the litigation on the merits and leaves nothing for the court to do but execute the judgment, it is a final decision.
Matter of Chung and President Enters.,
The district court’s order in this case ended the litigation on the merits and left nothing for the court to do. The district court’s order is therefore a final, appealable decision.
III. DISMISSAL OF AN ACTION INVOLVING AN EMBEDDED ARBI-TRABILITY PROCEEDING IS AN APPEALABLE FINAL JUDGMENT
There are two different courses of action that a district court may take when ordering-arbitration in an embedded arbitrability proceeding. Most of the time, the district court stays the case pending the outcome of arbitration. It is well-settled that an order compelling arbitration in those circumstances is an interlocutory order. See Prudential,
While the Ninth Circuit has not ruled on the issue whether an order compelling arbitration and dismissing an action is a final decision, the Sixth and Tenth Circuits have held that, where the district court dismisses the action upon ordering arbitration, the order is an appealable final decision. In Arnold v. Arnold Corp.,
In Armijo v. Prudential Insurance Co. of America,
The majority, however, chooses to rely on the contrary holdings of the Eighth and Fifth Circuits. In Gammaro v. Thorp Consumer Discount Co., the Eighth Circuit held that a district court’s order compelling arbitration and dismissing class allegations was an embedded proceeding and was therefore interlocutory.
The majority opinion also cites to cases from several other circuits in support of its assertion that the majority of circuits that have addressed this issue have followed the holding of Gammaro. The majority’s reliance on these cases is misplaced, however, because the facts of these cases involve stays rather than dismissals of actions. See F.C. Schaffer & Assocs., Inc. v. Demech Contractors, Ltd.,
The majority opinion and the Eighth and Fifth Circuit authority on which it relies ignore the critical distinction between a stay and a dismissal. Under a stay, the district court retains jurisdiction over the action. Matter of Chung,
By ignoring the distinction between a stay and a dismissal and treating the dismissal in this case as interlocutory, the majority creates a jurisdictional loophole that unjustifiably precludes immediate appeal in eases where the arbitrability issue is embedded but the action is dismissed rather than stayed. In this case, this loophole disadvantages the senior citizens and benefits Providential. Under the majority’s approach, the senior citizens’ claims are completely dismissed from the district court unless and until the senior citizens apply for review after the arbitration proceeding has run its course. Moreover, the senior citizens are denied the opportunity for immediate appeal that such a dismissal would ordinarily provide. Providential, however, is shielded from the possibility of immediate appeal of the arbitration order and also enjoys the benefit of an immediate dismissal of the senior citizens’ claims from federal court.
Finally, I also note that the majority’s new jurisdictional rule effectively deprives the senior citizens of any hope for review of their claims that Providential effectively cheated them out of their home equity. As stated above, TILA provides for class actions in federal court. 15 U.S.C. § 1640(a)(2)(B). Plaintiffs sought to represent the class of senior citizens who had purchased reverse mortgages from Providential, by bringing federal and state claims in federal court.
Instead, the senior citizens have been denied their day in federal court and have been told to turn to arbitration. Because we have held that the Federal Arbitration Act does not permit consolidation of separate arbitration claims absent express language in the arbitration clause that allows such consolidation, Weyerhaeuser Co.,
IV. CONCLUSION
The jurisdictional bar created by the majority gives Providential and its agents a windfall. The company benefits from both the dismissal of the senior citizens’ claims from federal court and the protection from appeal that is bestowed by the majority. Moreover, Providential may reap the additional benefit of avoiding arbitration with senior citizens who are too poor to pay initial arbitration fees. Because the majority unfairly deprives the senior citizens of then-appeal of right, I dissent.
. Significantly, in Filanto, the Second Circuit held that an order compelling arbitration that failed to expressly dismiss the complaint was not appealable.