Taylor v. Allied Title Lending, LLC (In re Taylor)Taylor v. Allied Title Lending, LLC (In re Taylor)
Bеfore the Court in this adversary proceeding (the "Adversary Proceeding") is a Motion to Compel
Jurisdiction and Venue
The United States Bankruptcy Court for the Eastern District of Virginia (the
Count II of the Amended Complaint wholly implicates the allowance and disallowance of claims against the estate as it objects to Allied's claim on the grounds that it arises out of a null and void contract, which would disallow the claim under section 502(b)(1) of Title 11 of the United States Code (the "Bankruptcy Code"). See
Venue is appropriate in this Court pursuant to
Background and Procedural History
Background
The Debtor is a salaried employee of the U.S. Probation Office. Am. Compl. ¶ 21. Allied, a Delaware limited liability company, offers "short-term, small-dollar loans to Virginians that mimic payday loans but are in the form of open-end credit plans."
In July 2016, thе Debtor submitted an application to Allied requesting a loan in the amount of $1500. Mot. to Compel ¶ 6. On July 25, 2016, the Debtor executed a line of credit agreement with Allied (the "Credit Agreement"). Am. Compl. ¶ 22. Under the terms of the Credit Agreement, Allied agreed to loan the Debtor $1500 in cash, and the Debtor agreed to repay the $1500 along with interest accruing at a rate of 0.75% per day, which equates to an
Before signing this Agreement, you should carefully review the Arbitration Agreement located on pages 5 and 6. The Arbitration Agreement provides that all Claims arising from or relating to this Agreement or any other agreement that you and we have ever entered into must be resolved by binding arbitration if the person or entity against whom a Claim is asserted elects to arbitrate the Claim. Thus, if the person or entity against whom you assert a Claim elects to arbitrate the Claim, then you will not have the following important rights:
• Yоu may not file or maintain a lawsuit in any court except a small claims court.
• You may not join or participate in a class action, act as a class representative or a private attorney general, or consolidate your Claim with the claims of others.
• You will have to pay the arbitration firm certain fees in order to commence an arbitration proceeding, unless you ask us to pay those fees to the arbitration firm for you.
• You give up your right to have a jury decide your Claim.
• You will not be afforded the procedural, pre-trial discovery and appellate rights in an arbitration proceeding that you would enjoy in a court or judicial proceeding.
If you do not want tо arbitrate all Claims as provided in the Arbitration Agreement, then you have the right to reject the Arbitration Agreement. To reject arbitration, you must deliver written notice to us at the following address within 30 days following the date of this Agreement: Allied Cash Advance, Attn: Arbitration Opt-Out, P.O. Box 36381, Cincinnati, Ohio 45236. Nobody else can reject arbitration for you; this method is the only way you can reject the Arbitration Agreement. Your rejection of the Arbitration Agreement will not affect your right to credit, how much credit you receive, or any contract term other than the Arbitration Agreement.
Mot. to Compel Ex. B, at 2.
Bankruptcy Proceeding
On January 11, 2017, (the "Petition Date") the Debtor filed a voluntary petition under chapter 13 of the Bankruptcy Code in this Cоurt (the "Bankruptcy Case"). On March 21, 2017, Allied filed proof of claim 8-1 in the Bankruptcy Case in the amount of $2756.92 for "Money loaned" ("Claim 8-1"). The Debtor filed her initial objection to Claim 8-1 on August 29, 2017, alleging that Allied had "neither attached a copy of the writing upon which the claim is based nor a statement of the circumstances of the loss or destruction of such writing" in contravention of Rule 3001 of the Federal Rules of Bankruptcy Procedure (the "Bankruptcy Rules"). Obj. Claim No. 8-1 & Mem. Supp. Thereof ¶ 13, In re Taylor , No. 17-30142-KRH (Bankr. E.D. Va.), ECF No. 29. On September 1, 2017, the Court entered an order confirming the Debtor's chapter 13 plan. Order Confirming Plan,
On September 28, 2017, Cerastes filed a transfer of claim, indicating that Allied had transferred Claim 8-1 to Cerastes. Transfеr Claim Other Than Security, In re Taylor , No. 17-30142-KRH (Bankr. E.D. Va.), ECF No. 38.
Adversary Proceeding
On January 15, 2018, the Debtor initiated this Adversary Proceeding by filing a complaint against Allied and Cerastes. Compl. Objecting Claim No. 8-1 & No. 8-2, Damages, Costs, & Att'y Fees Pursuant FDCPA
On March 15, 2018, the Debtor filed the Amended Complaint. The Amended Complaint contained five counts. Count I objects to Claims 8-1 and 8-2 on the grounds that fees and interest were assessed after the Petition Date, the claims were not properly identified as open-end credit, and Clаim 8-2 falsely asserted that no interest or fees had been added. Count II seeks to disallow the claims pursuant to section 502(b)(1) of the Bankruptcy Code because they are unenforceable under Virginia Law governing consumer finance and because they neither provide the writing underlying the claims nor provide all information required for a claim based on open-end credit as required by Bankruptcy Rule 3001. Count II also seeks to assert a class claim objection against Allied on behalf of other similarly situated debtors in the Eastern District of Virginia.
On March 29, 2018, the Court received, among other filings, (i) Allied's Motion to Dismiss the Amended Complaint, Mot. Dismiss Pursuant Fed. R. Civ. P. 12(b)(1) & 12(b)(6); & Mem. P. & A., ECF No. 35 ("Allied's Motion to Dismiss"),
On April 12, 2018, the Debtor filed several responses, including a response to the Motion to Compel. Pls.' Mem. Opp'n Def. Allied's Mot. Compel Arb., ECF No. 47. Allied filed replies to the Debtor's responses on April 19, 2018. See Allied's Reply Supp. Mot. Entry Order Staying Adv. Pro. & Compelling Arb., ECF No. 53. The Court set a hearing on, among other motions, Allied's Motion to Dismiss and the Motion to Compel for July 24, 2018. Prior to the hearing on July 24, 2018, Allied submitted a new motion asking the Court to certify the questions of state law, pertinent tо Counts II and III of the Amended Complaint, to the Supreme Court of Virginia. See Mot. Certif. Questions State Law; & Mem. P. & A., ECF No. 71 ("Motion for Certification").
On August 31, 2018, the Supreme Court of Virginia respectfully declined to accept the certified questions of state law that the Court had submitted to it. See Letter, ECF No. 81. On September 18, 2018, the Supreme Court of Virginia denied Allied's motion for reconsideration of the certification of questions of state law. See Letter, ECF No. 88.
On November 8, 2018, the Virginia Attorney General filed a motion to intervene and file pleadings in intervention in this Adversary Proceeding. Commonwealth's Mot. Leave File Pleadings Interven., ECF No. 108 ("Motion to Intervene"). The Virginia Attorney General alleged that it met the criteria for intervening in this Adversary Proceeding under Federal Rule of Civil Procedure 24(b) as incorporated by Bankruptcy Rule 7024. Mot. to Intervene 1. The Virginia Attorney General attached as an exhibit its proposed complaint in intervention, which seeks disallowance of Allied's claim against the Debtor for violation of Virginia consumer finance laws and Virginia usury law and seeks relief from Allied in the form of "restitution, civil penalties, attorney's fees and costs, as well as injunctive relief" arising out of Allied's "loans that the Commonwealth alleges are void."
At the Hearing, after entertaining arguments from all parties, the Court granted the Motion to Intervene, permitting the Virginia Attorney General to intervene in this Adversary Proceeding. The Court also denied the Motion to Compel. The Court took Allied's Motion to Dismiss under advisement and granted Cerastes's Motion to Dismiss with respect to Count V of the Amended Complaint.
Analysis
In its Motion to Compel, Allied asks the Court to stay this Adversary Proceeding and refer Counts II and III of the Debtor's Amended Complaint to arbitration "pursuant to the agreement to arbitrate set forth in the [Credit] Agreement." Mot. to Compel ¶ 13. The Motion to Compel also asks the Court to determine that Counts II and III are "non-core proceedings that are otherwise related to a case under title 11."
The Federal Arbitration Act provides that written contracts to arbitrate "shall be valid, irrevocable, and enforceable, save upon grounds as exist at law or equity for the revocation of any contract."
Arbitration agreements, though "on an equal footing with other contracts," are not inviolate. Id. at 339,
In Moses v. CashCall , the United States Court of Appeals for the Fourth Circuit applied this framework in the bankruptcy context. The Fourth Circuit recognized that sending a constitutionally core claim to arbitration pursuant to an arbitration agreement would "inherently conflict with the purposes of the Bankruptcy Code." Id. at 72. See also Anderson v. CreditOne Bank, N.A. (In re Anderson ),
The Fourth Circuit recognized the distinction the Supreme Court had drawn in Stern v. Marshall ,
In CashCall , on facts strikingly similar to those presented in the case at bar, a loan servicer filed a motion asking the bankruptcy court to compel arbitration for two of a debtor's claims: a claim to declare the loan between the loan servicer and debtor illegal and void under North Carolina law and a claim to obtain damages for the loan servicer's debt collection practices. Id. at 68. The Fourth Circuit held that the first claim was constitutionally core becаuse "the validity of the Loan Agreement 'would necessarily be resolved' in adjudicating CashCall's proof of claim and Moses' objections thereto." Id. at 70 (quoting Stern ,
The Fourth Circuit held that the second claim in CashCall , a counterclaim seeking
Of importance to the Fourth Circuit was that the counterclaim was not related to the debtor's proof of claim. The counterclaim involved "an allegation that CashCall sought to collect on an invalid debt." Id. at 85. The constitutionally non-core litigation surrounding the counterclaim was "entirely peripheral to the core claim" dealing with the allowance of the proof of claim. Id. at 86. The counterclaim would not necessarily be resolved in the claims allowance process but would "require detailed and time-consuming findings regarding CashCall's conduct in trying to collect on the loan, other violations of the state statute, and damages like emotional distress." Id. at 85. Although tangentially related to the constitutionally core function of the bankruptcy court to administer the claims allowance process, the counterclaim primarily implicated the collection process, not "whether an individual was owed money by a debtor." Id. The Fourth Circuit concluded there was "no reason to believe that arbitration in these circumstances would substantially interfere with Moses's bankruptcy and present an inherent conflict with the purposes of the Bankruptcy Code." Id. at 86.
Based on this analysis of the Fourth Circuit's opinion in CashCall , the Court finds that Counts II and III of the Amended Complaint present constitutionally core claims and that referring those core claims to arbitration would inherently conflict with the purposes of the Bankruptcy Code in contravention of Fourth Circuit precedent. The Debtor asks the Court in Count II of her Amended Complaint to disallow Allied's claim because it is unenforceable under Virginia law. Am. Compl. ¶ 101. The Debtor alleges that Allied charged her 273.75% interest plus an origination fee оf $100.00. Id. ¶ 92. The Debtor maintains that because Allied did not obtain a consumer finance license and does not otherwise qualify under the exception provided by section 6.2-312(A) of the Virginia Code, Allied's loan to her is null and void. Id. ¶¶ 89-91, 93-99. The Debtor also requests in Count II that the Court certify a class of similarly situated claimants under Federal Rule of Civil Procedure 23(a) as incorporated by Bankruptcy Rule 7023. Id. ¶¶ 79-88; see also Fed. R. Bankr. P. 7023.
The relief requested in Count II is substantially similar to that requested in the first claim in CashCall , which "sought a declaratory judgment that CashCall's loan was illegal and unenforceable, in violation of
In Count III, the Debtor asks the Court to determine that Allied's credit was usurious such that it is not entitled to any interest pursuant to section 6.2-304 of the Virginia Code. Am. Compl. ¶¶ 105-16. Like Count II, it also seeks to сertify a class of claimants similarly situated to the Debtor under Federal Rule of Civil Procedure 23(a).
Count III attacks the loans Allied made to the Debtor and to other similarly situated debtors as null and void under section 6.2-1541 of the Virginia Code, which would invalidate the contract Allied is using as the basis for its claims. Count III also asks the Court to find that "Allied knowingly filed Proofs of Claim on null and void loans, attempting to collect debts that cannot be enforced against debtors in bankruptcy pursuant to
Unlike the counterclaim in CashCall , which the Fourth Circuit deemed to be
Count III would necessarily be resolved by the Court in the claims allowance process when considering Allied's proofs of claim.
The Court also denied the Motion to Compel for a second reason. A court should not compel arbitration in scenarios where it would hinder the ability of an agency to pursue the relief it is statutorily charged with seeking. In light of the Court's decision to grant the Virginia Attorney General's Motion to Intervene in this Adversary Proceeding, referring Counts II and III to arbitration would violate the Supreme Court's explicit command in EEOC v. Waffle House, Inc.
Conclusion
For the foregoing reasons, the Motion to Compel is denied. A separate order shall issue.
Notes
Mot. Entry Orders (I) Staying Adv. Pro. & Compelling Arb. & (II) Determining Class Action Claims this Pro. Are Non-Core Pursuant
Am. Compl. Objecting Claim No. 8-1 & No. 8-2, Damages, Costs, & Att'y Fees Pursuant FDCPA
A distinction is drawn here between statutorily core and constitutionally core proceedings as it affects the jurisdictional analysis for bankruptcy courts for reasons stated infra .
Allied challenges this position in its Motion to Compel, arguing that "the Class Action Claims are non-core proceedings otherwise related tо a case under title 11" and "do not qualify under any of the sixteen core proceedings listed in
While the Debtor objects to Allied's claim and requests relief on behalf of her herself in Counts II and III of the Amended Complaint, she also requests class certification on the grounds that other debtors in the Eastern District of Virginia have been similarly affected by Allied's common course of conducting business by allegedly charging interest in excess of the legal limit. The Court has not yet addressed the issue of class certification on either Count II or Count III.
See Fed. R. Bankr. P. 3001(e)(2).
The Debtor alleges that her transaction history on the account shows that in the five-and-one-half month period between the time hеr loan was funded and the Petition Date, she repaid Allied a total of $795.62. Am. Compl. ¶ 69.
The Bankruptcy Rules require an objection to the allowance of a claim to be brought as part of an adversary proceeding when it includes a demand for the recovery of property, Fed R. Bankr. P. 7001(1), equitable relief,
The claim objection class members are defined as "[a]ll debtors in the Bankruptcy Court for the Eastern District of Virginia who, before filing bankruptcy, entered into a credit agreement with Allied based upon a purportedly open-end credit basis, and a claim was filed regarding the agreement." Am. Compl. ¶ 79. The Court has not addressed the merits of the proрosed class certification.
Count IV of the Amended Complaint was dismissed without prejudice by consent order. Agreed Order Dismissing Without Prejudice Class Claim Against Cerastes, LLC Violations FDCPA (15 U.S.C. § 1692e ), ECF No. 50.
At the Hearing, the Court ruled that it would dismiss Count V as to Cerastes.
Allied's Motion to Dismiss asks the Court to determine whether the Debtor's credit agreement with Allied violated Virginia's consumer finance law and usury law. Specifically the Court must decide whether the credit agreement qualifies as an open-end credit facility. If the Court determines that the credit agreement is actually a closed-end facility, then the agreement between the Debtor and Allied would be void and unenforceable because Allied would not meet the exception provided by Virginia to its usury law.
Allied brought the Motion for Certification under section 105 of the Bankruptcy Code and Rule 5:40 of the Rules of the Supreme Court of Virginia. The Motion for Certification asserted that the interpretation of Allied's credit agreement with the Debtor and the legal meaning of section 6.2-312 of the Virginia Code were questions of Virginia law for which there was no controlling state court precedent. The Motion for Certification also represented that the resolution of these state law questions was determinative of the relief sought by the Debtor in Counts II and III of the Amended Complaint.
On September 6, 2018, Allied filed a "motiоn for reconsideration of denial of certified question" with the Supreme Court of Virginia. See Letter, ECF No. 88.
While it was not argued by any party at the Hearing, the Court questioned whether legal grounds exist for revocation of the arbitration contract if the Credit Agreement was in fact void as the Virginia Attorney General maintains. Query whether there exists consideration to support the contract if the agreement containing the Arbitration Provision is void.
The distinction between a constitutionally core claim and a "Stern claim" is whether the counterclaim arises out of the same nucleus of fact. See Stern ,
See supra note 9. While class actions are unusual in the bankruptcy context, they may be permissible under certain circumstances. See Gentry v. Siegel ,
As stated by Allied in its Motion for Certification:
[T]he legal meaning of Virginia Code § 6.2-312 is determinative of the issues presented in Counts II and III of the Amended Complaint.... [T]he fulcrum of Taylor's class claims is a dispute over the legal meaning of Virginia Code § 6.2-312. She contends that the Origination Fee is a "finance charge under the statute, and that, as such, Allied did not qualify for the open-end credit exemption because, according to Taylor, finance charges can only be assessed on unpaid balances following a 25-day grace period. If Taylor is correct, then Allied does not qualify for the exemption; if Taylor is incorrect on either of these questions of law, then her claims must be dismissed.
Mot. for Certification ¶¶ 23-24.
The Supreme Court explained that the FAA directs courts "to place arbitration agreements on equal footing with other contracts, but it 'does not require parties to arbitrate when they have not agreed to do so.' " Id. at 293,