gavel

By George Kennedy

Today, in the civil case of Hayes v. Delbert Services Corporation, the Fourth Circuit reversed the order of the district court compelling arbitration under the Federal Arbitration Act. The Fourth Circuit held that the arbitration agreement at issue was unenforceable as a matter of law, and accordingly reversed the district court order and remanded for further proceedings.

The Origin of the Dispute: Payday Loans Issued by Western Sky

The plaintiff, James Hayes, received a payday loan from Western Sky Financial, LLC, a lender owned and operated by the Cheyenne River Sioux Tribal Nation. Under the terms of the loan, Hayes received a loan of $2525 at an annual rate of 139.12% over four years, meaning that Hayes was set to pay over $14,000 for a loan of just $2525.  The exorbitant rates charged by Western Sky were not the issue of this case. Western Sky’s lending practices violated a number of federal and state laws. Eventually, extended litigation and prosecution caused Western Sky to stop issuing loans in 2013.

The issue in this case, however, concerned Western Sky’s use of collection agencies. Notwithstanding the end of Western Sky’s lending business, the corporation continued to pursue unpaid loan balances through the use of these agencies. One of these agencies was Delbert Services Corporation, the defendant. Delbert’s actions as a debt collector raised issues of their own, and Hayes filed several claims against Delbert in federal district court, prompting the litigation of this case.

The District Court Compels Arbitration

Hayes filed a putative class action with a number of similarly situated plaintiffs in the Eastern District of Virginia. In the class action, Hayes sought to obtain relief from Delbert’s allegedly unlawful collection practices. Hayes alleged that Delbert violated both the Fair Debt Collection Practices Act and the Telephone Consumer Protection Act in the carrying out of its debt collection practice. Delbert countered that Hayes was precluded from suing in federal court because of a binding arbitration clause and forum selection clause in the loan agreement Hayes had previously signed with Western Sky. In response, Hayes argued that the  forum selection and arbitration provisions in the loan agreement were unenforceable.

The district court agreed with Hayes that the loan agreement’s forum selection clause was unenforceable, but ultimately sided with Delbert in ruling that it would enforce the arbitration clause. Accordingly, Hayes appealed the order compelling arbitration.

Fourth Circuit Holds that The Arbitration Agreement Is Unenforceable as a Matter of Law

The Fourth Circuit disagreed with the district court’s ruling, and held that the arbitration agreement was legally unenforceable.   In its analysis, the Fourth Circuit focused on two key provisions of the loan agreement. The first provision stated that “[t]his Loan Agreement is subject solely to the exclusive laws and jurisdiction of the Cheyenne River Sioux Tribe.” The second provision stated “no United States state or federal law applies to this Agreement.” The Fourth Circuit held that these two provisions were extremely problematic. As the court explained, these provisions allow the “disavowal of state and federal law,” and the substitution of the law of the Cheyenne River Sioux Tribe in its place.

The Fourth Circuit adamantly maintained that arbitration agreements may never be used to totally circumvent federal and state law. While the court acknowledged that the Federal Arbitration Act gives parties fairly wide discretion to structure arbitration in the way they wish, the court explained that this discretion does not allow parties to dodge federal and state law completely. Doing so, the Fourth Circuit argued, would endanger the federally protected civil rights of individuals privy to arbitration awards. The Fourth Circuit held that this issue of the arbitration agreement circumventing state and federal law was so problematic and so central to the “essence” of the contract that the arbitration agreement as a whole was unenforceable.

Reversed and Remanded

Accordingly, the Fourth Circuit reversed the order of the district court compelling arbitration, and remanded the case for further proceedings.

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