Summary:
Knox obtained payday loans from loan servicers for Community State Bank (CSB), an out of state-chartered bank, and subsequently brought suit in state court alleging various violations of North Carolina lending and usury laws, as well as unfair and deceptive trade practices.
In response, the loan servicers advanced on two fronts- first, the loan servicers sought to have the matters removed to federal court in the Eastern District of North Carolina, arguing that the National Bank Act (NBA) and Federal Deposit Insurance Act (FDIA) completely pre-empted state-law usury claims. The district court remanded to state court, finding that the NBA did not completely pre-empt state law usury claims and accordingly the complaint did not present a federal question and, subject to 28 U.S.C. § 1441(b), lacked subject matter jurisdiction.
Secondly, the loan servicers (apparently dissatisfied with both state court and the Eastern District federal court) brought a petition in the Middle District of North Carolina seeking to compel arbitration under the Federal Arbitration Act (FAA) at 9 U.S.C. § 4, which allows a federal district court to compel arbitration if that court would, “save for [the arbitration] agreement,” have “ subject matter of a suit arising out of the controversy between the parties.” The Middle District court found only state law causes of action and the loan servicers again argued for federal jurisdiction based on complete pre-emotion of state law. The court then found that the loan servicers were “non-bank entities” with no basis for seeking protection under the FDIA, leaving only state law claims against non-bank entities. (The Middle District also found that the Eastern District order was entitled to preclusive effect on this issue.) Further, the district court held that CSB could not compel arbitration under the FAA, as Knox had disclaimed any allegations against CSB, CSB had ceased lending in North Carolina for long enough that the Statute of Limitations had run on any loan previously made, and because the loan servicers were obliged to indemnify CSB for any losses. Accordingly, CSB was not an “aggrieved party” as required by 9 U.S.C. § 4. CSB and the loan servicers appealed.
The Court of Appeals agreed with the Eastern District Court that the claims by Knox were directed at the loan servicers not CSB and thus any pre-emption flowing from the FDIA did not apply. The loan servicers relied heavily on Discover v. Vaden (Vaden I), 489 F.3d 594 (4th Cir. 2007), which held that state law usury claims asserted against a loan servicer, were in actuality asserted against the originating lender, a state-chartered bank, and thus pre-empted by the FDIA. This decision was reversed and remanded on other grounds, See Vaden v. Discover Bank (“Vaden II”), 556 U.S. 49 (2009). Questioning the entire validity of its own opinion in Vaden I, the 4th Circuit found that even if still good law, the facts asserted by Knox distinguished it from Vaden I- Knox only asserted claims against the loan servicers and the indemnification agreement was reversed from that in Vaden I, with the loan servicers in Knox instead being ultimately responsible for any claims. As a result, loan servicers were not allowed to compel arbitration.
The 4th Circuit express recognized that its holding was contrary to the result reached by the 11th Circuit in Community State Bank v. Strong, 651 F.3d 1241 (1tth Cir. 2011), where CSB’s petition for arbitration under the FAA was “freestanding” and without defined contours as to the controversy. The 4th Circuit, however, found that there was no controversy between Knox and CSB, with any possible future claims being pure speculation by CSB.
For a copy of the opinion, please see:
Community State Bank v. Knox- Arbitration and Aggrieved Parties.pdf
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