The plaintiffs, all North Carolina residents, borrowed money at allegedly illegal interest rates from one of the out-of-state defendants and asked the Court to compel arbitration of their predatory lending claims pursuant to arbitration provisions in the loan agreements. The plaintiffs alleged that all of the defendants were under the complete dominion and control of Select Management Resources, L.L.C., and sought to recover damages and penalties under the North Carolina Consumer Finance Act, N.C. Gen. Stat. § 53-164 et seq., the N.C. Gen. Stat. § 24-1.1 et seq., and under the North Carolina Unfair and Deceptive Trade Practices Act. N.C. Gen. Stat. § 75-1.1
Select argued that the North Carolina Consumer Finance Act is an unconstitutional violation of the Commerce Clause as applied to them because all lending activities took place out of state and each is an out-of-state business.
Under the Federal Arbitration Act ("FAA"), a litigant can compel arbitration by proving:
(1) the existence of a dispute between the parties,
(2) a written agreement that includes an arbitration provision which purports to cover the dispute,
(3) the relationship of the transaction, which is evidenced by the agreement, to interstate or foreign commerce, and
(4) the failure, neglect or refusal of the defendant to arbitrate the dispute.
It was not disputed that the first and third requirements were met. The defendants, however, disputed that the fourth requirement as to all plaintiffs and dispute the second only as to certain agreements. Select was not a signatory to any agreement with an arbitration provision and the court rejected the proposition that corporate affiliation was sufficient to establish agency or to pierce the corporate veil.
Several of the title loan agreements included a provision that "[t]o the extent that any Claim or defense to any
Claim requires a determination under the United States Constitution (a 'Constitutional Determination'), such
Constitutional Determination must be decided by a court, not an arbitrator." The district court found that, because it contained conflicting provisions the contract was susceptible to more than one reasonable interpretation, with the FAA establishing that "any doubts about the scope of arbitrable issues should be resolved in favor of arbitration," including when "the problem at hand is the construction of the contract language itself" or a "defense to arbitrability." Moses H. Cone Mem'l Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 24-25 (1983). Accordingly the defendant's request that the court determine the constitutionality of the North Carolina Consumer Finance Act prior to arbitration, was denied.
This is a somewhat strange (hah!) inversion, as the consumers sought to compel arbitration with the lenders (who certainly drafted the contracts) sought to avoid such.
For a copy of the opinion, please see: