Snipes v. TitleMax of Va. ( 2022 )

IN THE COURT OF APPEALS OF NORTH CAROLINA
2022-NCCOA-558
No. COA21-374
Filed 16 August 2022
Guilford County, No. 19-CVD-2593
JENNIFER SNIPES, Plaintiff,
v.
TITLEMAX OF VIRGINIA, INC., Defendant.
Appeal by plaintiff from order entered 24 March 2021 by Judge Caroline
Pemberton in District Court, Guilford County. Heard in the Court of Appeals 11
January 2022.
Brown, Faucher, Peraldo & Benson, PLLC, by Drew Brown, for plaintiff-
appellant.
Troutman Pepper Hamilton Sanders, LLP, by Jason D. Evans and William J.
Farley III, for defendant-appellee.
STROUD, Chief Judge.
¶1 Plaintiff, Jennifer Snipes, appeals from an order vacating an arbitration award
in her favor and dismissing her claims against Defendant, TitleMax of Virginia.
Because the trial court properly reviewed the arbitrator’s award based on the essence
of the contract doctrine and, upon de novo review, properly found the arbitrator’s
award did not draw its essence from the parties’ contract, we affirm the vacatur of
the arbitrator’s award. But because the trial court could not dismiss Plaintiff’s claims
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based on its vacatur of the arbitrator’s award, we remand for the trial court, in its
discretion, to either direct a rehearing by the arbitrator or decide the issues originally
sent to the arbitrator.
I. Background
¶2 This case arises out of a “Motor Vehicle Title Loan Agreement” between
Plaintiff and Defendant from August 2016 in which Plaintiff received a loan of just
under $2,500 secured by title to her vehicle with an interest rate and fees of
approximately 144%. While Plaintiff lives in North Carolina, she traveled to
Virginia, where Defendant is based, to enter into the Loan Agreement. The Loan
Agreement contains two provisions pertinent to this appeal. A provision entitled
“Governing Law, Assignment and Amendment” provides, in relevant part, “This Loan
Agreement shall be governed by the laws of the State of Virginia, except that the
Waiver of Jury Trial and Arbitration Provision is governed by the Federal Arbitration
Act, 9 U.S.C. §§ 1–16 (‘FAA’).”
¶3 The “Waiver of Jury Trial and Arbitration Provision” provides for an arbitrator
to “issue a final and binding decision” on any dispute that arises under the Loan
Agreement, with the term “dispute” being “given the broadest possible meaning and
includ[ing], without limitation” inter alia “all federal or state law claims, disputes or
controversies, arising from or relating directly or indirectly to th[e] Loan Agreement.”
(Capitalization altered.)
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¶4 On 14 January 2019, Plaintiff filed a complaint against Defendant arising out
of the Loan Agreement. Specifically, Plaintiff alleged the Loan Agreement violated
“the North Carolina Consumer Finance Act, North Carolina usury statutes, and the
North Carolina Unfair and Deceptive Trade Practices Act.” “Plaintiff also sought
punitive damages.” Pursuant to the Loan Agreement’s arbitration provision, Plaintiff
included a motion to compel arbitration in her complaint explaining she filed the
action “to toll the application of the statute of limitations.” In response, Defendant
filed a motion to dismiss the case for improper venue under North Carolina Rule of
Civil Procedure 12(b)(3), N.C. Gen. Stat. § 1A-1, Rule 12(b)(3) (2019), on the grounds
Plaintiff did not live in the county where the case was filed and Defendant did not
have an office there.
¶5 On 22 May 2019, the trial court entered an order denying Defendant’s motion
to dismiss, granting Plaintiff’s motion to compel arbitration, and staying litigation
“pending completion of the arbitration ordered.” The parties then “arbitrated their
dispute on the papers” they had submitted “without an evidentiary hearing.”
¶6 On 16 November 2020, the arbitrator issued an award in favor of Plaintiff for
approximately $12,800—representing treble damages. In the award, the arbitrator
explained he had to choose between applying Virginia law and applying North
Carolina law to the dispute as well as the importance of the difference between those
two options:
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This case involves the extension of a loan to Claimant, a
North Carolina resident, secured by an automobile titled in
North Carolina, where the loan documents were signed in
Respondent’s office in Virginia. The loan carried an
interest rate of nearly 150%, a rate that clearly violates the
North Carolina Consumer Finance Act (the “CFA”), but
that is arguably not illegal in Virginia. The question to be
resolved is whether the language of the CFA applies to the
transaction at issue here.
Despite this recognition, the arbitration award never mentioned the Loan
Agreement’s express Virginia choice of law provision. The arbitration award
exclusively focuses on North Carolina’s Consumer Finance Act in its primary analysis
before also discussing an argument Defendant made based on the Commerce Clause
of the United States Constitution and addressing damages and fees.
¶7 The same day the arbitrator entered his award, Plaintiff filed a motion to
confirm the arbitration award and enter judgment. On 15 February 2021, Defendant
filed a motion to vacate the arbitration award. In its motion, Defendant argued the
trial court should vacate the arbitration award for two reasons: (1) because the award
“strayed both from the interpretation and application of the agreement” in that it
inter alia “refus[ed] to enforce the parties’ valid choice-of-law provision” and (2)
because the arbitrator “showed a manifest disregard for the law” by refusing to
enforce the choice-of-law provision and by ignoring “a well-established principle of
constitutional law,” the Commerce Clause. As part of its prayer for relief in its motion
to vacate, Defendant also asked the trial court to dismiss Plaintiff’s claims and enter
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judgment on its behalf.
¶8 On 24 March 2021, the trial court entered an order “granting Defendant’s
motion to vacate [the] arbitration award and denying Plaintiff’s motion to confirm
[the] arbitration award.” (Capitalization altered.) After making Findings of Fact on
the procedural history of the case, the trial court made Conclusions of Law explaining
how it could only vacate an arbitration award on limited grounds including manifest
disregard of law and an award failing to draw its essence from the parties’ agreement.
Applying those doctrines to the arbitration award, the trial court concluded the Loan
Agreement “contains an unambiguous, valid, and enforceable choice-of-law provision
confirming that Virginia law applies” and the arbitration award “demonstrated a
manifest disregard of the law” and “fail[ed] to draw its essence from the Loan
Agreement” by ignoring the choice of law provision favoring Virginia law and instead
applying North Carolina law. As a result, the trial court granted Defendant’s motion
to vacate the arbitration award and denied Plaintiff’s motion to confirm the
arbitration award. Based on its decision to vacate the arbitration award, the trial
court also dismissed Plaintiff’s claims stating: “Plaintiff’s claims against Defendant
are hereby dismissed with prejudice.”
¶9 On 20 April 2021, Plaintiff filed a written notice of appeal from the trial court’s
order.
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II. Analysis
¶ 10 Plaintiff contends the trial court erred by “granting Defendant-Appellee’s
motion to vacate [the] arbitration award” and by “denying Plaintiff-Appellant’s
motion to confirm [the] arbitration award.” (Capitalization altered.) As both parties
agree, these two arguments are two sides of the same coin because under the Federal
Arbitration Act (“FAA”)1 a court “must” confirm an arbitration award “unless the
award is vacated, modified, or corrected as prescribed in sections 10 and 11” of the
Act. 9 U.S.C. § 9. We first provide background on the law governing vacatur under
the FAA to help situate the parties’ specific arguments on the trial court’s order
vacating the arbitrator’s award.
¶ 11 “The FAA declares a liberal policy favoring arbitration,” such that “[j]udicial
review of an arbitration award is severely limited in order to encourage the use of
arbitration and in turn avoid expensive and lengthy litigation.” See Carpenter v.
Brooks, 139 N.C. App. 745, 750–51, 534 S.E.2d 641, 645 (2000) (citing Moses H. Cone
1The FAA governs this case because the title loan between Plaintiff and Defendant specifies
the arbitration clause “is governed by the” FAA. See In re Fifth Third Bank, Nat. Ass’n, 216
N.C. App. 482, 487, 716 S.E.2d 850, 854 (2011) (explaining the FAA governed because the
arbitration clause of the promissory note in question stated the FAA would “apply to the
construction, interpretation, and enforcement of this arbitration provision” (quotations
omitted)). As the Supreme Court of the United States has explained, state courts have a
“prominent role in arbitral enforcement” under the FAA. See Badgerow v. Walters, ___ U.S.
____, _____, 212 L. Ed. 2d 355, 363 (2022) (quotations and citation omitted) (stating as part
of an analysis on how the FAA does not provide independent jurisdiction for “applications to
confirm, vacate, or modify arbitral awards (under Sections 9 through 11)”).
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Hospital v. Mercury Constr. Corp., 460 U.S. 1, 74 L. Ed. 2d 765 (1983)) (including
“liberal policy” quote immediately before listing FAA grounds for vacating an
arbitration award); First Union Securities, Inc. v. Lorelli, 168 N.C. App. 398, 399–
400, 607 S.E.2d 674, 676 (2005) (including other quote immediately after listing FAA
grounds for vacatur). This policy favoring arbitration by limiting judicial review
manifests in two ways. First, “under the FAA, an arbitration award is presumed
valid, and the party seeking to vacate it must shoulder the burden of proving the
grounds for attacking its validity.” First Union, 168 N.C. App. at 400, 607 S.E.2d at
676 (quoting Carpenter, 139 N.C. App. at 751, 534 S.E.2d at 646) (internal quotations,
citations, and alterations omitted).
¶ 12 Second, the FAA limits vacatur of arbitration awards to the situations listed
in § 10 of the statute. See Carpenter, 139 N.C. App. at 750–51, 534 S.E.2d at 645–46
(explaining “[u]nder the FAA, arbitration awards may be vacated only in limited
situations” before listing the grounds in § 10). Specifically, § 10(a) limits vacatur to
the following situations:
(1) where the award was procured by corruption, fraud, or
undue means;
(2) where there was evident partiality or corruption in the
arbitrators, or either of them;
(3) where the arbitrators were guilty of misconduct in
refusing to postpone the hearing, upon sufficient cause
shown, or in refusing to hear evidence pertinent and
material to the controversy; or of any other misbehavior by
which the rights of any party have been prejudiced; or
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(4) where the arbitrators exceeded their powers, or so
imperfectly executed them that a mutual, final, and
definite award upon the subject matter submitted was not
made.
9 U.S.C. § 10. “The text of the FAA” and the “national policy favoring arbitration
with just the limited [judicial] review needed to maintain arbitration’s essential
virtue of resolving disputes straight away” in turn “compel[] a reading of the §[] 10 .
. . categories as exclusive.” In re Fifth Third Bank, 216 N.C. App. at 487, 716 S.E.2d
at 854 (alterations from original omitted and own alterations added) (quoting Hall
Street Associates, L.L.C. v. Mattel, Inc., 552 U.S. 576, 588, 170 L. Ed. 2d 254, 265
(2008)).
¶ 13 The exclusivity of the § 10(a) categories does not require a party seeking
vacatur of an arbitration award or a court vacating such an award to cite the specific
language of the section; rather courts have at times read other doctrines into § 10’s
specific text. For example, the Supreme Court of the United States recognized the
essence of the contract doctrine fits within § 10(a)(4)’s provision for vacatur when the
“arbitrators exceeded their powers.” 9 U.S.C. § 10(a)(4); see Oxford Health Plans LLC
v. Sutter, 569 U.S. 564, 569–70, 186 L. Ed. 2d 113, 119–20 (2013) (explaining a court
can overturn the arbitrator’s determination under § 10(a)(4) only when the arbitrator
exceeded his contractually delegated authority by issuing an award based on his own
policy determinations rather than “drawing its essence from the contract” (quoting
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Eastern Associated Coal Corp. v. United Mine Workers of America, Dist. 17, 531 U.S.
57, 62, 148 L. Ed. 2d 354 (2000) (alterations omitted))).
¶ 14 The essence of the contract doctrine pre-existed Hall Street Associates’s
declaration § 10’s categories were exclusive. See Eastern Associated Coal Corp., 531
U.S. at 62, 148 L. Ed. 2d at 360 (a case from 2000 stating, “[A]n arbitrator’s award
must draw its essence from the contract and cannot simply reflect the arbitrator’s
own notions of industrial justice.” (quotations and citations omitted)). But, post-Hall
Street Associates, the doctrine was incorporated into one of the categories within §
10(a). See Oxford Health Plans, 569 U.S. at 569–70, 186 L. Ed. 2d at 119–20 (laying
out the essence of the contract doctrine as part of determining “the arbitrator did not
exceed his powers” under § 10(a)(4) (alterations omitted)).
¶ 15 Not all pre-existing doctrines necessarily survived Hall Street Associates,
however. For example, before Hall Street Associates, courts would vacate arbitration
awards when the arbitrator “manifestly disregarded the law.” See In re Fifth Third,
216 N.C. App. at 487–89, 716 S.E.2d at 854–55 (quoting Fourth Circuit case Three S
Delaware, Inc. v. DataQuick Information Systems, Inc., 492 F.3d 520, 529 (4th Cir.
2007), to explain manifest disregard of the law after recognizing appellant only cited
cases from before Hall Street Associates). As this Court has recognized, “the United
States Supreme Court has ‘not decided whether manifest disregard survives the
decision in Hall Street Associates . . . .’” In re Fifth Third Bank, 216 N.C. App. at 487–
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88, 716 S.E.2d at 854 (alterations from original omitted) (quoting Stolt-Nielsen S.A.
v. AnimalFeeds Int’l Corp., 559 U.S. 662, 672 n.3, 176 L. Ed. 2d 605, 616 n.3 (2010));
see also Wachovia Securities, LLC v. Brand, 671 F.3d 472, 483 (4th Cir. 2012) (noting
a federal circuit court split on the issue because the Fourth Circuit considers manifest
disregard still in existence in contrast to the Fifth and Eleventh Circuits).2
¶ 16 With this background on the FAA and the limited grounds on which it allows
judicial review, we now return to Plaintiff-Appellant’s specific arguments. Plaintiff
argues three grounds on which we should reverse the trial court’s decision to vacate
the arbitration award: (1) “the trial court impermissibly conducted a de novo review”
of the award; (2) “the essence of the contract doctrine does not apply” such that the
trial court could not have vacated the award on that ground; and (3) the arbitrator
“did not commit a manifest disregard of law” as the trial court found.3 (Capitalization
2 We cite Wachovia Securities on the circuit-split issue only for ease of reference because the
trial court relied on it in its order vacating the arbitration award here. For a discussion of
the circuit split more broadly, see generally Stuart M. Boyarsky, The Uncertain Status of the
Manifest Disregard Standard One Decade After Hall Street, 123 Dick. L. Rev. 167, 187–205
(2018) (recounting Hall Street Associates and the ensuing circuit split with decision from each
circuit).
3 Plaintiff also includes a sub-section arguing the arbitrator “had no obligation to further
explain his rejection of [Defendant]’s choice-of-law provision” in the award such that the lack
of explanation “certainly was no basis on which the trial court could properly vacate” the
award. The trial court’s order included a Conclusion of Law explaining “[t]he arbitrator
demonstrated a manifest disregard of the law by ignoring and refusing to enforce the
unambiguous choice-of-law provision in the Loan Agreement.” As a result, the further
explanation argument best fits within Plaintiff’s broader manifest disregard of law
argument.
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altered.)
¶ 17 We first address Plaintiff’s argument the trial court “impermissibly conducted
a de novo review” because if the manner of the trial court’s review was wrong, we
must reverse. See First Union Securities, 168 N.C. App. at 400, 607 S.E.2d at 676(“Judicial review of an arbitration award is severely limited . . . .”). Given the trial
court’s order rests on two independent grounds of essence of the contract and manifest
disregard, we can proceed on either basis. Given our courts and the Supreme Court
of the United States have thus far declined to answer whether manifest disregard
survived Hall Street Associates, see In re Fifth Third Bank, 216 N.C. App. at 487–88,
716 S.E.2d at 854–55 (explaining the U.S. Supreme Court has not decided the matter
before declining to determine whether manifest disregard is still valid), we will
address the trial court’s “essence of the contract” grounds first and only proceed to
“manifest disregard” if the trial court erred by vacating the arbitrator’s award on the
basis of the essence of the contract doctrine.
A. Applicable Law and Standard of Review
¶ 18 Before addressing the trial court’s review of the arbitrator’s award, we first
examine the applicable law and our standard of review of the trial court’s decision.
¶ 19 When reviewing orders based on federal statutes such as the FAA, we look to
a mix of state and federal court decisions. As this Court explained in In re Fifth Third
Bank:
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According to well-established law, when an “action is
brought under [a] Federal statute . . . in so far as it has
been construed by the Supreme Court of the United States,
we are bound by that construction.” Dooley v. R.R., 163
N.C. 454, 457–58, 79 S.E. 970, 971 (1913). However, “North
Carolina appellate courts are not bound, as to matters of
federal law, by decisions of federal courts other than the
United States Supreme Court.” Enoch v. Inman, 164 N.C.
App. 415, 420–21, 596 S.E.2d 361, 365 (2004) (citing
Security Mills v. Trust Co., 281 N.C. 525, 529, 189 S.E.2d
266, 269 (1972)). Even so, despite the fact that they are
“‘not binding on North Carolina’s courts, the holdings and
underlying rationale of decisions rendered by lower federal
courts may be considered persuasive authority in
interpreting a federal statute.’” McCracken & Amick, Inc.
v. Perdue, 201 N.C. App. 480, 488 n. 4, 687 S.E.2d 690, 695
n. 4 (2009) (quoting Security Mills, 281 N.C. at 529, 189
S.E.2d at 269), disc. review denied, 364 N.C. 241, 698
S.E.2d 400 (2010).
216 N.C. App. at 488–89, 716 S.E.2d at 855. Of course, we are also bound by decisions
of our Supreme Court and by prior panels of this Court. See, e.g., In re O.D.S., 247
N.C. App. 711, 721–22, 786 S.E.2d 410, 417 (2016) (“One panel of this Court cannot
overrule a prior panel of this Court, or our Supreme Court.” (citing In re Civil Penalty,
324 N.C. 373, 384, 379 S.E.2d 30, 37 (1989))).
¶ 20 Turning to “the standard of review of the trial court’s vacatur of [an]
arbitration award,” it “is the same as for any other order in that we accept findings
of fact that are not clearly erroneous and review conclusions of law de novo.”
Carpenter, 139 N.C. App. at 750, 534 S.E.2d at 645 (quotations and citation omitted).
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B. Trial Court’s Review
¶ 21 Plaintiff first argues “the trial court impermissibly conducted a de novo review
of” the arbitration award. (Capitalization altered.) Specifically, Plaintiff argues
“[t]he transcript of the proceedings demonstrates” the trial judge “simply
misunderstood the role of the court in connection with a request for the confirmation
of an arbitration award” in that she “impermissibly substituted her judgment for that
of” the arbitrator.
¶ 22 We reject Plaintiff’s argument because it improperly focuses on the hearing
rather than the written order. “The trial judge’s comments during the hearing as to
. . . law are not controlling; the written court order as entered is controlling.”
Fayetteville Publishing Co. v. Advanced Internet Technologies, Inc., 192 N.C. App.
419, 425, 665 S.E.2d 518, 522 (2008) (citing Draughon v. Harnett Cty. Bd. of Educ.,
158 N.C. App. 208, 215, 580 S.E.2d 732, 737 (2003), aff’d per curiam, 358 N.C. 131,
591 S.E.2d 521 (2004)). Thus, all the trial judge’s comments to which Plaintiff points
here are not controlling; we only review the entered written order vacating the
arbitrator’s award.
¶ 23 Turning to the written order, Plaintiff does not demonstrate the trial court
impermissibly conducted a de novo review. As laid out above, “[u]nder the FAA,
arbitration awards may be vacated only in limited situations.” Carpenter, 139 N.C.
App. at 750, 534 S.E.2d at 645. The trial court’s written order lists two alternative
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bases for vacating the arbitration award: (1) “the award fails to draw its essence from
the Loan Agreement” and (2) the arbitrator “demonstrated a manifest disregard of
the law.” We have already explained essence of the contract is an acceptable grounds
for review as the Supreme Court of the United States has determined it falls within
§ 10(a)(4) of the FAA. See Oxford Health Plans, 569 U.S. at 569–70, 186 L. Ed. 2d at
119–20 (laying out the essence of the contract doctrine as part of determining “the
arbitrator did not exceed his powers” under § 10(a)(4)). Thus, on at least one of the
alternative grounds, the trial court’s review was proper.
¶ 24 If at least one of the grounds for review was proper and with the uncertainty
around the continued existence of manifest disregard, we would not need to address
the propriety of the trial court’s review on that ground. First, we can consider
whether to uphold the trial court’s order based on the essence of the contract doctrine.
Second, even if we cannot uphold the order based on essence of the contract grounds,
we could determine the order needs to be reversed because, presuming arguendo
manifest disregard is still a valid ground, Defendant failed to show a manifest
disregard below. See In re Fifth Third Bank, 216 N.C. App. at 488, 716 S.E.2d at 855(concluding party failed to demonstrate manifest disregard of the law such that the
court did not need to “determine the extent, if any, to which ‘manifest disregard of
the law’ remains a valid non-statutory basis for vacating an arbitration award”).
Thus, only if we first determine the trial court improperly applied essence of the
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contract but correctly applied manifest disregard do we need to determine whether
the trial court properly reviewed for manifest disregard. Only in that scenario would
the existence of manifest disregard be dispositive such that we have to address the
question the Supreme Court of the United States and this Court have avoided. In re
Fifth Third Bank, 216 N.C. App. at 487–88, 716 S.E.2d at 854–55. We first evaluate
the essence of the contract ground.
C. Essence of the Contract
¶ 25 Plaintiff argues the trial court’s vacatur of the arbitration award based on the
essence of the contract doctrine “is erroneous in two regards.” First, Plaintiff argues
the doctrine does not apply because she did “not assert[] any breach of contract
claims.” Second, she contends even if it applies, the award “is, at a minimum,
rationally inferable from material terms contained in the parties’ loan agreement.”
¶ 26 As noted, essence of the contract is a doctrine that fits with the FAA provision
allowing for vacatur where the arbitrators “exceeded their powers.” 9 U.S.C. §
10(a)(4); see Oxford Health Plans, 569 U.S. at 569–70, 186 L. Ed. 2d at 119–20
(explaining a court can overturn the arbitrator’s determination under § 10(a)(4) only
when the arbitrator exceeded his contractually delegated authority by issuing an
award based on his own policy determinations rather than “drawing its essence from
the contract” (quoting Eastern Associated Coal, 531 U.S. at 62, 148 L. Ed. 2d 354)).
The bar for an arbitrator’s award drawing its essence from a contract is low; the
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arbitrator need only be “‘arguably construing or applying the contract.’” See Eastern
Associated Coal, 531 U.S. at 62, 148 L. Ed. 2d at 360 (explaining as long as the
arbitrator is doing that, “the fact that ‘a court is convinced he committed serious error
does not suffice to overturn his decisions.’” (quoting United Paperworkers Int’l Union,
AFL-CIO v. Misco, Inc., 484 U.S. 29, 38, 98 L. Ed. 2d 286 (1987)); see also Oxford
Health Plans, 569 U.S. at 573, 186 L. Ed. 2d at 122 (“Under § 10(a)(4), the question
for a judge is not whether the arbitrator construed the parties’ contract correctly, but
whether he construed it at all.”).
¶ 27 As an example of this low bar, in Oxford Health Plans, when the arbitrator
explained “his . . . decision was ‘concerned solely with the parties’ intent as evidenced
by the words’” of the relevant contract clause and performed a “textual analysis,” the
Supreme Court of the United States found the arbitrator was construing the contract
“focusing, per usual, on its language.” 569 U.S. at 570–71, 186 L. Ed. 2d at 120–21.
As a result, “to overturn his decision, [the Court] would have to rely on a finding that
he misapprehended the parties’ intent,” but “§ 10(a)(4) bars that course: It permits
courts to vacate an arbitral decision only when the arbitrator strayed from his
delegated task of interpreting a contract, not when he performed that task poorly.”
Id., 569 U.S. at 571–72, 186 L. Ed. 2d at 121.
¶ 28 The United States Court of Appeals for the Fourth Circuit (“Fourth Circuit”)
has also expanded upon the essence of the contract doctrine in a persuasive manner.
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It has clarified vacatur is appropriate for “an award that contravenes the plain and
unambiguous terms of the” contract. See Patten v. Signator Ins. Agency, Inc., 441
F.3d 230, 237 (4th Cir. 2006) (citing United Paperworkers Int’l Union, 484 U.S. at 38,
98 L. Ed. 2d 286) (explaining the “deferential” standard of review of arbitration
awards “does not require” affirming such an award). In other words, a court can
vacate an arbitration award on the grounds it fails to draw its essence from the
contract “when an arbitrator has disregarded or modified unambiguous contract
provisions or based an award upon his own personal notions of right and wrong.”
Three S Delaware, 492 F.3d at 528 (citing Patten, 441 F.3d at 235).
¶ 29 For example, in Patten, the Fourth Circuit considered an issue of the timeliness
of the arbitration demand when the governing agreement “contained no explicit time
limitation.” 441 F.3d at 236. The Fourth Circuit found the arbitrator’s award “failed
to draw its essence from the governing arbitration agreement” because the
arbitrator’s imposition of a one-year limitations period “contradicted the plain and
unambiguous terms” of the agreement. Id. at 236–37. While that example covers
interpreting the scope of arbitration, the essence of the contract doctrine extends to
other provisions as well. E.g. MCI Constructors, LLC v. City of Greensboro, 610 F.3d
849, 861–62 (4th Cir. 2010) (applying doctrine to aspects of contract related to
“damages claim”).
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¶ 30 Here, the trial court vacated on essence of the contract grounds by explaining:
“Additionally, the award fails to draw its essence from the Loan Agreement as the
application of North Carolina law is inconsistent with the plain language of the Loan
Agreement stating that Virginia law applies.” In a section on “Governing Law,
Assignment and Amendment,” the Loan Agreement states: “This Loan Agreement
shall be governed by the laws of the State of Virginia, except that the Waiver of Jury
Trial and Arbitration Provision is governed by the Federal Arbitration Act, 9 U.S.C.
§§ 1–16 (‘FAA’).” Thus, a “plain and unambiguous term[]” of the contract provides
Virginia law applies. Patten, 441 F.3d at 237.
¶ 31 The arbitration award recognized the arbitrator needed to decide whether to
apply North Carolina law or Virginia law and explained the differences between the
two:
This case involves the extension of a loan to Claimant, a
North Carolina resident, secured by an automobile titled in
North Carolina, where the loan documents were signed in
Respondent’s office in Virginia. The loan carried an
interest rate of nearly 150%, a rate that clearly violates the
North Carolina Consumer Finance Act (the “CFA”), but
that is arguably not illegal in Virginia. The question to be
resolved is whether the language of the CFA applies to the
transaction at issue here.
¶ 32 Despite this recognition, the arbitration award never considers or even
mentions the Loan Agreement’s Virginia choice of law provision. Instead, the
arbitration award exclusively focuses on North Carolina’s Consumer Finance Act in
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its primary analysis. Thus, as in Patten, vacatur is appropriate here because the
arbitration award “contradicted the plain and unambiguous terms” of the Loan
Agreement. Patten, 441 F.3d at 236. The arbitrator here did not construe the
governing contract “at all.” See Oxford Health Plans, 569 U.S. at 573, 186 L. Ed. 2d
at 122 (“Under § 10(a)(4), the question for a judge is not whether the arbitrator
construed the parties’ contract correctly, but whether he construed it at all.”). As
such, the arbitration award does not draw its essence from the contract and therefore
the arbitrator exceeded his power. See id., 569 U.S. at 569–70, 186 L. Ed. 2d at 119–
20 (explaining a court can overturn the arbitrator’s determination under § 10(a)(4)
when the award does not “draw[] its essence from the contract”). As a result, the trial
court properly vacated the arbitrator’s award.
¶ 33 Plaintiff first argues “the essence of the contract doctrine does not apply”
because she did not assert “any breach of contract claims.” (Capitalization altered.)
First, this statement has no basis when looking at Fourth Circuit precedent we found
persuasive above. E.g. MCI Constructors, 610 F.3d at 852, 861–62 (applying essence
of the contract doctrine in case where complaint alleged claims including negligent
misrepresentation and wrongful termination). Patten is one of the cases applying
essence of the contract doctrine when the claims were not all contractual in nature,
see 441 F.3d at 232, 236–37 (applying doctrine when underlying claims submitted to
arbitration included age discrimination and wrongful termination), and Plaintiff cites
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Patten a page later in her own briefing on essence of the contract doctrine.
¶ 34 Second, the only case law authority Plaintiff cites to support this proposition
is a “Memorandum Opinion and Order” from the United States District Court for the
Middle District of North Carolina (“Middle District”) in Strange et al. v. Select
Management Resources, LLC et al., No. 1:19-cv-00321 (M.D.N.C. 2021).
(Capitalization altered.) According to the copy of Strange et al. included in the
addendum to Plaintiff’s brief, when the Middle District was analyzing a party’s
argument the arbitrator refused to apply a choice of law provision, it was reviewing
on the grounds of manifest disregard of the law, not essence of the contract. Thus,
we reject Plaintiff’s unsupported assertion that essence of the contract doctrine only
applies to contract claims.
¶ 35 Plaintiff’s other argument is that even if the essence of the contract doctrine
does apply, the arbitrator’s award is “at a minimum, rationally inferable from
material terms contained in the parties’ loan agreement.” (Citing Patten, 441 F.3d at
235.) Plaintiff is correct that “[a]n arbitration award fails to draw its essence from
the agreement only when the result is not ‘rationally inferable from the contract.’”
Patten, 441 F.3d at 235 (quoting Apex Plumbing Supply, Inc. v. U.S. Supply Co., 142
F.3d 188, 193 n.5 (4th Cir. 1998). But Patten itself defeats Plaintiff’s argument. In
Patten, when the arbitrator’s award “disregarded the plain and unambiguous
language of the” governing contract, the Fourth Circuit found “[t]he arbitrator’s
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Opinion of the Court
ruling . . . resulted in an award that, in the language of Apex Plumbing, simply was
‘not rationally inferable from the contract.’” Id. at 235–37 (quoting Apex Plumbing,
142 F.3d at 193 n.5). While Plaintiff points to a portion of the Loan Agreement
relating to the interest rate and possession of title taking place at the NCDMV, that
does not cure the arbitrator’s failure to mention the choice of law provision when
choice of law was the question he recognized he had to answer. Because the
arbitrator’s award “disregarded the plain and unambiguous language of the” Loan
Agreement requiring application of Virginia law, the award “simply was ‘not
rationally inferable from the contract.’” Id. at 235–37. Therefore, the arbitrator’s
award failed to draw its essence from the Loan Agreement.
¶ 36 The issue before us is solely “Whether the trial court erred by granting
Defendant-Appellee’s Motion to Vacate [the] Arbitration Award.” We conclude the
trial court did not err in granting that motion because the arbitrator’s lack of mention
or consideration of the Loan Agreement’s choice of law provision means his award
does not draw its essence from the parties’ contract containing that provision, and a
failure to draw from the essence of the contract is a valid ground on which to vacate
an arbitration award.
¶ 37 Therefore, after de novo review, we affirm the trial court’s order vacating the
arbitration award. Because we affirm, the trial court’s vacatur order on essence of
the contract grounds, we do not need to address its alternative ground of manifest
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disregard. Also, as we explained above, because we affirm the trial court’s order
granting Defendant’s motion to vacate the arbitration award, we also affirm its order
denying Plaintiff’s motion to confirm the arbitration award. See 9 U.S.C. § 9(explaining a court “must grant” an order confirming an arbitration award “unless
the award is vacated . . .”).
III. Trial Court’s Dismissal
¶ 38 After vacating the arbitration award, the trial court also dismissed the case
saying, “Plaintiff’s claims against Defendant are hereby dismissed with prejudice.”
The trial court’s use of the word “hereby” indicates its dismissal of Plaintiff’s claims
turns on its decision to vacate the arbitration award. While the trial court properly
vacated the arbitration award as we have explained above, the FAA does not allow it
to then dismiss the action. The FAA explains, “If an award is vacated . . . the court
may, in its discretion, direct a rehearing by the arbitrators.”4 9 U.S.C. § 10(b). The
United States Supreme Court has explained if a court, in its discretion, chooses not
to “‘direct a rehearing by the arbitrators’” then the court “must . . . decide the question
that was originally referred to the” arbitrators. See Stolt-Nielsen, 559 U.S. at 677,
4 The omitted portion of § 10(b) restricts the trial court’s ability to direct a rehearing to
situations where “the time within which the agreement required the award to be made has
not expired.” 9 U.S.C. §10(b). That restriction does not apply here because the arbitration
provisions of the Loan Agreement do not include a “time within which” the award has to be
made.
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176 L. Ed. 2d at 619 (quoting 9 U.S.C. § 10(b)) (so explaining in terms of its own
review after vacating an arbitration panel’s award). Therefore, a court cannot
dismiss a case following vacatur of an arbitration award under the FAA. As a result,
we remand to the trial court to, in its discretion, choose between “‘direct[ing] a
rehearing by the arbitrator[]’” or “decid[ing] the question that was originally referred”
to the arbitrator. Stolt-Nielsen, 559 U.S. at 677, 176 L. Ed. 2d at 619 (quoting 9 U.S.C.
§ 10(b)).
IV. Conclusion
¶ 39 We hold the trial court properly reviewed to determine whether the award
drew its essence from the Loan Agreement and did not err in vacating the arbitrator’s
award and, based on our de novo review, properly concluded the award did not.
Because we affirm based on the essence of the contract doctrine, we do not reach the
trial court’s alternative ground for vacatur, i.e. manifest disregard. Given we affirm
the trial court’s order vacating the arbitrator’s award, we also affirm its order denying
Plaintiff’s motion to confirm the award. The trial court, however, could not dismiss
the case in reliance on its vacatur of the arbitration award. We remand for the trial
court, in its discretion, to either direct a rehearing by the arbitrator or decide for itself
the issues originally sent to the arbitrator.
AFFIRMED AND REMANDED.
Judges TYSON and GORE concur.