Community State Bank v. James Strong

[PUBLISH]
IN THE UNITED STATES COURT OF APPEALS
FOR THE ELEVENTH CIRCUIT FILED
________________________ U.S. COURT OF APPEALS
ELEVENTH CIRCUIT
No. 06-11582 AUGUST 25, 2011
________________________ JOHN LEY
CLERK
D. C. Docket No. 04-02608-CV-WSD-1
COMMUNITY STATE BANK,
CASH AMERICA FINANCIAL SERVICES, INC.,
CASH AMERICA INTERNATIONAL, INC.,
GEORGIA CASH AMERICA, INC.,
DANIEL R. FEEHAN,
Petitioners-Appellants,
versus
JAMES E. STRONG,
Respondent-Appellee.
________________________
Appeal from the United States District Court
for the Northern District of Georgia
_________________________
(August 25, 2011)
Before CARNES and MARCUS, Circuit Judges, and JORDAN,* District Judge.
MARCUS, Circuit Judge:
*
Honorable Adalberto J. Jordan, United States District Judge for the Southern District of
Florida, sitting by designation.
This resilient case has arrived back in our Court after the Supreme Court’s
opinion in Vaden v. Discover Bank, 556 U.S. 49, 129 S. Ct. 1262 (2009), and
following a detour through our en banc Court. Again we are asked to navigate the
labyrinth of federal jurisdiction to determine whether the district court had
jurisdiction to entertain a petition to compel arbitration, pursuant to Section 4 of
the Federal Arbitration Act (“FAA”), 9 U.S.C. § 4.
The case arose when the Respondent James Strong (“Strong”) obtained a
month-long $200 loan from a storefront in Georgia in 2004. Strong later sought
relief from a Georgia state court, arguing that the loan was illegal and usurious
under Georgia law, because it carried a finance charge of $36, equivalent to an
annual percentage rate of 253%. The Petitioners in this case, Community State
Bank, Cash America Financial Services, Inc., Cash America International, Inc.,
Georgia Cash America, Inc., and Daniel Feehan, counter that the loan was
perfectly legal, because federal law permits Community State Bank to charge
interest rates without regard to Georgia law. The only issue on appeal is
jurisdictional: whether the federal district court has jurisdiction over the petition to
compel arbitration of Strong’s claims.
In our first opinion in this case, we held that in order to determine whether
there is federal jurisdiction over a petition to compel arbitration under § 4 of the
2
FAA, we must “look through” the arbitration petition to the underlying controversy
and ask whether the underlying dispute between the parties would have arisen
under federal law. Cmty. State Bank v. Strong (“Strong I”), 485 F.3d 597, 607
(11th Cir. 2007). We concluded that, looking through the § 4 arbitration petition to
the underlying controversy, it was apparent that Strong could have filed a coercive
action arising under federal law, and therefore the district court had subject matter
jurisdiction over the petition to compel arbitration. Id. at 612. Subsequently, this
Court vacated Strong I to review the case en banc, Cmty. State Bank v. Strong, 508
F.3d 576 (11th Cir. 2007), but stayed its en banc proceedings to await the Supreme
Court’s decision in Vaden, which raised a substantially similar jurisdictional
question.
In Vaden, the Supreme Court adopted the “look through” approach for
determining federal jurisdiction over FAA § 4 arbitration petitions, holding that
“[a] federal court may ‘look through’ a § 4 petition and order arbitration if, ‘save
for [the arbitration] agreement,’ the court would have jurisdiction over ‘the
[substantive] controversy between the parties.’” Vaden, 129 S. Ct. at 1268
(quoting 9 U.S.C. § 4) (alterations in Vaden). In light of Vaden, this Court vacated
its en banc order and remanded the case back to the panel. Cmty. State Bank v.
Strong, 565 F.3d 1305, 1306 (11th Cir. 2009).
3
We now revisit the same question we faced in Strong I, with the benefit of
the Supreme Court’s guidance in Vaden. Following Vaden’s instruction to “look
through” the FAA § 4 petition to the substantive controversy between the parties,
we remain convinced that Strong’s dispute with Community State Bank (“the
Bank”) could have arisen under federal law and, therefore, provides a basis for
federal jurisdiction over the FAA petition. We therefore continue to endorse the
primary thrust of the Strong I holding with respect to the Bank, and conclude that
the district court has jurisdiction over the Bank’s § 4 petition.
However, we depart from our result in Strong I as to the other petitioners in
the case -- Cash America Financial Services, Inc., Cash America International,
Inc., Georgia Cash America, Inc., and Daniel R. Feehan (collectively “Cash
America”). During the long pendency of this appeal, the Cash America parties --
who were defendants in a parallel state-court lawsuit brought by Strong -- moved
to compel arbitration of Strong’s claims in state court. Yet, when the state court
ordered Cash America to produce discovery on the limited issue of the
enforceability of the arbitration agreement between the parties, Cash America
repeatedly refused to comply with the state court’s orders. Ultimately, the state
court struck Cash America’s arbitration defenses as a statutorily authorized
sanction for its willful discovery abuses. We now conclude that this state-court
4
judgment -- which has since been upheld on appeal and now constitutes a final
judgment from a court of competent jurisdiction -- has preclusive effect, and Cash
America is collaterally estopped from petitioning the district court to decide the
very same issue that the state court has already decided against it. We, therefore,
affirm the district court’s dismissal of the FAA petition as to all of the petitioners
who were defendants in the state-court lawsuit. Accordingly, we affirm in part,
reverse in part, and remand for further proceedings consistent with this opinion.
I.
The essential facts and procedural history are these.1 On February 6, 2004,
James Strong took out a “payday loan” of $200 at a store called Cash America
Pawn of Atlanta #15, located in Cobb County, Georgia. The store was operated by
Georgia Cash America, Inc., an affiliate of Cash America Financial Services, Inc.
“‘Payday loans’ are generally small-dollar, short-term, high interest loans secured
by a check given to the payday lender in the amount of the cash advance plus
interest.” Dale v. Comcast Corp., 498 F.3d 1216, 1221 n.9 (11th Cir. 2007).
Banks that provide payday loans generally partner with local institutions to
“market” or “service” the small loans.
In exchange for the $200 loan, Strong signed a loan agreement, styled as a
1
A fuller explication of the facts and procedural history is laid out in Strong I, 485 F.3d
at 601-05.
5
promissory note, that required payment of “the principal sum of $200.00, plus a
finance charge in the amount of $36.00” by March 3, 2004. The finance charge of
$36 for the one month of the loan is equivalent to an annual percentage rate of
253%. Although the loan document identified the “Lender” as Community State
Bank, chartered in Milbank, South Dakota, and stated that payment should be
made “to the order of COMMUNITY STATE BANK,” it permitted Strong to make
his payment in person to the Cash America Pawn of Atlanta #15 store in Georgia --
the same place he had obtained the loan.
In a provision under the heading, “Cash America,” the loan agreement stated
that “Lender [the Bank] has entered into a contract with Cash America Financial
Services, Inc. to assist with this loan transaction. Neither Cash America Financial
Services, Inc., nor any of its affiliates (collectively, ‘Cash America’), is owned by,
operated by, or affiliated with Lender.” The loan agreement also contained an
arbitration clause. Strong agreed that “[a]ny controversy or claim between me and
the Lender, Cash America, or any employees . . . arising out of or in any way
relating to this Note and my loan relationship with Lender (including this
arbitration agreement) shall be settled by binding arbitration.”
On August 6, 2004, Strong filed a lawsuit against Georgia Cash America,
Inc., Cash America International, Inc., and Daniel Feehan, the CEO of both
6
companies (collectively, the “Cash America defendants”), in the State Court of
Cobb County, in Georgia, alleging that the payday loans made to him and others he
purported to represent were illegal and usurious under Georgia law. Strong sought
to cast his suit as a class action on behalf of “hundreds, if not thousands” of
similarly situated borrowers. Among other claims, Strong alleged that the Cash
America defendants violated the Georgia usury statute, Ga. Code Ann. § 7-4-1 et
seq., by charging more than 16% per annum on a loan of $3,000 or less, id. §
7-4-2(a)(2),2 or more than 5% per month on a loan of any sum, id. § 7-4-18,3; the
Georgia Industrial Loan Act, Ga. Code Ann. § 7-3-1 et seq., by failing to be
licensed under the statute, id. § 7-3-8,4 and charging more than 10% per annum
2
Georgia’s usury statute provides:
Where the principal amount involved is $3,000.00 or less, [the legal rate of interest]
shall not exceed 16 percent per annum simple interest on any loan, advance, or
forbearance to enforce the collection of any sum of money unless the loan, advance,
or forbearance to enforce the collection of any sum of money is made pursuant to
another law.
Ga. Code Ann. § 7-4-2(a)(2).
3
Georgia’s usury statute makes charging a 5% per month interest rate a misdemeanor,
providing that “[a]ny person, company, or corporation who shall reserve, charge, or take for any
loan or advance of money . . . any rate of interest greater than 5 percent per month, either
directly or indirectly, . . . by any . . . device whatsoever shall be guilty of a misdemeanor.” Ga.
Code Ann. § 7-4-18(a).
4
The Georgia Industrial Loan Act’s licensing provision states that “[a]ll persons engaged
in the business of making loans of $3,000.00 or less in the State of Georgia, unless expressly
exempted therefrom, shall be required to obtain a license under this chapter.” Id. § 7-3-8.
7
plus an 8% loan fee on a loan of $3,000 or less, id. § 7-3-145 ; and Georgia’s
Racketeer Influenced and Corrupt Organizations statute (“Georgia RICO”), Ga.
Code Ann. § 16-14-1 et seq., by conducting an enterprise through a pattern of
racketeering activity, to wit, payday lending violations, see id. § 16-14-
3(9)(A)(xxxviii).6 In an obvious effort to avoid federal jurisdiction, Strong did not
sue Community State Bank, and expressly stated in the complaint that he and the
putative class members did “not assert any claims under the laws of the United
States,” did “not assert any claim against a state or nationally chartered bank,” and
did “not seek recovery . . . in excess of $75,000.”
On August 31, 2004, the Cash America defendants -- together with
Community State Bank -- served a Notice of Intent to Arbitrate on Strong. Class
counsel for Strong rejected the Notice, and informed the Bank and the Cash
America defendants that Strong intended to go forward in state court with his state-
5
The Georgia Industrial Loan Act prohibits licensees from charging interest at a rate that
“exceed[s] 10 percent per annum of the face amount of the contract, whether repayable in one
single payment or repayable in monthly or other periodic installments,” id. § 7-3-14(1);
however, it permits licensees to charge “[i]n addition thereto,” a loan fee in “an amount not
greater than 8 percent of the first $600.00 of the face amount of the contract plus 4 percent of the
excess.” Id. § 7-3-14(2).
6
We note in passing, however, that although the Georgia RICO statute includes
violations of the Payday Lending statute, Ga. Code Ann. § 16-17-2, as predicate “racketeering
activity,” see id. § 16-14-3(9)(A)(xxxviii), this Payday Lending statute was not in effect at the
time of Strong’s loan on February 6, 2004. See 2004 Ga. Laws Act 440 (S.B. 157) (eff. May 1,
2004) (codified in relevant part at Ga. Code Ann. § 16-17-1, et seq.). Moreover, violations of
Georgia’s usury statute, Ga. Code Ann. § 7-4-1, et seq., are not listed as qualifying “racketeering
activity” in the Georgia RICO statute. See id. § 16-14-3(9)(A).
8
law-grounded claims. On September 7, 2004, despite the complaint’s having
expressly disavowed any intention to sue the Bank or to assert any federal claims,
the Cash America defendants removed Strong’s state-court lawsuit to the United
States District Court for the Northern District of Georgia. On the same day, the
Cash America defendants -- together with the Bank and Cash America Financial
Services, Inc. -- commenced an independent action against Strong by filing a
Verified Petition to Compel Arbitration and Stay Judicial Proceedings in the same
federal district court, seeking to compel arbitration of Strong’s claims pursuant to §
4 of the FAA.7 The Petitioners argued that the district court had jurisdiction to
entertain the petition because Strong’s state-law usury claims were completely
7
Section 4 of the FAA permits an “aggrieved” party to petition a federal court to compel
arbitration pursuant to a party’s written agreement:
A party aggrieved by the alleged failure, neglect, or refusal of another to arbitrate
under a written agreement for arbitration may petition any United States district
court which, save for such agreement, would have jurisdiction under Title 28 . . . of
the subject matter of a suit arising out of the controversy between the parties, for an
order directing that such arbitration proceed in the manner provided for in such
agreement. . . . The court shall hear the parties, and upon being satisfied that the
making of the agreement for arbitration or the failure to comply therewith is not in
issue, the court shall make an order directing the parties to proceed to arbitration in
accordance with the terms of the agreement. . . . If the making of the arbitration
agreement or the failure, neglect, or refusal to perform the same be in issue, the court
shall proceed summarily to the trial thereof.
9 U.S.C. § 4.
Section 2 of the FAA -- the Act’s “centerpiece provision,” Mitsubishi Motors Corp. v.
Soler Chrysler-Plymouth, Inc., 473 U.S. 614, 625 (1985) -- provides that covered arbitration
agreements are “valid, irrevocable, and enforceable, save upon such grounds as exist at law or in
equity for the revocation of any contract.” 9 U.S.C. § 2.
9
preempted by Section 27(a) of the Federal Deposit Insurance Act (“FDIA”), 12
U.S.C. § 1831d(a).8 Strong moved the district court to dismiss the arbitration
petition for lack of subject matter jurisdiction and to remand the state-court action
back to state court, similarly for lack of federal jurisdiction. On December 13,
2005, the district court granted Strong’s motion to remand the state case, agreeing
with Strong that federal jurisdiction was lacking. On February 7, 2006, the district
court also granted Strong’s motion to dismiss the Verified Petition, rejecting the
Petitioners’ asserted bases of federal jurisdiction. The Petitioners timely appealed
to this Court the dismissal of the arbitration petition.
The case has since taken a circuitous route. On April 27, 2007, a panel of
this Court reversed the district court’s dismissal and held that, looking through the
§ 4 arbitration petition to the underlying controversy, it was apparent that Strong
8
Section 27 of the FDIA was drafted as Section 521 in Title V of the Depository
Institutions Deregulation and Monetary Control Act of 1980 (“DIDA”), Pub. L. No. 96-221, §
521, 94 Stat. 132 (1980) (codified at 12 U.S.C. § 1831d). Section 27(a) of the FDIA provides, in
relevant part:
In order to prevent discrimination against State-chartered insured depository
institutions . . . with respect to interest rates, if the applicable rate prescribed in this
subsection exceeds the rate such State bank . . . would be permitted to charge in the
absence of this subsection, such State bank . . . may, notwithstanding any State
constitution or statute which is hereby preempted for the purposes of this section, .
. . charge on any loan . . . interest at a rate of not more than 1 per centum in excess
of the discount rate on ninety-day commercial paper in effect at the Federal Reserve
bank . . . or at the rate allowed by the laws of the State . . . where the bank is located,
whichever may be greater.
12 U.S.C. § 1831d(a).
10
could have filed a coercive action arising under federal law, and therefore the
district court had federal jurisdiction over the petition to compel arbitration.
Strong I, 485 F.3d at 612. Strong petitioned for rehearing en banc. On September
10, 2007, the full Court granted his petition, Cmty. State Bank v. Strong, 508 F.3d
576, and heard argument on February 26, 2008. However, before this Court could
render its decision in the en banc case, the Supreme Court granted certiorari in a
case raising similar jurisdictional issues arising out of the Fourth Circuit in
Discover Bank v. Vaden, 396 F.3d 366 (4th Cir. 2005). See Vaden v. Discover
Bank, 552 U.S. 1256 (2008) (granting cert.). We stayed further proceedings,
awaiting the Supreme Court’s decision. After the Supreme Court rendered its
decision in Vaden, 129 S. Ct. 1262, this Court vacated its en banc order and
remanded this case back to the panel. Cmty. State Bank v. Strong, 565 F.3d at
1306.
II.
For purposes of this opinion, we have divided the Petitioners into two
distinct groups, because our judgment differs as to each group: (1) Community
State Bank, and (2) all Cash America affiliates and their CEO, Daniel Feehan
(collectively, “Cash America”). In this Part, we address the issue of whether there
is federal jurisdiction over the Bank’s petition to compel arbitration, under 28
11
U.S.C. § 1331. And then, in Part III, we address the parallel question of whether
there is federal jurisdiction over Cash America’s petition to compel arbitration,
under 28 U.S.C. § 1331. We review the district court’s determination of its subject
matter jurisdiction de novo. Asociacion de Empleados del Area Canalera
(ASEDAC) v. Pan. Canal Comm’n, 453 F.3d 1309, 1313 (11th Cir. 2006).
A.
Title 28 of the United States Code grants federal district courts jurisdiction
over “all civil actions arising under the Constitution, laws, or treaties of the United
States.” 28 U.S.C. § 1331. The test ordinarily applied for determining whether a
claim arises under federal law is whether a federal question appears on the face of
the plaintiff’s well-pleaded complaint. Louisville & Nashville R.R. v. Mottley,
211 U.S. 149, 152 (1908). “As a general rule, a case arises under federal law only
if it is federal law that creates the cause of action.” Diaz v. Sheppard, 85 F.3d
1502, 1505 (11th Cir. 1996) (citing Franchise Tax Bd. v. Constr. Laborers
Vacation Trust, 463 U.S. 1, 8-10 (1983)).
The FAA provides that when one party to an arbitration agreement is
“aggrieved” by another’s resistance to arbitration, the aggrieved party may petition
for an order compelling arbitration in “any United States district court which, save
for such agreement, would have jurisdiction under Title 28 . . . of the subject
12
matter of a suit arising out of the controversy between the parties.” 9 U.S.C. § 4.
It is a long-accepted principle that the FAA is non-jurisdictional: The statute does
not itself supply a basis for federal jurisdiction over FAA petitions. See Vaden,
129 S. Ct. at 1271. The Supreme Court described the non-jurisdictional cast of the
statute in Vaden this way: “‘As for jurisdiction over controversies touching
arbitration,’ however, the [FAA] is ‘something of an anomaly’ in the realm of
federal legislation: It ‘bestow[s] no federal jurisdiction but rather requir[es] [for
access to a federal forum] an independent jurisdictional basis’ over the parties’
dispute.” Id. (quoting Hall Street Assocs., L.L.C. v. Mattel, Inc., 552 U.S. 576,
581-82 (2008)) (first alteration added, subsequent alterations in original). Thus,
although the FAA “enlarg[es] the range of remedies available in the federal
courts,” id. at 1283 (Roberts, C.J., concurring in part and dissenting in part)
(quotation omitted), it does not supply an independent basis for federal jurisdiction.
Therefore, the parties must identify an independent basis for federal jurisdiction
over a petition to compel arbitration brought pursuant to the FAA.
In our first panel opinion in this case, we held that in order to determine
whether there is federal question jurisdiction over a petition to compel arbitration
under § 4 of the FAA, we must “look through” the arbitration petition to the
underlying controversy and ask whether any of the underlying disputes would have
13
arisen under federal law. Strong I, 485 F.3d at 607. We then analogized the
question to that of federal jurisdiction over a declaratory judgment action, which
holds that “a federal district court has subject-matter jurisdiction over a declaratory
judgment action if . . . [the] plaintiff’s well-pleaded complaint alleges facts
demonstrating the defendant could file a [non-frivolous] coercive action arising
under federal law.” Id. at 610 (quoting Household Bank v. JFS Group, 320 F.3d
1249, 1259 (11th Cir. 2003)) (alterations added). We concluded that, although
Strong’s state-court complaint expressly disavowed any federal claims, Strong’s
potential, non-asserted federal claims created federal question jurisdiction over the
FAA petition. Id. at 611.
Although Vaden arose in an unusual procedural posture,9 it raised
substantially the same jurisdictional question we faced in Strong I. The case began
“as a garden-variety, state-law-based contract action,” when a Discover Bank
affiliate (“Discover”) sued one of its credit card holders, Vaden, in state court to
9
The Court acknowledged that the posture of Vaden was “unusual,” Vaden, 129 S. Ct. at
1274 n.13, noting that usually when litigation precedes the filing of a § 4 petition, it is the
defendant of the lawsuit that seeks to compel arbitration and thereby avoid litigation. By
contrast, in Vaden, Discover Bank was “the party that initiated litigation of the underlying
dispute [and was] also the party seeking to compel arbitration.” Id. Discover Bank’s initial
decision to litigate its dispute with Vaden without invoking the arbitration agreement may have
influenced the Court’s receptivity to Discover Bank’s belated attempt to enlist federal court
assistance in enforcing the arbitration agreement. See id. at 1277 (stating that “it is hardly
fortuitous that the controversy in this case took the shape it did,” as Discover Bank itself,
“[s]eeking to collect a debt, . . . filed an entirely state-law-grounded complaint in state court”
(internal quotation marks, alteration, and citation omitted)).
14
recover past-due charges. Vaden, 129 S. Ct. at 1268. In the state-court action,
Vaden raised state-law affirmative defenses and counterclaims, asserting that
Discover’s finance charges, interest, and late fees violated state usury and credit
laws. Id. In response, Discover commenced a separate § 4 petition in federal
district court to compel arbitration of Vaden’s counterclaims -- marking the first
time that either party had invoked the arbitration clause in their credit card
agreement. Id. at 1268-69.
After the district court ordered arbitration, the Fourth Circuit affirmed the
district court’s exercise of federal question jurisdiction over Discover’s § 4
petition. Id. at 1270. Like this Court in Strong I, the Fourth Circuit majority
adopted the “look-through” approach to determining jurisdiction over FAA § 4
petitions -- that is, that the federal court must “look through” the § 4 petition and
assess federal question jurisdiction on the basis of the substantive controversy
between the parties. Id. at 1269. The Fourth Circuit majority then held that
Section 27(a) of the FDIA completely preempted Vaden’s counterclaims, and
concluded that these now-federalized counterclaims supplied a sufficient predicate
for federal question jurisdiction. Id. at 1270.
On certiorari review, the Supreme Court unanimously affirmed the Fourth
Circuit’s “look through” approach for determining federal jurisdiction over FAA §
15
4 arbitration petitions, holding that “[a] federal court may ‘look through’ a § 4
petition and order arbitration if, ‘save for [the arbitration] agreement,’ the court
would have jurisdiction over ‘the [substantive] controversy between the parties.’”
Vaden, 129 S. Ct. at 1268 (quoting 9 U.S.C. § 4) (alterations in Vaden). All
members of the Court concurred in adopting this “look through” approach. See id.
(majority); id. at 1279 (Roberts, C.J., concurring in part and dissenting in part).
However, the Vaden majority of five Justices reversed the Fourth Circuit’s
application of the “look through” rule. The majority concluded that when the
parties’ controversy has already been “embodied” in pending litigation, id. at 1276
n.16, as it had been in Vaden, federal jurisdiction over the subsequent FAA petition
must be assessed from the face of the preexisting complaint. Id. at 1277-78. In
other words, when “actual litigation has [already] defined the parties’ controversy,”
the well-pleaded complaint rule must be applied only to the “controversy as framed
by the parties”; in such cases, “[w]hether one might imagine a federal-question suit
involving the parties’ disagreement . . . is beside the point.” Id. at 1276-77
(emphasis added). As applied to the litigation in Vaden, the Court held that the
“dimensions of the controversy between the parties” were defined by Discover’s
original state-court complaint against Vaden. Id. at 1268 (internal quotation marks
omitted). The Court explained that, because the “triggering plea” in Vaden was
16
Discover’s state-law suit for past-due credit card charges, which itself contained no
federal element, the federal court did not have federal question jurisdiction over
Discover’s subsequent § 4 petition to compel arbitration of Vaden’s counterclaims,
as the counterclaims were but a “slice” of the parties’ full controversy. Id. The
majority did not, however, answer the question of how to define the parties’
controversy for purposes of determining jurisdiction when no litigation between
the parties precedes the filing of the FAA petition.
Four justices who dissented in part (the Vaden “dissent”) agreed that
determining federal question jurisdiction requires a federal court to “look through”
the FAA petition, but disagreed with the majority about what precisely a federal
court should train its attention on, once it has looked through the petition. See id.
at 1279 (Roberts, C.J., concurring in part and dissenting in part) (“I agree with the
Court that a federal court asked to compel arbitration pursuant to § 4 of the Federal
Arbitration Act should ‘look through’ the dispute over arbitrability in determining
whether it has jurisdiction to grant the requested relief. But look through to
what?”). They criticized the majority for its “mistaken focus on . . . existing
litigation,” id. at 1281, noting that the majority’s rule turns entirely on the mere
“fortuity that a complaint happens to have been filed,” id. at 1279. Instead, the
dissent would have held that the district court should focus on the concrete dispute
17
to be arbitrated and determine for itself whether a hypothetical suit -- whether
pending or not -- arising out of that controversy would arise under federal law. Id.
at 1282.
Upon careful review, we conclude that, as applied to Community State
Bank, the essential holding of Strong I survives Vaden. The Bank was not a party
to Strong’s state-court lawsuit. Indeed, Strong expressly disavowed any claims
against the Bank. Therefore, no preexisting litigation has yet defined the contours
of the controversy between Strong and the Bank. The Bank’s FAA petition is, in
other words, what we will call “freestanding” -- that is, it does not arise out of
pending litigation between the parties. As we’ve noted, the Vaden majority did not
answer the question of how a federal court should assess the nature of the parties’
controversy when faced with a freestanding FAA petition. Nonetheless, we
believe the approach we adopt most faithfully adheres to the Court’s reasoning in
Vaden, in spite of this case’s admittedly different posture.
At the outset, it is clear that Vaden did not foreclose the possibility of
freestanding FAA petitions. The Court stated unambiguously:
The parties’ underlying dispute may or may not be the subject of
pending litigation. This explains § 4’s use of the conditional “would”
and the indefinite “a suit.” A party often files a § 4 petition to compel
arbitration precisely because it does not want to bring suit and litigate
in court.
18
Id. at 1274 n.13 (quoting 9 U.S.C. § 4) (emphasis in original); see also id. at 1276
n.16 (“Section 4, we recognize, enables a party to seek an order compelling
arbitration even when the parties’ controversy is not the subject of pending
litigation.”). Indeed, the Vaden Court expressly endorsed the continuing vitality of
freestanding § 4 petitions in explaining its “look through” approach, saying “the
‘look through’ approach permits a § 4 petitioner to ask a federal court to compel
arbitration without first taking the formal step of initiating or removing a federal-
question suit.” Id. at 1275 (emphasis added).10 Clearly, then, Vaden should not be
interpreted to mean that federal district courts lack jurisdiction over freestanding
FAA petitions.
However, in the case of a freestanding § 4 petition, by definition, there is no
preexisting litigation defining the parties’ controversy to structure the court’s
inquiry. The Vaden majority’s jurisdictional focus on the “actual litigation [that]
has defined the parties’ controversy,” id. at 1277, does not answer the question we
10
The proposed alternative to the “look-through” rule would have located a federal
question only, if at all, in the parties’ discrete dispute over the arbitrability of the asserted claims.
See Vaden, 129 S. Ct. at 1274. Because such disputes are primarily contractual in nature and
would rarely, if ever, raise federal questions, the Court noted that such a rule would prevent a
party from enlisting the help of a federal court in compelling arbitration under the heading of
federal question jurisdiction unless the party first filed or removed a federal question suit to
federal court, and only then sought to compel arbitration. Id. at 1275. The Court criticized this
result as “creat[ing] a totally artificial distinction based on whether a dispute is subject to
pending federal litigation.” Id. (internal quotation omitted). By contrast, the Court’s “look-
through” rule would “accommodate a § 4 petitioner who could file a federal-question suit . . . ,
but who has not done so.” Id.
19
face of how to discern jurisdiction when no such “actual litigation” exists. Indeed,
the dissent criticized the majority’s “mistaken focus on . . . existing litigation” for
this very reason: It provides no instruction to a court faced with a freestanding § 4
petition, where no complaint has been filed “to ‘look through’ to.” Id. at 1281
(Roberts, C.J., concurring in part and dissenting in part) (“In many if not most
cases under § 4, no complaint will have been filed. What to ‘look through’ to
then?” (citation omitted)). The Vaden Court did not answer the question of what a
district court must look through to when the parties’ controversy has not yet been
“embodied,” id. at 1276 n.16 (majority), in litigation -- because that question was
not before it.
Nonetheless, it remains clear that we must still “look through” the petition to
something. The Court was very clear that jurisdiction should be predicated on the
substantive dispute between the parties, not the arbitrability issue actually to be
decided by the district court. See id. at 1273 (“The text of § 4 drives our
conclusion that a federal court should determine its jurisdiction by ‘looking
through’ a § 4 petition to the parties’ underlying substantive controversy.”
(emphasis added)); id. at 1274 (rejecting the alternative construction in which
“[t]he relevant ‘controversy between the parties’ . . . is simply and only the parties’
discrete dispute over the arbitrability of their claims”). The Vaden Court thus
20
gives us one primary instruction for how to approach freestanding FAA petitions.
“Whether or not the controversy between the parties is embodied in an existing
suit, the relevant question remains the same: Would a federal court have
jurisdiction over an action arising out of that full-bodied controversy?” Id. at 1276
n.16. In other words, the proper jurisdictional inquiry is whether either party to the
§ 4 petition “could file a federal-question suit” based on the parties’ underlying
dispute. Id. at 1275 (emphasis in original).
We, therefore, conclude that where the parties’ controversy has not yet been
embodied in preexisting litigation, “[a] district court entertaining a § 4 petition”
must decide for itself “what ‘a suit’ arising out of the allegedly arbitrable
controversy would look like.” Id. at 1282 (Roberts, C.J., concurring in part and
dissenting in part) (quoting 9 U.S.C. § 4). That is, the court must examine the
dimensions of the “full-bodied controversy,” id. at 1276 n.16 (majority), between
the parties, and determine whether any hypothetical claims arising out of that
controversy would support federal jurisdiction. If so, then the district court may
entertain the petition and, if warranted, compel arbitration of the entire
controversy. 9 U.S.C. § 4; see Vaden, 129 S. Ct. at 1275 (“[Section 4 of the FAA
allows a party access to federal court if] the entire, actual ‘controversy between the
parties,’ as they have framed it, could be litigated in federal court.” (quoting 9
21
U.S.C. § 4)).
The statutory language supports such an approach, by expressly directing a
court to imagine whether it hypothetically “would have jurisdiction” over “a suit
arising out of the controversy between the parties.” 9 U.S.C. § 4 (emphases
added). The subjunctive mood overtly invites the consideration of hypothetical
suits, and the indefinite article “a” suggests the court may consider any possible
suit that the factual controversy could precipitate. While the Vaden Court rejected
such hypothesizing where “actual litigation” is available to focus the court’s
inquiry, “[t]here is no helping” it when no such preexisting litigation exists.
Vaden, 129 S. Ct. at 1282 (Roberts, C.J., concurring in part and dissenting in part);
see id. at 1277 (majority) (“[Section] 4 does not invite federal courts to dream up
counterfactuals when actual litigation has defined the parties’ controversy.”
(emphasis added)). Nonetheless, we heed the Vaden majority’s instruction not to
“slice,” id. at 1268, 1277, up the controversy and predicate jurisdiction on
“lurk[ing]” federal questions that could only arise by way of an actual or
anticipated defense, id. at 1278; rather, we look only to potential claims between
the parties that could be stated on the face of a well-pleaded complaint.
B.
Although the Vaden majority had no occasion to reach the issue, Chief
22
Justice Roberts, whose opinion commanded four votes, provided some clues as to
how a federal court should confront a freestanding FAA petition. As a start, a
federal court should focus on “the specific controversy -- the concrete dispute that
one party has ‘fail[ed], neglect[ed], or refus[ed]’ to arbitrate -- and determine
whether that controversy would give rise to a suit under federal law.” Id. at 1282
(Roberts, C.J., concurring in part and dissenting in part) (quoting 9 U.S.C. § 4).
After all, FAA § 4 is only triggered when one party has expressed a “refusal” to
arbitrate, and the other party has been thereby “aggrieved.” See 9 U.S.C. § 4. This
refusal will undoubtedly be documented in some way (for example, by a letter).
Examining these pre-litigation or extra-legal communications between the parties
can provide insight into the factual nature of the dispute. In addition, the FAA
petitioner’s description of the underlying dispute in the § 4 petition itself can
provide some (although not conclusive) evidence of the contours of the dispute.11
Thus, although the court’s task necessarily requires some hypothesizing, the
inquiry is not thereby utterly “free-form” or readily manipulable by the parties.
11
In this regard, we part with the Vaden dissent, which apparently would accept the § 4
petitioner’s statement of the controversy as dispositive. See Vaden, 129 S. Ct. at 1282 (Roberts,
C.J., concurring in part and dissenting in part) (advocating that the court “[l]ook to the
controversy the § 4 petitioner seeks to arbitrate [] as set forth in the § 4 petition” (emphasis
added)). Instead, we heed the Vaden majority’s command to examine the “whole controversy
between the parties -- not just a piece broken off from that controversy,” and to ensure that
“[a]rtful dodges by a § 4 petitioner” not blinker the court from assessing “the full flavor of the
parties’ entire dispute.” Id. at 1276 (majority).
23
Vaden, 129 S. Ct. at 1282 (Roberts, C.J., concurring in part and dissenting in part).
As Chief Justice Roberts explained, “the exercise is closely analogous to the
jurisdictional analysis in a typical declaratory judgment action,” which requires a
court to imagine for itself which coercive claims the parties’ dispute could
hypothetically support, in order to determine whether a hypothetical coercive
lawsuit brought by the declaratory judgment defendant would present a federal
question on the face of its well-pleaded complaint. Id. (citing Franchise Tax Bd.,
463 U.S. at 19).
In short, the appropriate way to determine jurisdiction over the instant FAA
petition as to Community State Bank remains, in its essence, the same one this
Court adopted in Strong I. We must discern the nature of the parties’ “whole
controversy,” id. at 1276 (majority), on the basis of their various representations to
the court, and then determine whether “a suit” arising out of the underlying dispute
“would” support federal jurisdiction, 9 U.S.C. § 4. See Strong I, 485 F.3d at 606
(“We therefore look to petitioners’ own statement of the dispute or disputes they
wish to arbitrate, and in this, they are not limited to seeking compelled arbitration
of claims that have been brought against them in court.”); cf. id. at 607 (“[W]e
must ‘look through’ the petition to compel arbitration and . . . ask: If petitioners
had brought this dispute in federal district court . . . , would it have arisen under
24
federal law?”).
To understand the “full flavor” of the parties’ underlying dispute in this case,
see Vaden, 129 S. Ct. at 1276, we examine the Bank’s allegations in its FAA
petition, as well as the exhibits attached thereto, which in this case include Strong’s
state-court complaint and the correspondence between the parties regarding
arbitration. The Bank’s FAA petition characterizes the underlying dispute as being
“whether a loan made to Respondent is governed by Section 27 of the Federal
Deposit Insurance Act, . . . as opposed to state law.” The petition states that “[t]he
legal theory of the State Action is that the Loans are made not by the Bank but
rather by a Cash America Petitioner, as the de facto lender.” The Petitioners seek
an order directing that “the disputes raised in the State Complaint and the
additional disputes described herein be determined by binding individual
arbitration in accordance with the Arbitration Provision.” The Petitioners note that
“[i]n the arbitration demanded by this Petition, Petitioners will seek a declaration
that the interest on Respondent’s Loan is governed by Section 27 and that the Loan
is lawful.”
The exhibits to the petition provide additional insight into the “full flavor” of
the underlying dispute between the parties. See Vaden, 129 S. Ct. at 1276. In
25
Strong’s state-court complaint filed against the Cash America defendants,12 Strong
described the underlying dispute as one of “subterfuge,” in which the out-of-state
bank claimed immunity from usury laws as the purported maker of the loan, “[y]et,
in reality, the out-of-state bank ha[d] little involvement other than lending its name
to the transaction.” Strong, therefore, claimed the Cash America defendants were
“the de facto lenders,” despite what the loan documents showed. Strong repeatedly
declared that it was the Cash America defendants who “made” or “extended” the
loans to him and the class members, and “charged” him interest.13 He alleged that
in so doing, the Cash America defendants violated, inter alia, Georgia usury
statutes, the Georgia Industrial Loan Act, and Georgia RICO.
12
Because the Bank was not a party to Strong’s state-court litigation, we do not “look
through” the petition to Strong’s state-court complaint exclusively, as Vaden would require for
the Cash America defendants. However, because the Bank characterizes its own controversy by
explicitly referencing Strong’s complaint in its FAA petition, and, notably, attaches the
complaint as an exhibit to its petition as demonstrative evidence of the parties’ underlying
dispute, it is appropriate for us to consider it insofar as it helps us discern the nature of the
dispute between Strong and the Bank.
13
Thus, in paragraph 58, Strong said, “Defendants [Cash America] made loans to
Plaintiff and other[s] similarly situated . . . without being licensed . . . as required by [Georgia
law]”; in paragraph 61, “[a]ll loans by Defendants were made in violation of the Georgia
Industrial Loan Act”; in paragraph 62, “[a]ll loans made by Defendants are null and void”; and
in paragraph 69, “Defendants violated the duty owed to Plaintiff and the Class when they made
loans of $3,000 or less [at usurious rates].” (Compl. ¶¶ 58, 61, 62, 69 (emphases added)). In
paragraph 89, Strong alleged that “Defendants conspired to illegally extend loans to Georgians
charging annual interest rates in excess of that allowed by law.” (Id. ¶ 89 (emphases added)). In
paragraph 47, Strong described one of the common questions of fact as “[w]hether Defendants
charged more than 10% per annum simple interest on loans of $3,000 or less in violation of
[Georgia law]”; and in paragraph 82, Strong alleged that “Defendants charged Plaintiff and the
Class an amount in excess of 10% of the face amount of the check.” (Id. ¶¶ 47, 82 (emphases
added)).
26
Finally, the correspondence evidencing Strong’s “refusal” to submit the
dispute to arbitration, see 9 U.S.C. § 4, which was also attached to the Bank’s FAA
petition, further illuminates the dispute between the parties. In a letter to Strong’s
counsel, counsel for the Bank characterized the dispute this way: “In the [state-
court] Lawsuit[], you allege that your loan[] dated . . . February 6, 2004 (the
“Loan[]”), made in the name of Community State Bank (the “Bank”), [was]
actually made by other parties and that, accordingly, the Loan[] violate[d] Georgia
usury laws and [is] otherwise unlawful. It is the position of the Lawsuit
Defendants and the Bank . . . that the Loan[] [was] made by the Bank and that the
legality of the interest charges on the Loan[] is accordingly governed by Section
27(a) of the Federal Deposit Insurance Act . . . .” Strong’s counsel responded,
“Plaintiff[] believe[s] that the payday loan contract[] entered into between
Plaintiff[] and your client [Cash America] [is] unconscionable and unenforceable.
Accordingly, we plan to move forward with our lawsuit . . . .”
C.
Having probed the factual basis of the underlying controversy between the
parties, we now explore the potential lawsuits that could arise between the parties
from this controversy. In so hypothesizing, we can only consider well-pled, non-
27
frivolous potential suits.14 Steel Co. v. Citizens for a Better Env’t, 523 U.S. 83, 89
(1998) (stating that federal subject matter jurisdiction may not be premised on a
“wholly insubstantial and frivolous” claim (quoting Bell v. Hood, 327 U.S. 678,
682-83 (1946))); Caterpillar, Inc. v. Williams, 482 U.S. 386, 392 (1987) (“[T]he
well-pleaded complaint rule . . . provides that federal jurisdiction exists only when
a federal question is presented on the face of the plaintiff’s properly pleaded
complaint.” (emphasis added) (internal quotation marks omitted)). Anticipated
federal defenses are irrelevant. See Vaden, 129 S. Ct. at 1272 (“Federal
jurisdiction cannot be predicated on an actual or anticipated defense.” (citing
Mottley, 211 U.S. at 152)). Moreover, in conducting this inquiry, we may only
consider potential claims between Strong and the Bank; jurisdiction over the
Bank’s petition may not be founded on potential claims that exist only between
Strong and Cash America.
We can discern at least one potential basis for federal jurisdiction over the
Bank’s FAA petition. The dispute between Strong and the Bank could support a
potential Federal Racketeer Influenced and Corrupt Organizations (“Federal
14
We consider only potential coercive actions here. We have no occasion to consider
hypothetical declaratory judgment actions, because the jurisdictional analysis regarding a
potential declaratory judgment suit by the Bank is simply the mirror image of the jurisdictional
analysis regarding potential coercive suits by Strong. See Household Bank, 320 F.3d at 1251
(holding that jurisdiction over a declaratory judgment action depends on whether the declaratory
judgment defendant could file a non-frivolous coercive claim against the declaratory judgment
plaintiff arising under federal law).
28
RICO”) claim against the Bank, that would be both well pled and non-frivolous,
and which would state a federal issue on its face. Federal RICO prohibits
conducting the affairs of an enterprise affecting interstate commerce through the
collection of an “unlawful debt,” that is, charging a usurious rate that is more than
twice the enforceable rate under either state or federal law, or conspiring to do the
same. 18 U.S.C. §§ 1961-1962.15
If the Bank were the true lender of Strong’s loan, it could not be liable for
violating Federal RICO through the collection of an “unlawful debt.” As an FDIC-
insured, state-chartered bank, the Bank is not subject to Georgia’s usury laws;
instead, it is authorized under Section 27(a) of the FDIA to export its home-state
usury laws. See 12 U.S.C. 1831d(a) (allowing state-chartered, FDIC-insured banks
to charge “interest . . . at the rate allowed by the laws of the State . . . where the
bank is located,” “notwithstanding any State constitution or statute which is hereby
preempted for the purposes of this section”). The Bank is chartered in South
15
Federal RICO prohibits, inter alia, investing in, acquiring an interest in, or conducting
the affairs of an enterprise engaged in or affecting interstate commerce, through the “collection
of an unlawful debt.” 18 U.S.C. § 1962(a)-(c). Section 1962(d) prohibits conspiracy to commit
the same. Id. § 1962(d). Section 1961(6) defines an “unlawful debt” as “a debt (A) . . . which is
unenforceable under State or Federal law in whole or in part as to principal or interest because of
the laws relating to usury, and (B) which was incurred in connection with . . . the business of
lending money or a thing of value at a rate usurious under State or Federal law, where the
usurious rate is at least twice the enforceable rate.” Id. § 1961(6). Section 1961(4) defines an
“enterprise” as including “any individual, partnership, corporation, association, or other legal
entity, and any union or group of individuals associated in fact although not a legal entity.” Id. §
1961(4).
29
Dakota, which places no limitation on interest rates. See S.D. Codified Laws §
54-3-1.1 (imposing “no maximum interest rate . . . or usury rate restriction” under
state law). Therefore, if the Bank were the true lender of the loan under federal
law, there would be no RICO violation, because there would be no predicate
offense of collecting an “unlawful debt.”
However, Strong could potentially assert (and has in fact alleged facts
supporting) a non-frivolous Federal RICO claim against the Bank under a theory of
conspiracy. See 18 U.S.C. § 1962(d). To do so, Strong would have to plead facts
demonstrating that the Bank was not the actual lender (otherwise, the predicate
usury violation would be lacking), yet the Bank conspired with Cash America to
facilitate Cash America’s making of usurious loans. Because this cause of action is
a creature of federal law, such a claim would clearly state a federal question on the
face of the well-pleaded complaint.
Given the nature of the parties’ dispute, such a Federal RICO conspiracy
claim would be well pled and non-frivolous, even if not in the end meritorious.
Members of this Court have already recognized that Section 27(a)’s protections
extend to a state bank only insofar as it is the true lender under federal law. As
Judge Carnes has observed:
[Section 27(a) preemption] does not mean that any transaction where
an out-of-state bank associates with a non-bank agent in Georgia is
30
protected, even if the relationship is clearly a sham. If, under federal
law, a transaction is not actually a loan from an out-of-state bank
within the meaning of § 27(a), then the bank does not have the right to
export its charter state’s interest rate under § 27(a).
BankWest, Inc. v. Baker, 411 F.3d 1289, 1319 (11th Cir. 2005) (Carnes, J.,
dissenting), majority opinion vacated for mootness, 446 F.3d 1358 (11th Cir.
2006). The BankWest majority likewise agreed that Section 27(a)’s protection of
out-of-state banks is not absolute, and even went further to hold in the context of
the state payday lending statute that although state banks were exempt from direct
violations of the statute, they could be liable under the “aid[ing] or abet[ing]”
provision of the statute, consistently with Section 27(a) of the FDIA. See
BankWest, 411 F.3d at 1308 (“[W]e conclude that . . . Section 27(a) does not
preempt state legislation imposing penalties on . . . out-of-state banks who aid and
abet [direct] violations [of the payday lending statute].”), vacated for mootness,
446 F.3d 1358. We agree with the view that Section 27(a) does not provide
immunity to a state bank for usury-related offenses if it is not the true lender of the
loan under federal law.
Bringing this conspiracy claim would require careful pleading by Strong to
navigate this narrow legal path. He would have to allege, on the one hand, that the
Bank was not the true lender of the loan, and yet, on the other hand, that the Bank
was sufficiently complicit in the illegal act so that it could be deemed a conspirator
31
(e.g., by knowingly and willfully lending its name to the sham operation).
Nonetheless, Strong has alleged facts that render this claim plausible and non-
frivolous. In Strong’s state-court complaint, Strong referred to the Bank’s
relationship with Cash America as a “subterfuge,” and alleged that the Bank “has
little involvement other than lending its name to the transaction.” He called Cash
America “the de facto lenders,” and repeatedly alleged that it was the Cash
America defendants that “made” or “extended” the loan to him. If Strong could
substantiate these claims in his lawsuit, he could potentially prevail on a Federal
RICO claim against the Bank. In short, the claim would not be frivolous.
Because we find that Strong’s potential Federal RICO claim against the
Bank provides a basis for jurisdiction over the Bank’s FAA petition, we decline to
reach the question of whether Section 27(a) of the FDIA completely preempts
state-law usury claims against state-chartered banks. Cf. Beneficial Nat’l Bank v.
Anderson, 539 U.S. 1, 9-10 (2003) (holding that the National Bank Act, 12 U.S.C.
§§ 85, 86, completely preempts state-law usury claims against national banks).16
16
Complete preemption is a rare doctrine that entirely transforms a state-law claim into a
federal claim, regardless of how the plaintiff framed the legal issue in his complaint. Blab T.V.
of Mobile, Inc. v. Comcast Cable Commc’ns, Inc., 182 F.3d 851, 854-55 (11th Cir. 1999); see
also U.S. Const. art. VI, cl. 2. Under complete preemption, “the pre-emptive force of a [federal]
statute is so extraordinary,” Caterpillar, 482 U.S. at 393 (internal quotation marks omitted), that
the “federal statute wholly displaces the state-law cause of action.” Beneficial, 539 U.S. at 8.
Thus, “any complaint raising claims in that area is necessarily federal in character.” Cotton v.
Mass. Mut. Life Ins. Co., 402 F.3d 1267, 1281 (11th Cir. 2005). Complete preemption creates
federal subject-matter jurisdiction over completely preempted state-law claims, allowing for
32
The Supreme Court, too, has declined to answer this question. See Vaden, 129 S.
Ct. at 1269 n.4.
In sum, in looking through the Bank’s FAA petition, we see a potential
coercive claim between Strong and the Bank that would be both well pled and non-
frivolous, and which would state a federal issue on its face -- namely, a Federal
RICO conspiracy claim. Under the look-through rule, this hypothetical coercive
claim in turn supplies a basis for federal jurisdiction over the Bank’s FAA petition.
Therefore, with respect to the Bank, we reverse the district court’s dismissal of the
FAA petition and again hold to the contrary, as we did in Strong I, 485 F.3d at 600,
that the district court has subject matter jurisdiction over the Bank’s petition to
compel arbitration under the FAA. Accordingly, we remand to the district court
with instructions to determine in the first instance whether to compel arbitration
pursuant to the FAA, 9 U.S.C. § 4.
III.
removal to federal court.
Complete preemption is distinct from “ordinary” or “defensive” preemption. Ordinary
preemption simply allows a defendant to defeat a plaintiff’s state-law claim on the merits by
asserting the supremacy of federal law as an affirmative defense. See Blab T.V., 182 F.3d at
855. By contrast to complete preemption, “defensive preemption does not furnish federal
subject-matter jurisdiction under 28 U.S.C. § 1331.” Butero v. Royal Maccabees Life Ins. Co.,
174 F.3d 1207, 1212 (11th Cir. 1999); see also Caterpillar, 482 U.S. at 393 (“[I]t is now settled
law that a case may not be removed to federal court on the basis of a federal defense, including
the defense of pre-emption, even if the defense is anticipated in the plaintiff’s complaint, and
even if both parties concede that the federal defense is the only question truly at issue.”).
33
We now turn to the Cash America petitioners. Because the Cash America
petitioners were named as defendants in Strong’s state-court lawsuit, we would be
constrained by the holding in Vaden to “look through” exclusively to Strong’s
state-court complaint to determine whether there was federal jurisdiction over Cash
America’s FAA petition. However, we need not pursue this inquiry because we
conclude that Cash America’s petition to compel arbitration must be dismissed
based on the preclusive effect of a prior state-court judgment.17
17
Strong twice raised the state-court judgment as an alternative basis on which to affirm
the district court’s order dismissing the FAA petition in this case. (See Suggestion of Mootness
by Appellee (“Strong’s Mootness Br.”), filed Oct. 17, 2005; Appellee’s Supplemental Brief
Regarding the Impact of Vaden v. Discover Bank (“Strong’s Vaden Br.”), filed June 22, 2009, at
12.) Strong said that “[Cash America’s] ability to compel arbitration in a state or federal forum
against [Strong] has been mooted by the State Court’s order striking this defense.” (Strong’s
Mootness Br. at 3.) Although Strong failed to use the words “res judicata” or “collateral
estoppel,” we nonetheless find that Strong has sufficiently raised the issue of preclusion such
that this Court may address it. We note in passing that the Supreme Court of Georgia has
similarly found that a party sufficiently raised a preclusion defense even without specifically
articulating it as either res judicata or collateral estoppel. See Boozer v. Higdon, 313 S.E.2d
100, 102 & n.1 (Ga. 1984) (holding that a “probate court order was sufficient evidence to
support Boozer’s defense, when construed as a plea of collateral estoppel,” even though
“Boozer’s defensive pleading did not specifically enumerate either res judicata or collateral
estoppel as its grounds, but merely stated that ‘the matter [has been] formally adjudicated in the
Probate Court of Cobb County . . . ’”). And indeed, even if the parties had not raised the issue,
this Court may consider the preclusive effect of a prior judgment sua sponte. See Am. Furniture
Co. v. Int’l Accommodations Supply, 721 F.2d 478, 482 (5th Cir. Unit A Mar. 1981) (“We are
cognizant that res judicata, as such, has not been specially pled. In the posture of this case,
however, where all of the relevant facts are contained in the record before us and all are
uncontroverted, we may not ignore their legal effect, nor may we decline to consider the
application of controlling rules of law to dispositive facts, simply because neither party has seen
fit to invite our attention to the issue by technically correct and exact pleadings. We do so sua
sponte.” (citation omitted)); cf. Bonner v. City of Prichard, 661 F.2d 1206, 1209 (11th Cir. 1981)
(en banc) (adopting as binding precedent all former Fifth Circuit decisions handed down before
the close of business on September 30, 1981); cf. also Arizona v. California, 530 U.S. 392, 412
(2000) (“[I]f a court is on notice that it has previously decided the issue presented, the court may
dismiss the action sua sponte, even though the defense has not been raised. This result is fully
34
A.
While the instant FAA petition was pending in federal court, the Cash
America defendants moved to stay the state-court proceedings and compel
arbitration of Strong’s claims (after an unsuccessful removal to federal court and
subsequent remand for lack of jurisdiction). On April 18, 2006, the state trial court
ordered the parties to conduct limited discovery on the issue of the enforceability
of the arbitration agreement -- in particular, the factual issues relating to the
potential defenses of “fraud in the factum” and procedural unconscionability. See
Ga. Cash Am., Inc. v. Strong, 649 S.E.2d 548, 551, 553 (Ga. Ct. App. 2007). The
Cash America defendants did not attempt to appeal this order. Id. at 551-52.
When the defendants failed to produce any of Strong’s requested discovery, Strong
moved to compel. Id. at 552. On July 17, 2006, after a hearing on Strong’s
consistent with the policies underlying res judicata: it is not based solely on the defendant’s
interest in avoiding the burdens of twice defending a suit, but is also based on the avoidance of
unnecessary judicial waste.” (quoting United States v. Sioux Nation, 448 U.S. 371, 432 (1980)
(Rehnquist, J., dissenting)).
Moreover, “[Cash America] can claim no surprise or prejudice” by our addressing
collateral estoppel here. Am. Furniture Co., 721 F.2d at 482. Cash America specifically treated
Strong’s mootness argument as one of claim or issue preclusion. (See Petitioners’ Response to
the Suggestion of Mootness by Appellee James E. Strong (“Petitioners’ Mootness Resp.”), filed
Nov. 3, 2006, at 3-4.) And Cash America was given “a chance to argue . . . why the imposition
of an estoppel would be inappropriate.” Blonder-Tongue Labs., Inc. v. Univ. Found., 402 U.S.
313, 350 (1971). In particular, Cash America argued estoppel would be inappropriate because
the state-court order regarding sanctions was neither “on the merits” nor final. (Petitioners’
Mootness Resp. at 3.) We address these arguments below and conclude neither is persuasive. In
the end, the dispositive facts here are “uncontroverted,” and “we may not ignore their legal
effect.” Am. Furniture Co., 721 F.2d at 482.
35
motion, the trial court found that the defendants had flouted its discovery order and
“deliberately chose to not even review the documents or produce a privilege log”
to substantiate their blanket objections. Id. at 552 (quoting trial court’s July 17,
2006 order). Nor had the defendants requested a protective order for those
documents they asserted were protected from disclosure. Id. The state court again
ordered the defendants to comply with the plaintiff’s discovery requests. Id. at
553.
On October 11, 2006, after yet another hearing, the state court ruled that the
defendants had “deliberately and willfully failed and refused to produce the
documents which were the subject of the April 18 and July 17 orders.” Id. at 556
(quoting trial court’s October 11, 2006 order). The trial court held the defendants
in contempt, and, as a sanction, struck the defendants’ arbitration defenses,
pursuant to Georgia Code Section 9-11-37(b)(2).18 Id. at 553. The Court of
18
Section 9-11-37(b)(2) of the Official Code of Georgia Annotated provides:
If a party . . . fails to obey an order to provide or permit discovery, . . . the court in
which the action is pending may make such orders in regard to the failure as are just
and, among others, the following:
(A) An order that the matters regarding which the order was made or any
other designated facts shall be taken to be established for the purposes of the
action in accordance with the claim of the party obtaining the order;
(B) An order refusing to allow the disobedient party to support or oppose
designated claims or defenses, or prohibiting him from introducing
designated matters in evidence;
(C) An order striking out pleadings or parts thereof, or staying further
proceedings until the order is obeyed, or dismissing the action or proceeding
or any part thereof, or rendering a judgment by default against the
36
Appeals of Georgia affirmed the judgment on July 6, 2007. Id. at 556.19 The
Supreme Court of Georgia denied certiorari on September 24, 2007. Id. at 548.
When we rendered our decision in Strong I, the state-court sanction had not
yet been upheld on appeal and thus did not yet constitute a final judgment for
purposes of claim or issue preclusion. See Strong I, 485 F.3d at 613 n.21.
However, now that the sanction represents a final judgment from a court of
competent jurisdiction, the doctrine of collateral estoppel prevents Cash America
from relitigating those issues here.
B.
disobedient party;
(D) In lieu of any of the foregoing orders, or in addition thereto, an order
treating as a contempt of court the failure to obey any orders . . . .
19
The Court of Appeals of Georgia permits interlocutory appeals when:
(1) The issue to be decided appears to be dispositive of the case; or
(2) The order appears erroneous and will probably cause a substantial error at trial
or will adversely affect the rights of the appealing party until entry of final judgment
in which case the appeal will be expedited; or
(3) The establishment of precedent is desirable.
Ga. Ct. App. R. 30. To appeal, the losing party must first seek a certificate of immediate review
from the trial court: “[I]n any appeal under this chapter where the order, decision, or judgment is
not final, it shall be necessary that the trial judge certify within ten days of entry thereof that the
order, decision, or judgment is of such importance to the case that an immediate review should
be had.” Ga. Code Ann. § 5-7-2; see also id.. § 5-6-34(b) (“Where the trial judge in rendering an
order, decision, or judgment, not otherwise subject to direct appeal . . . certifies within ten days
of entry thereof that the order, decision, or judgment is of such importance to the case that
immediate review should be had, the Supreme Court or the Court of Appeals may thereupon, in
their respective discretions, permit an appeal to be taken from the order, decision, or judgment if
application is made thereto within ten days after such certificate is granted.”).
37
The general principle of res judicata prevents the relitigation of issues and
claims already decided by a competent court. “Once a party has fought out a
matter in litigation with the other party, he cannot later renew that duel.” Comm’r
of Internal Revenue v. Sunnen, 333 U.S. 591, 598 (1948). Res judicata comes in
two forms: claim preclusion (traditional “res judicata”) and issue preclusion (also
known as “collateral estoppel”). See id. at 597-98.
In considering whether to give preclusive effect to state-court judgments
under res judicata or collateral estoppel, the federal court must apply the rendering
state’s law of preclusion. See Kizzire v. Baptist Health Sys., Inc., 441 F.3d 1306,
1308 (11th Cir. 2006) (res judicata); Agripost, Inc. v. Miami-Dade Cnty., ex rel.
Manager, 195 F.3d 1225, 1229 n.7 (11th Cir.1999) (collateral estoppel); see also
28 U.S.C. § 1738. Thus, in this case, we are obliged to apply Georgia preclusion
law.
While claim preclusion bars “repetitious suits involving the same cause of
action,” Sunnen, 333 U.S. at 597 (emphasis added); accord Cromwell v. Cnty. of
Sac, 94 U.S. 351, 352 (1876), issue preclusion precludes the re-adjudication of the
same issue, where the issue was actually litigated and decided in the previous
adjudication, even if it arises in the context of a different cause of action, Karan,
Inc. v. Auto-Owners Ins. Co., 629 S.E.2d 260, 262 (Ga. 2006); Waldroup v.
38
Greene Cnty. Hosp. Auth., 463 S.E.2d 5, 7 (Ga. 1995); Dep’t of Human Res. v.
Fleeman, 439 S.E.2d 474, 475 (Ga. 1994). Because the instant FAA petition and
the state-court litigation as a whole do not share identical causes of action, which is
required for the application of claim preclusion, Morrison v. Morrison, 663 S.E.2d
714, 718 (Ga. 2008), we treat the instant preclusion question as one of collateral
estoppel.
Although Georgia law has not settled on a canonical list of elements to
establish collateral estoppel, Georgia case law can be distilled into the following
formulation: A party seeking to assert collateral estoppel under Georgia law must
demonstrate that (1) an identical issue, (2) between identical parties, (3) was
actually litigated and (4) necessarily decided, (5) on the merits, (6) in a final
judgment, (7) by a court of competent jurisdiction. See Body of Christ
Overcoming Church of God, Inc. v. Brinson, 696 S.E.2d 667, 669 (Ga. 2010)
(requiring for collateral estoppel that “issue . . . had been resolved on the merits in
prior litigation,” “identity of the parties or their privies between the two actions,”
and that “previous litigation was decided by a court of competent jurisdiction”);
Karan, 629 S.E.2d at 262-63 (“[C]ollateral estoppel precludes the re-adjudication
of an issue that has previously been litigated and adjudicated on the merits in
another action between the same parties or their privies . . . [where] those issues . . .
39
actually were litigated and decided in the previous action, or . . . necessarily had to
be decided in order for the previous judgment to have been rendered.” ) (quoting
Waldroup, 463 S.E.2d at 7); In re T.M.G., 570 S.E.2d 327, 329 (Ga. 2002)
(requiring for collateral estoppel “identity of the parties . . . in both actions” and
that same issue “actually [was] litigated and decided in the previous action” or
“necessarily had to be decided in order for the previous judgment to have been
rendered”) (citing Waldroup, 463 S.E.2d at 7); Kent v. Kent, 452 S.E.2d 764, 766
(Ga. 1995) (“[C]ollateral estoppel applies where an issue of fact or law is actually
litigated and determined by a valid judgment, and the determination is essential to
the judgment.”).20 Thus, as a general principle, issue preclusion requires the same
elements as claim preclusion,21 except that instead of requiring an identical cause
20
Although this Court recited a slightly different formulation of the requisite collateral
estoppel elements in Pleming v. Universal-Rundle Corp., 142 F.3d 1354, 1359 (11th Cir. 1998)
(citing I.A. Durbin, Inc. v. Jefferson Nat’l Bank, 793 F.2d 1541, 1549 (11th Cir. 1986)) (not
requiring identity of parties), the Court appeared to draw those elements from federal common
law rather than Georgia law, and acknowledged in a footnote that “the parties and the district
court have failed to address whether federal or state principles of collateral estoppel apply to this
question.” Pleming, 142 F.3d at 1359 n.6. The court did not reach the question of which law to
apply, because both Georgia and federal law required “the actual litigation of the issue in
question in the prior proceeding,” which was dispositive of the issue in the case. Id. The court
cited to Waldroup, 463 S.E.2d at 7, as representing the Georgia law of collateral estoppel.
Waldroup supports the formulation we have laid out in the text above, requiring identity of
parties. Of course, it would make no difference in this case, because there is identity of parties.
21
Under Georgia law, a case is barred by claim preclusion if the following elements are
met: “(1) identity of the cause of action, (2) identity of the parties or their privies, . . . (3)
previous adjudication on the merits by a court of competent jurisdiction”; (4) embodied in a final
judgment. Karan, 629 S.E.2d at 262; see also Ga. Code Ann. § 9-12-40.
40
of action, it requires only an identical issue between the two cases, where the issue
was actually litigated and decided in the previous adjudication. See Waldroup, 463
S.E.2d at 7 (“[U]nlike res judicata, collateral estoppel does not require identity of
the claim -- so long as the issue was determined in the previous action and there is
identity of the parties, that issue may not be re-litigated, even as part of a different
claim.”).
C.
We conclude that Georgia’s law of collateral estoppel bars the district court
from granting the relief requested by Cash America’s FAA petition in the instant
case. We consider each of the necessary elements of collateral estoppel in turn.
1. Competent Jurisdiction
The parties do not dispute that the rendering court -- the State Court of Cobb
County -- had jurisdiction over both the parties and the subject matter of the
controversy.22 The case was properly before the state court after having been
remanded from the federal court for lack of federal jurisdiction.
2. Final Judgment
“It is the general rule that a judgment sought to be used as a basis for the
22
While Georgia county state courts, as opposed to superior courts, are courts of limited
jurisdiction, their jurisdiction extends to “[t]he trial of civil actions without regard to the amount
in controversy, except those actions in which exclusive jurisdiction is vested in the superior
courts.” Ga. Code Ann. § 15-7-4(a)(2).
41
application of the doctrine of res judicata (or collateral estoppel) must be a final
judgment.” CS-Lakeview At Gwinnett, Inc. v. Retail Dev. Partners, 602 S.E.2d
140, 142 (Ga. Ct. App. 2004) (quotation omitted);23 Restatement (Second) of
Judgments § 13 (1982) (“Restatement of Judgments”) (“The rules of res judicata
are applicable only when a final judgment is rendered.”). In general, “under
Georgia law finality for preclusion purposes may . . . be measured by the same
standard as finality for appealability purposes.” Lops v. Lops, 140 F.3d 927, 938
(11th Cir. 1998); accord Culwell v. Lomas & Nettleton Co., 248 S.E.2d 641, 642
(Ga. 1978) (equating appealability and expiration of appeal period with preclusive
effect). The courts of Georgia and our own binding precedent interpreting Georgia
law have clarified that when a trial judge certifies an interlocutory order for
immediate appeal, the order becomes final for purposes of both appealability and
preclusion. See Culwell, 248 S.E.2d at 642 (holding that “[i]f the trial court does
certify that the judgment is final and ripe for review under Code Ann. §
81A-154(b) [now § 9-11-54(b)24 ], the time for appeal begins to run,” creating “res
23
“Absent a decision by the highest state court or persuasive indication that it would
decide the issue differently, federal courts follow decisions of intermediate appellate courts in
applying state law.” Galindo v. ARI Mut. Ins. Co., 203 F.3d 771, 775 (11th Cir. 2000).
24
Section 9-11-54(b) provides:
When more than one claim for relief is presented in an action, whether as a claim,
counterclaim, cross-claim, or third-party claim, or when multiple parties are
involved, the court may direct the entry of a final judgment as to one or more but
42
judicata effect”); Walker v. Robinson, 207 S.E.2d 6, 7 (Ga. 1974) (holding that for
order to be appealable, it must either resolve all claims or else be accompanied by
trial court certificate of appeal); see also Gresham Park Cmty. Org. v. Howell, 652
F.2d 1227, 1242 n.43 (5th Cir. Unit B Aug. 1981) (explaining that “final
judgments” for purposes of res judicata include “those in which the action is no
longer pending” and “those made final through the appropriate certification [by the
trial court] under Ga. Code § 81A-154(b) [now § 9-11-54(b)]”), overruled on other
grounds, Wood v. Orange Cnty., 715 F.2d 1543, 1546 (11th Cir. 1983).
Cash America correctly argued in its briefing to this Court that “only a final
judgment has preclusive effect and a judgment that is subject to appellate review or
is being appealed is not a final judgment.” (Petitioners’ Mootness Resp. at 4.) It is
true that the preclusive effect of a judgment is suspended while the order is on
appeal. See Ga. Code Ann. § 9-12-19. Cash America specifically informed this
Court before our decision in Strong I that it “intend[ed] to appeal the [state court’s]
fewer than all of the claims or parties only upon an express determination that there
is no just reason for delay and upon an express direction for the entry of judgment.
In the absence of such determination and direction, any order or other form of
decision, however designated, which adjudicates fewer than all the claims or the
rights and liabilities of fewer than all the parties shall not terminate the action as to
any of the claims or parties, and the order or other form of decision is subject to
revision at any time before the entry of judgment adjudicating all the claims and the
rights and liabilities of all the parties.
Ga. Code Ann. § 9-11-54(b) (emphasis added).
43
Order.” (Id.) Accordingly, in Strong I, we did not hold that the state-court
sanction precluded Cash America from pursuing its FAA petition. See Strong I,
485 F.3d at 613 n.21. However, a judgment becomes final for all purposes upon
the conclusion of the appeals process. Ga. Code Ann. § 9-11-60(h) (“[A]ny ruling
by the Supreme Court or the Court of Appeals in a case shall be binding in all
subsequent proceedings in that case . . . .”); cf. CS-Lakeview, 602 S.E.2d at 142.
The Cash America defendants successfully sought an interlocutory appeal from the
state court’s order striking their arbitration defense, and the state-court judgment
was affirmed by the Court of Appeals of Georgia. See Ga. Cash Am., 649 S.E.2d
at 550, 556. The Supreme Court of Georgia denied certiorari. Id. at 548. The
judgment is now final for all preclusive purposes.
3. Identical Parties
Strong named three Cash America parties -- Cash America International,
Inc., Georgia Cash America, Inc., and Daniel R. Freehan, the CEO of both
companies -- as defendants in his state-court complaint. The state court’s sanction
was imposed as to all defendants jointly in that litigation. See Ga. Cash Am., 649
S.E.2d at 551, 553. The very same Cash America defendants brought the instant
FAA petition.25 They named Strong as the Respondent in this petition. Thus, as
25
There is also a new Cash America petitioner that was not specifically named as a
defendant in the state-court litigation, called Cash America Financial Services, Inc. However, it
44
between Strong and the Cash America defendants, there is identity of parties in
both the state-court case and the instant FAA petition.26
4. Identical Issue
The issue presented to the federal district court in the instant FAA petition is
the identical issue that was already decided by the state court: whether Strong’s
claims that the conditions of his loan violated state law are subject to binding
arbitration. This is the threshold issue both for a federal court to grant relief to
Cash America under Section 4 of the FAA, and for a state court to adjudicate the
merits of Cash America’s asserted arbitration defense in the state-court litigation.
Both the state and federal courts would decide the issue under identical
governing law. The substantive provisions of the FAA -- found in § 2, the Act’s
“centerpiece provision,” Vaden, 129 S. Ct. at 1274 (quoting Mitsubishi, 473 U.S.
at 625) -- are “equally binding on state and federal courts.” Id. at 1271 (citing
appears that Cash America Financial Services, Inc. is either the parent corporation or an affiliate
of Georgia Cash America, Inc. Indeed, Cash America Financial Services, Inc. expressly referred
to itself as a defendant in Strong’s state-court litigation, stating in the FAA petition that
“Petitioners . . . Cash America Financial Services, Inc. (“Cash America”) . . . bring this Verified
Petition . . . to stay a court proceeding . . . initiated by Respondent against Cash America
[Financial Services, Inc.].” In other words, Cash America Financial Services, Inc. has itself
conceded that it is an identical party in both lawsuits.
26
The Cash America defendants are bound by the prior judgment even though they
brought the instant petition together with Community State Bank, which was not a party in the
state-court litigation. See Crider v. Harris, 189 S.E. 519, 520 (Ga. 1937) (holding that prior
judgment was res judicata as to plaintiffs who were parties to first action, notwithstanding that
new party in second action was not bound by judgment).
45
Southland Corp. v. Keating, 465 U.S. 1, 12 (1984)). Both state and federal courts
must compel arbitration if the substantive provisions of Section 2 are satisfied; that
is, both courts must find the arbitration agreement “valid, irrevocable, and
enforceable,” unless the court finds “such grounds as exist at law or in equity for
the revocation of any contract.” 9 U.S.C. § 2.27
In both state and federal court, Strong alleged defects in the “making of the
arbitration agreement,” 9 U.S.C. § 4 -- namely fraud in the factum and procedural
unconscionability, either of which would constitute “grounds [that] exist at law or
in equity for the revocation of any contract.” 9 U.S.C. § 2.28 Such contractual
defects would equally undermine Cash America’s state-court arbitration defenses
27
The full text of Section 2 provides:
A written provision in any maritime transaction or a contract evidencing a
transaction involving commerce to settle by arbitration a controversy thereafter
arising out of such contract or transaction, or the refusal to perform the whole or any
part thereof, or an agreement in writing to submit to arbitration an existing
controversy arising out of such a contract, transaction, or refusal, shall be valid,
irrevocable, and enforceable, save upon such grounds as exist at law or in equity for
the revocation of any contract.
9 U.S.C. § 2.
28
The ability of such contractual defects to invalidate arbitration agreements is not
affected by the Supreme Court’s decision in AT&T Mobility LLC v. Concepcion, 563 U.S. --,
131 S. Ct. 1740 (2011), which preserved “generally applicable contract defenses, such as fraud,
duress, or unconscionability,” so long as the defenses do not “apply only to arbitration or . . .
derive their meaning from the fact that an agreement to arbitrate is at issue.” Id. at 1746
(quotation omitted); see also id. at 1753 (Thomas, J., concurring) (acknowledging arbitration
agreements may be invalidated by “challenges [to] the formation of the arbitration agreement,
such as . . . fraud or duress”).
46
and its claim for § 4 relief. Because the FAA petition in this case was stalled on
federal jurisdiction grounds, the state court reached the issue of the arbitration
agreement’s enforceability first. This issue is identical to the one that the federal
district court faces in adjudicating Cash America’s § 4 petition.
5. Actually Litigated
To support collateral estoppel, the issue must have been “actually . . .
litigated” in the previous litigation. Karan, 629 S.E.2d at 262-63 (quoting
Waldroup, 463 S.E.2d at 7). An issue is considered “actually litigated” when the
“issue is properly raised, by the pleadings or otherwise, and is submitted for
determination, and is determined.” Restatement of Judgments § 27, cmt. d.
Requiring that issues be “actually litigated” ensures that collateral estoppel
precludes only those issues that were contested by the parties. See Cleland v.
Gwinnett Cnty., 487 S.E.2d 434, 436 (Ga. Ct. App. 1997) (holding that where one
party’s interpretation was accepted without contest by both the other party and the
court, “it was not ‘actually litigated’” and thus could not support collateral estoppel
in subsequent litigation).
The state-court litigants unquestionably “actually litigated” the issue of
whether Strong’s state-court claims were subject to binding arbitration. The Cash
America defendants clearly raised the issue in the pleadings by asserting the
47
existence of the arbitration agreement in support of their “first, sixth and seventh
defenses” in their Answer to Strong’s complaint. See Order at 5-6, Strong v. Ga.
Cash Am., Inc., No. 2004A-7104-6 (Ga. Cobb Cnty. Oct. 11, 2006). Additionally,
the defendants raised the issue by way of motion, in moving to stay the
proceedings and compel arbitration, pursuant to the arbitration agreement. See Ga.
Cash Am., 649 S.E.2d at 551. Further, the issue was contested, in that Strong
disputed the agreement’s enforceability on the grounds of procedural
unconscionability and fraud in the factum. Id.; see Cleland, 487 S.E.2d at 436
(issues are “actually litigated” if they are “contested” by the parties). The state
court provided the defendants with an opportunity to substantiate their arbitration
defenses and overcome Strong’s objections to the arbitration agreement’s
enforceability by ordering discovery on the issue. Finally, the state court decided
the issue against the defendants by striking their arbitration defenses based on a
finding that the defendants “deliberately and willfully failed and refused” to follow
the court’s orders to take discovery on the issue. Ga. Cash Am., 649 S.E.2d at 553;
see also Ga. Code Ann. § 9-11-37(b)(2). There is no question that the
enforceability of the arbitration agreement was raised and contested, which is all
that is required by the “actually litigated” requirement.
6. Necessarily Decided
48
The “necessarily decided” prong of the collateral estoppel test ensures that
the prior court actually ruled on the issue at hand. The issue must have been
squarely addressed, or “directly decided,” in the former suit before it can be held as
conclusive for subsequent litigation. Tootle v. Player, 169 S.E.2d 340, 341 (Ga.
1969) (quoting Brown v. Brown, 91 S.E.2d 495, 497 (Ga. 1956)). “[I]t is of the
essence of estoppel by judgment that it is certain that the precise fact was
determined by the former judgment.” De Sollar v. Hanscome, 158 U.S. 216, 221
(1895).
The essential role of this “necessarily decided” requirement is that it
prevents judgments that rest on ambiguous grounds from having issue preclusive
effect. Thus, where two or more possible grounds would theoretically support a
judgment, and both were actually litigated, and the court does not clearly state on
which ground its judgment rests, the judgment cannot have issue preclusive effect
as to either issue, for neither is definitively the ground of the judgment. See
Restatement of Judgments § 27, cmt. i (“If a judgment of a court of first instance is
based on determinations of two issues, either of which standing independently
would be sufficient to support the result, the judgment is not conclusive with
respect to either issue standing alone.”); see also Callaway v. Irvin, 51 S.E. 477,
480 (Ga. 1905) (“Thus, where several defenses are pleaded, and the judgment does
49
not show upon which issue the decision was rendered, there is no estoppel.”).29 By
contrast, an issue is “necessarily decided” when the prior court in fact “resolved”
it. Lindsey v. State, 651 S.E.2d 66, 71 (Ga. 2007) (quotation omitted).
This case easily satisfies the “necessarily decided” prong. The state court’s
order was unambiguous, and addressed only one issue: whether Strong’s state-
court claims were subject to binding arbitration. It squarely resolved this issue
against the Cash America defendants. This is not a case in which a court issued an
ambiguous dismissal order without stating its grounds or reasoning. Only one
issue was before the court, and only one issue was decided.
While the state court did not decide the issue of whether the arbitration
29
See also Exhibitors Poster Exch., Inc. v. Nat’l Screen Serv. Corp., 421 F.2d 1313, 1319
(5th Cir. 1970) (“If a claim requires elements 1, 2 and 3 for recovery, summary judgment is
proper if 2 is missing. But this would not give to a summary judgment based thereon a perpetual
cloak to forbid inquiry into 1 or 3, or both. This would distort the wholesome policy behind
collateral estoppel.”); Gunnin v. Carlile, 25 S.E.2d 652, 653-54 (Ga. 1943) (holding that where
defendant answered suit by both asserting title to land and denying allegations as to timber
removal, general verdict in defendant’s favor did not carry preclusive effect as to issue of
defendant’s title to land, for it “does not appear that the issue as to title was necessarily or
actually determined, and it was incumbent upon her to remove the uncertainty and to show that
this issue was actually determined in her favor, before she would be entitled to a verdict in the
instant case upon the theory of res adjudicata [sic] or estoppel”); Sumner v. Sumner, 197 S.E.
833, 834 (Ga. 1938) (syllabus by the court) (“[T]here is an estoppel by judgment only as to such
matters within the scope of the previous pleadings as necessarily had to be adjudicated in order
for the previous judgment to be rendered, or as to such matters within the scope of the pleadings
as might or might not have been adjudicated, but which are shown by aliunde proof to have been
actually litigated and determined.”); Hudgins v. Bawtinhimer, 395 S.E.2d 909, 911 (Ga. Ct. App.
1990) (holding that court order dismissing petition for involuntary commitment without
specifying reason does not carry preclusive effect on issue of whether commitment process was
defective, as court might have found that dismissal was warranted for other reasons, including
finding that involuntary treatment was not needed).
50
agreement would have been enforceable in the counterfactual world in which the
defendants did not commit discovery abuses, that issue did not need to be decided,
because it was irrelevant. The defendants did commit discovery abuses. Thus, the
only issue to be decided was whether the agreement was enforceable in spite of the
discovery abuses. This issue the court explicitly and necessarily decided.
7. On the Merits
It is not entirely clear whether Georgia law requires an “on the merits”
inquiry for purposes of collateral estoppel.30 Nonetheless, because the law is
unclear, and because the Petitioners opposed Strong’s collateral estoppel claim
30
The term “on the merits” sometimes appears in Georgia case law as a collateral
estoppel requirement. E.g., Body of Christ, 696 S.E.2d at 669 (requiring for collateral estoppel
that “issue . . . had been resolved on the merits in prior litigation”); Waldroup, 463 S.E.2d at 7
(“Collateral estoppel precludes the re-adjudication of an issue that has previously been litigated
and adjudicated on the merits in another action between the same parties or their privies.”);
Powell v. Powell, 37 S.E.2d 191, 194 (Ga. 1946) (“Under both [res judicata and collateral
estoppel], in order for the former decision to be conclusive, it must have been based, not merely
on purely technical grounds, but at least in part on the merits where under the pleadings they
were or could have been involved.” (quoting Sumner, 197 S.E. at 834) (alteration added)). Other
times it does not. E.g., Kent, 452 S.E.2d at 766 (“[C]ollateral estoppel applies where an issue of
fact or law is actually litigated and determined by a valid judgment, and the determination is
essential to the judgment.” (emphasis omitted)). There is also evidence that Georgia courts view
the “actually litigated” and “necessarily decided” requirements of collateral estoppel as already
encompassing an especially stringent “on the merits” requirement. See, e.g., Piedmont Cotton
Mills, Inc. v. Woelper, 498 S.E.2d 255, 256 (Ga. 1998) (contrasting claim preclusion, which
requires that “merits were or could have been determined,” with collateral estoppel, which
“applies only to matters which were directly decided in the former action”); Waldroup, 463
S.E.2d at 8 (holding that prior judgment did not collaterally estop plaintiff’s subsequent lawsuit
because, “[w]hile [the previous] ruling was on the merits,” the relevant issue was not “actually
litigated and decided” in the first action); see generally In re Graham, 191 B.R. 489, 494-95
(Bankr. N.D. Ga. 1996) (stating that Georgia’s “actually . . . litigated and determined”
requirement “implicit[ly]” encompasses an “on the merits” inquiry).
51
specifically on the basis of the “on the merits” requirement, we will address this
requirement out of an abundance of caution and treat it as a prerequisite to the
operation of collateral estoppel. Cash America argued in its briefing to this Court
that the state-court order “is not a final merits decision on the enforceability of the
arbitration agreement, [sic] instead it only strikes the defense of arbitration.”
(Petitioners’ Mootness Resp. at 3.) Thus, Cash America asserts, the state-court
order “does not preclude another court from considering the merits of the
arbitration issue on the basis of either res judicata or collateral estoppel because it
did not reach the merits of the arbitrability issue.” (Id.) We are unpersuaded.
The Georgia cases are clear that court orders dismissing claims or striking
pleadings as a sanction for willful discovery violations function as an adjudication
on the merits and carry res judicata effect. See Brantley v. Sparks, 306 S.E.2d 337,
338 (Ga. Ct. App. 1983) (sanction of dismissal after finding of willful violation of
discovery order operates as an adjudication on the merits); Morton v. Retail Credit
Co., 196 S.E.2d 902, 902-03 (Ga. Ct. App. 1973) (holding that where discovery
violation was willful, statutory sanctions of dismissal, default, or striking of
pleadings operate as adjudication on the merits and carry res judicata effect); cf.
Semtek Int’l Inc. v. Lockheed Martin Corp., 531 U.S. 497, 509 (2001) (stating in
dicta that “dismissals for willful violation of discovery orders” should be accorded
52
“claim-preclusive effect” to preserve the rendering court’s “interest in the integrity
of [its] own processes”).
Georgia case law has explained that the on-the-merits requirement can be
satisfied even if the court does not pass directly on the substance of the claim:
[A]n adjudication on the merits does not require that the litigation
should be determined on the merits, in the moral or abstract sense of
these words. It is sufficient that the status of the action was such that
the parties might have had their suit thus disposed of, if they had
properly presented and managed their respective cases. Thus, it is
only where the merits were not and could not have been determined
under a proper presentation and management of the case that res
judicata is not a viable defense. If, pursuant to an appropriate
handling of the case, the merits were or could have been determined,
then the defense is valid.
Smith v. AirTouch Cellular of Ga., Inc., 534 S.E.2d 832, 836 (Ga. Ct. App. 2000)
(quoting Piedmont Cotton, 498 S.E.2d at 256).31 Thus, it is clear that even if “on
31
The Second Restatement of Judgments has similarly explained that the term “on the
merits” does not necessarily mean that the court has evaluated the substance of the claim,
because “[i]ncreasingly, . . . by statute, rule, or court decision, judgments not passing directly on
the substance of the claim have come to operate as a bar.” Restatement of Judgments § 19, cmt.
a. The authors explained the reasons for this development this way:
[C]onsiderations [of fairness and repose] may impose [preclusive effect] even though
the substantive issues have not been tried, especially if the plaintiff has failed to avail
himself of opportunities to pursue his remedies in the first proceeding, or has
deliberately flouted orders of the court.
The general rule stated in this Section requires that errors underlying a
judgment be corrected on appeal or other available proceedings to modify the
judgment or to set it aside, and not made the basis for a second action on the same
claim.
Id.
53
the merits” adjudication is a prerequisite to collateral estoppel, such a requirement
is satisfied by the state-court order in this case. The state court struck the Cash
America defendants’ arbitration defenses as a statutorily authorized sanction for
repeated and flagrant discovery violations. The court specifically found the
violations to be “deliberate[] and willful[].” And the court did not specify that its
adjudication was not on the merits. Cf. Ga. Code Ann. § 9-11-41(b)-(c) (dismissal
of a counterclaim operates as an adjudication on the merits unless court in its order
specifies otherwise). Were the district court to order arbitration in this case in spite
of the state-court order, it would render utterly nugatory the state court’s sanction
-- a sanction that was upheld on appeal and that the court was entitled by law to
impose. See Ga. Code Ann. § 9-11-37(b)(2).
In sum, because Cash America’s arbitration defenses were struck by the
Georgia state court as a statutorily authorized sanction for their willful and
deliberate discovery abuses, Cash America may not relitigate the issue of the
arbitration clause’s enforceability in federal court.32
32
We acknowledge that this resolution creates an anomalous result, insofar as the same
common nucleus of operative fact may be the subject of two separate proceedings in two
separate fora -- a state-court lawsuit in Cobb County, Georgia and an arbitration proceeding in
Atlanta, Georgia. However, this result follows directly from the Supreme Court’s admonition
that judicial concerns about “economy and efficiency” do not trump the importance of resolution
in the proper forum. Dean Witter Reynolds, Inc. v. Byrd, 470 U.S. 213, 217 (1985) (quotation
omitted). As the Court has said, “[t]he Arbitration Act requires district courts to compel
arbitration of pendent arbitrable claims when one of the parties files a motion to compel, even
where the result would be the possibly inefficient maintenance of separate proceedings in
54
IV.
For the foregoing reasons, we AFFIRM the district court’s dismissal of the
FAA petition, on the alternative ground of issue preclusion, as to Cash America
Financial Services, Inc., Cash America International, Inc., Georgia Cash America,
Inc., and Daniel R. Feehan. However, we VACATE the order of dismissal as to
Community State Bank, and REMAND to the district court to consider in the first
instance the merits of the Bank’s petition to compel arbitration.
AFFIRMED IN PART, VACATED IN PART, AND REMANDED.
different forums.” Id. And a panel of this Circuit has since explained that “[t]he corollary is that
a court cannot shoehorn pendent non-arbitrable claims into arbitration based on ‘its own views
of economy and efficiency.’” Thomas v. Carnival Corp., 573 F.3d 1113, 1120 (11th Cir. 2009)
(quoting Dean Witter, 470 U.S. at 217) (emphasis in original).
55