Community State Bank v. Tommy Knox

UNPUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
No. 12-1304
COMMUNITY STATE BANK; COMPUCREDIT CORPORATION; VALUED
SERVICES, LLC; VALUED SERVICES OF NORTH CAROLINA, LLC;
FORESIGHT MANAGEMENT COMPANY, LLC,
Plaintiffs – Appellants,
and
VALUED SERVICES AQUISITIONS COMPANY, LLC; VALUED SERVICES
FINANCIAL HOLDINGS, LLC; VALUED SERVICES HOLDINGS, LLC;
FIRST AMERICAN HOLDING, LLC; FIRST AMERICAN MANAGEMENT,
INC.; LARRY A. KUGLER; JAMES E. SCOGGINS; ROBERT P. MANNING,
Plaintiffs,
v.
TOMMY KNOX; VELMA KNOX; KERRY GORDON; WILLIE PATRICK,
Defendants – Appellees.
Appeal from the United States District Court for the Middle
District of North Carolina, at Greensboro. James A. Beaty, Jr.,
Chief District Judge. (1:05-cv-00226-JAB-LPA)
Argued: January 30, 2013 Decided: April 11, 2013
Before TRAXLER, Chief Judge, and GREGORY and DUNCAN, Circuit
Judges.
Affirmed by unpublished opinion. Judge Duncan wrote the
opinion, in which Chief Judge Traxler and Judge Gregory
concurred.
ARGUED: Jonathan Michael Watkins, MOORE & VAN ALLEN, PLLC,
Charlotte, North Carolina, for Appellants. J. Jerome Hartzell,
HARTZELL & WHITEMAN, LLP, Raleigh, North Carolina, for
Appellees. ON BRIEF: Jennifer K. Van Zant, BROOKS PIERCE,
MCLENDON, HUMPHREY & LEONARD, LLP, Greensboro, North Carolina,
for Appellant Community State Bank; Thomas D. Myrick, Mark A.
Nebrig, MOORE & VAN ALLEN, PLLC, Charlotte, North Carolina; J.
Allen Maines, Tameka Phillips, PAUL HASTINGS LLP, Atlanta,
Georgia, for Appellants Compucredit Corporation, Valued
Services, LLC, Valued Services of North Carolina, LLC, and
Foresight Management Company, LLC. Leslie A. Bailey, Amy Radon,
PUBLIC JUSTICE, Oakland, California; Carlene McNulty, NORTH
CAROLINA JUSTICE CENTER, Raleigh, North Carolina; Mallam J.
Maynard, FINANCIAL PROTECTION LAW CENTER, Wilmington, North
Carolina; Mona Lisa Wallace, John Hughes, WALLACE & GRAHAM, PA,
Salisbury, North Carolina; Richard A. Fisher, RICHARD FISHER LAW
OFFICE, Cleveland, Tennessee, for Appellees.
Unpublished opinions are not binding precedent in this circuit.
2
DUNCAN, Circuit Judge:
This appeal arises from the district court’s dismissal of a
petition to compel arbitration of state-law claims brought by
borrowers against payday loan servicers in state court (the
“Petition”). We agree with the district court that neither the
loan servicers nor the state-chartered bank that allegedly
issued the loans (collectively, “Petitioners”) has satisfied the
requirements of the Federal Arbitration Act (the “FAA”), 9
U.S.C. § 4, to bring the Petition in federal court, and affirm.
I.
A.
Tommy Knox, Velma Knox, and Kerry Gordon (collectively,
“Knox”) obtained short-term, or “payday” loans 1 from entities in
North Carolina operating under the name First American Cash
Advance (collectively, the “loan servicers”). Asserting harm
1
“Payday lending” generally refers to transactions wherein
a borrower writes a personal check to the lender for a small
amount in exchange for cash in the amount of the check, less a
fee, coupled with the lender’s promise that the check will not
be presented until a date in the near future. Often the lender
is aware that the borrower’s bank account does not have
sufficient funds to cover the amount stated on the check, but
nevertheless approves the transaction. In particular, the “fee”
charged may be exorbitant, translating to a loan at an annual
interest rate of over 300 percent. Because of the dangers to
consumers and potential for predatory lending practices, many
states have undertaken to regulate or eliminate such
transactions.
3
from those transactions, Knox filed suit in state court against
the loan servicers. See Knox v. First Southern Cash Advance,
No. 05-CVS-0445 (New Hanover County, N.C., filed Feb. 8, 2005)
(“Knox”).
The Knox complaint contains various factual allegations
against the loan servicers, including improper deferred check
presentment practices, solicitation of customers to write checks
supported by insufficient funds, and charging illegal fees and
interest rates. According to the complaint, by purporting to do
business as agents for Community State Bank (“CSB”), an out-of-
state, state-chartered bank, the loan servicers were either (1)
the “true lenders” on the loans issued to Knox, in which case
they violated applicable North Carolina lending and usury laws;
or (2) not the true lenders, in which case they engaged in
unfair and deceptive trade practices, illegal efforts to evade
state law, and activities as loan brokers in contravention of
state law. The Knox complaint also contains a “limitation of
claims” section, which specifies that Knox does not assert any
claims under federal law, or against CSB or any other bank.
B.
On March 2, 2005, counsel for the loan servicers sent Knox
a request to submit to arbitration of the Knox claims. Knox did
not respond to the demand letter. Meanwhile, the loan servicers
attempted to remove the Knox action to federal court in the
4
Eastern District of North Carolina, asserting as the basis for
federal jurisdiction that Knox’s state-law usury claims were
completely preempted by the National Bank Act (the “NBA”), 12
U.S.C. §§ 85, 86, and Section 27 of the Federal Deposit
Insurance Act (the “FDIA”), 12 U.S.C. § 1831d. 2 See Knox v.
First Southern Cash Advance, No. 05-CV-43 (E.D.N.C. 2005), J.A.
265-68.
The district court remanded the case to state court,
holding that the FDIA does not apply to Knox’s claims against
the non-bank loan servicers, even if CSB actually issued the
loans. Id. In that remand order, the eastern district reviewed
the well-pleaded complaint rule, which controls the
determination of whether federal question jurisdiction exists.
That rule provides that an action is not removable under 28
U.S.C. § 1441(b) unless a federal question is apparent from the
face of the complaint. See id. at 266 (citing Caterpillar, Inc.
v. Williams, 482 U.S. 386, 392 (1987)). However, complete
preemption is an exception to the well-pleaded complaint rule.
“If Congress has expressed a clear intention to permit removal
of all state law claims arising within an area of law, courts
will construe those state claims to arise under federal law.”
2
Because Petitioners do not assert the NBA as a basis for
jurisdiction in this case, we omit further discussion of it.
5
J.A. 266. As the court also noted, complete preemption is an
“extraordinary result” that the Supreme Court has applied only
three times. Id.Turning to the loan servicers’ arguments, the court
determined that state-law usury claims are not completely
preempted by the FDIA merely because a state-chartered bank was
the named lender in the loans at issue, where the claims were
not brought against that bank. Consequently, the eastern
district found no federal question presented on the face of the
Knox complaint, and remanded the action to state court for lack
of subject-matter jurisdiction.
C.
The loan servicers, joined now by CSB, subsequently filed
this Petition under § 4 of the FAA in the Middle District of
North Carolina, asking that court to order arbitration of Knox’s
claims. See Community State Bank v. Knox, 850 F. Supp. 2d 586,
603 (M.D.N.C. 2012). Knox moved to dismiss the Petition.
Section 4 of the FAA authorizes a federal district court to
entertain a petition to compel arbitration brought by a party
“aggrieved” by another’s resistance to arbitration, if the court
would have jurisdiction, “save for [the arbitration] agreement,”
over “the subject matter of a suit arising out of the
controversy between the parties.” 9 U.S.C. § 4. As the
district court below noted, although § 4 allows an aggrieved
6
party to file such a petition in any district court which would
have subject-matter jurisdiction over the underlying
controversy, it does not itself bestow federal jurisdiction;
rather, it requires that an independent jurisdictional basis
over the parties’ dispute exist for access to the federal forum.
See Vaden v. Discover Bank, 556 U.S. 49, 59 (2009). As relevant
here, to determine whether an adequate independent
jurisdictional basis exists, the court “may look through a § 4
petition [to the underlying substantive controversy] to
determine whether it is predicated on an action that arises
under federal law.” Id. at 62 (internal quotation marks
omitted).
The court looked through the Petition to the stated
underlying controversy between the parties--the Knox complaint.
Although Knox asserted only state-law claims against non-diverse
loan servicers, Petitioners argued that the Knox action
nonetheless supplies a basis for federal jurisdiction because
its claims are completely preempted by the FDIA. Thus, the
district court below was faced with essentially the same
argument already rejected by the eastern district in remanding
the Knox case to state court.
Addressing Petitioners’ preemption argument, the district
court below examined our opinion in Discover Bank v. Vaden, 489
F.3d 594 (4th Cir. 2007) (“Vaden I”) (holding that the FDIA
7
completely preempts state usury laws that hold state-chartered
banks to a different maximum permissible interest rate), noting
that the Supreme Court reversed and remanded that decision on
other grounds in Vaden v. Discover Bank, 556 U.S. 49 (2009)
(“Vaden II”). The district court expressed doubt as to whether
the Supreme Court’s decision left intact Vaden I’s holding with
respect to FDIA preemption, but reasoned that, even if the FDIA
completely preempts state-law usury claims asserted against
state-chartered banks, the Knox claims do not qualify as such.
The district court discussed the loan servicers and CSB
separately. As to the former, the court explained that the loan
servicers, as non-bank entities, have no basis for seeking
protection under the FDIA, which applies only to banks. Nor did
the court accept CSB, a state-chartered bank to which the FDIA
does apply, as the “real party in interest” in the Knox action,
reasoning that the Knox complaint asserts state-law claims
against the loan servicers “separate from any potential
unasserted claims against [CSB],” 850 F. Supp. 2d at 601, and
that, “[a]s a result, the state-law claims in the Knox case are
simply state law claims against non-bank entities,” id. at 601.
The court further reasoned that the remand order from the
eastern district is entitled to preclusive effect on this issue.
Finally, the district court turned to CSB’s arguments that
it may bring a petition to compel Knox to arbitrate any claims
8
that Knox might assert against CSB, which would present a
federal question. Having already rejected the premise that the
Knox action should be viewed as properly brought against CSB,
the court further concluded that no underlying controversy
exists between Knox and CSB. Specifically, the court considered
the facts that: (1) the Knox complaint disclaims any allegations
against CSB; (2) CSB has ceased its “payday loan” activities in
North Carolina, and the statute of limitations has run on any
potential claims that could have been asserted against CSB
raising any of the theories being litigated in the Knox action;
and (3) under the agreement between the loan servicers and CSB,
the servicers are obligated to indemnify CSB for any potential
liability, meaning that CSB has no monetary stake in the outcome
of the Knox action.
Finding that there is no controversy between Knox and CSB
subject to arbitration, the district court concluded that CSB is
not a “party aggrieved” under § 4 of the FAA. “According to the
plain text of the FAA, Petitioners must allege that Respondents
refused to arbitrate, as well as that an underlying controversy
exists between the parties apart from the refusal to arbitrate.”
850 F. Supp. 2d at 602 (citing Klay v. United Healthgroup, Inc.,
376 F.3d 1092, 1110 n.19 (11th Cir. 2004) (“[I]f a party makes a
motion to compel arbitration under 9 U.S.C. § 4, a district
court must determine if there exists a case or controversy in
9
order for it to exercise its jurisdiction over that motion to
compel.”)).
The district court accordingly dismissed the Petition.
Petitioners timely appealed.
II.
The primary issue in this appeal is whether the district
court correctly concluded that no federal question provides a
basis for jurisdiction over the Petition. We review de novo the
district court’s determination of its own subject-matter
jurisdiction. See Taylor v. Kellogg Brown & Root Servs., Inc.,
658 F.3d 402, 408 (4th Cir. 2011); Lontz v. Tharp, 413 F.3d 435,
439 (4th Cir. 2005).
A.
Turning first to the loan servicers’ arguments, we find
that the Knox claims against the non-bank loan servicers fall
squarely outside the scope of the FDIA. Put briefly, the FDIA
allows a state-chartered bank to charge interest rates permitted
in its home state on loans made outside of that state, even if
that interest rate would be illegal in the state where the loan
is made. 12 U.S.C. § 1831d; see also West Virginia v. CashCall,
Inc., 605 F. Supp. 2d 781, 784-85 (S.D.W. Va. 2009). Although
we decline to apply collateral estoppel to bar relitigation of
this issue, we nevertheless conclude, as did the eastern
10
district and the district court below, that the Knox claims are
substantively aimed at the loan servicers to the exclusion of
CSB. Thus, the claims have no connection to an out-of-state
state-chartered bank, and the FDIA cannot apply.
Petitioners rely heavily on our opinion in Vaden I, 489
F.3d at 601, in which a loan servicer sued to collect
outstanding credit card debt, and the debtor in turn filed
counterclaims and defenses which asserted violations of state
usury law against the servicer. On these facts, we found that
the debtor’s state-law usury claims were properly asserted
against the bank, not the servicer, because the bank was the
“real party in interest.” Id. Even if this analysis remains
intact after the Supreme Court’s reversal, see Vaden II, 556
U.S. 49, we would not reach the same result in the present case.
The Knox claims do not merely challenge certain terms of
the loans, but instead specifically target several practices of
the loan servicers. Unlike the borrower in Vaden I, Knox
disputes that CSB had authority over the loan terms and was the
“real lender.” Even so, pleading in the alternative, the Knox
complaint makes clear that, if CSB was in fact the actual lender
in the loans at issue, Knox still asserts claims against the
11
loan servicers only. 3 For this reason, and because unpaid debts
are not at issue, determination of which party controlled the
loan terms is far less integral here than in Vaden I.
Furthermore, the indemnification arrangement in this case is
reversed from that in Vaden I--the loan servicers have agreed to
indemnify CSB against potential claims, not vice versa. We
consequently decline Petitioners’ invitation to treat the Knox
claims as properly brought against CSB so as to bring those
claims within the scope of the FDIA.
Accordingly, no federal subject-matter jurisdiction exists
over the Knox claims, and no independent jurisdictional basis
supports the loan servicers’ Petition.
B.
Likewise, we find that the district court correctly
dismissed the Petition as brought by CSB. Because there is no
existing or potential substantive conflict between Knox and CSB
that Knox has refused to arbitrate, CSB has failed to satisfy
the requirements of § 4 of the FAA.
As the district court explained, Knox has not filed any
claims against CSB, in the Knox case or in any other forum. The
3
Specifically, Knox asserts unfair and deceptive trade
practices, illegal efforts to evade state law, and activities as
loan brokers in contravention of state law. We note that most
of these claims could not plausibly be asserted against CSB.
12
Knox complaint specifically disclaims any future action by Knox
against CSB, and the district court found that Knox would now be
time-barred from filing any claims related to the Knox
allegations against CSB. 4 Nevertheless, CSB argues that an
underlying dispute with Knox exists. In CSB’s view, the
Petition does not confine the underlying dispute to claims
asserted in the Knox action, but rather asks the court to find
federal question jurisdiction based on other potential claims.
We reject these arguments for the reasons that follow.
First, we reiterate that CSB has no stake in the Knox
action. Consequently, we cannot find an independent
jurisdictional basis for CSB’s Petition in the Knox claims.
Second, we fail to see any other underlying dispute between CSB
and Knox upon which CSB may base its request for arbitration,
and reject CSB’s invitation to invent one or allow a purely
hypothetical future claim to support the Petition.
The underlying controversy between the parties in this case
is concretely defined by the Knox claims. The Petition itself
makes this clear enough, asking the district court to order
arbitration of “the disputes raised in” the Knox action and stay
4
To support this point, Knox has filed a motion for
judicial notice, which proffers CSB’s “Motion for Voluntary
Dismissal” filed in a separate action proceeding in a different
federal venue. We deny the motion for judicial notice as
unwarranted and unnecessary to our determination.
13
those state proceedings. J.A. 25. Although the Petition also
attempts to frame the underlying dispute as one “centering
around the question of whether the loans made to [Knox] are
governed by [the FDIA], as opposed to state law,” J.A. 12, this
inaccurate characterization is just the sort of artful dodge
proscribed by Vaden II. See 556 U.S. at 67 (“Artful dodges by a
§ 4 petitioner . . . divert us from recognizing the actual
dimensions of that controversy.”). Petitioners do not seek
arbitration of the question of FDIA preemption; to the contrary,
they are currently seeking adjudication of that issue by federal
courts. Even if they desired arbitration on that point, a
preliminary jurisdictional issue such as this one could not be
passed on to an arbitrator in any event.
Accordingly, we decline to be diverted by the Petition’s
clever framing, recognizing instead that the Knox action
comprises the actual controversy between the parties. Cf. Vaden
II, 556 U.S. at 67-68 (“The text of § 4 instructs federal courts
to determine whether they would have jurisdiction over ‘a suit
arising out of the controversy between the parties’; it does not
give § 4 petitioners license to recharacterize an existing
controversy, or manufacture a new controversy, in an effort to
obtain a federal court’s aid in compelling jurisdiction.”).
Notably, the Eleventh Circuit recently reached the opposite
result, in Community State Bank v. Strong, 651 F.3d 1241 (11th
14
Cir. 2011). In that case, Strong, a payday lendee, brought a
putative class action against Georgia loan servicers, alleging
violations of state usury and licensing laws, as well as the
“Georgia RICO” statute, and renouncing any claims under federal
law or against any state-chartered bank. Id. at 1249-50. After
the loan servicer defendants, together with a non-named state-
chartered bank (also CSB), notified Strong of an intent to
arbitrate and received a rejection in reply, the loan servicers
and CSB filed a petition to compel arbitration under § 4 in
federal court. Id. at 1250.
The Eleventh Circuit affirmed the district court’s
dismissal of the loan servicers’ petition for reasons not
pertinent to this appeal, but determined that jurisdiction was
proper as to CSB because “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.” Id. at 1245. Thus apparently
freed from the Supreme Court’s focus on existing litigation to
define the actual controversy between the parties in Vaden II,
Strong surveyed any number of plausible claims that could be
filed against CSB, and ultimately found federal jurisdiction
proper based on a hypothetical Federal Racketeer Influenced and
15
Corrupt Organizations (“RICO”) claim, 18 U.S.C. §§ 1961-1962.
Id. at 1259-60.
We cannot reach the same result on the facts presented
here. Although it is true that no preexisting litigation
defines the controversy between Knox and CSB, this is so because
there is no controversy between Knox and CSB. Although the
Petition posits that Knox could allege RICO claims against CSB,
this is pure speculation. Not only has Knox specified, both in
the state court complaint and in sworn affidavits in the present
action, that the Knox plaintiffs will not bring any claims
against CSB, but CSB has also never asked Knox to arbitrate a
RICO claim. In fact, unlike in Strong, here CSB had not asked
Knox to arbitrate any claims at all prior to filing the
Petition. 5
To the extent the Petition describes the real controversy
that Petitioners seek to have arbitrated, that controversy is
5
At oral argument, Petitioners conceded that the March 2,
2005 letter from the loan servicers to Knox constitutes the only
demand for arbitration contained in the record, and that CSB was
not a party to any pre-Petition attempt to request arbitration.
This fact alone might be fatal to CSB’s ability to petition
under § 4 of the FAA. See 9 U.S.C. § 4 (describing a party who
may bring a petition thereunder as one “aggrieved by the alleged
failure, neglect, or refusal of another to arbitrate”); cf.
Strong, 651 F.3d at 1256 (“After all, FAA § 4 is only triggered
when one party has expressed a ‘refusal’ to arbitrate, and the
other party has been thereby ‘aggrieved.’” (quoting 9 U.S.C. §
4)).
16
embodied in the Knox claims. Those claims were not brought
against CSB, are distinct from any claims that could be made
against CSB, and do not implicate any interest on CSB’s part
that could be compelled to arbitration by a federal court. We
decline to reach beyond the existing litigation in search of a
basis for federal jurisdiction over the Petition. Accordingly,
we conclude that the district court properly focused on the
actual underlying controversy between the parties in dismissing
the Petition.
III.
For the foregoing reasons, the judgment of the district
court is
AFFIRMED.
17