Sues v. National Debt Relief LLC

NOT FOR PUBLICATION IN WEST'S HAWAI#I REPORTS AND PACIFIC REPORTER
Electronically Filed
Intermediate Court of Appeals
CAAP-XX-XXXXXXX
14-MAY-2021
08:22 AM
Dkt. 55 MO
NO. CAAP-XX-XXXXXXX
IN THE INTERMEDIATE COURT OF APPEALS
OF THE STATE OF HAWAI#I
CLEOFE SUES, and all others
similarly situated, Plaintiff-Appellee, v.
NATIONAL DEBT RELIEF LLC, Defendant-Appellant
APPEAL FROM THE CIRCUIT COURT OF THE FIRST CIRCUIT
(CIVIL NO. 1CC181–1563)
MEMORANDUM OPINION
(By: Leonard, Presiding Judge, and Wadsworth and Nakasone, JJ.)
This appeal arises out of a dispute regarding a "Debt
Negotiation Agreement" (Agreement) between Plaintiff-Appellee
Cleofe Sues (Sues) and Defendant-Appellant National Debt Relief,
LLC (NDR). NDR moved to compel arbitration of the dispute,
pursuant to an arbitration provision contained in the Agreement.
The Circuit Court of the First Circuit (Circuit Court) denied
NDR's motion.1/ NDR appeals from the June 4, 2019 "Order Denying
'Defendant [NDR's] Motion to Compel Arbitration, to Stay
Proceedings, or, in the Alternative, to Dismiss the Amended Class
Action Complaint, Filed on January 8, 2019,' Filed March 13,
2019" (Order Denying Arbitration), entered in the Circuit Court.
On appeal, NDR contends that the Circuit Court erred in
denying NDR's motion to compel arbitration. NDR asserts that in
refusing to compel arbitration, the Circuit Court improperly
addressed "the enforceability of the [Agreement] as a whole"
rather than "the arbitration clause standing alone."
1/
The Honorable James C. McWhinnie presided.
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Based on precedent by the United States Supreme Court
and the Hawai#i Supreme Court, we conclude that the Circuit Court
erred in denying NDR's motion to compel arbitration. We thus
vacate the Order Denying Arbitration and remand with instructions
to enter an order granting NDR's motion to compel arbitration.
I. Background
On January 8, 2019, Sues filed an Amended Class Action
Complaint (Complaint) alleging that NDR is a for-profit debt
adjuster conducting business in Hawai#i in violation of Hawaii
Revised Statutes (HRS) § 446-2 (2013 Repl.).2/ The Complaint
alleges that Sues hired NDR as a debt adjuster to help her manage
her debts with three creditors, and from January 30, 2017 to
February 1, 2018, she deposited a certain amount with NDR each
month to adjust her debts. The Complaint further alleges that
only one of Sues's three accounts was settled by NDR, and when
one of the remaining two creditors filed a lawsuit against Sues,
NDR left her without assistance. The Complaint asserts that NDR
"violated [HRS] § 446-2's prohibition against debt adjusting
without proper exemption as identified under [HRS] § 446-3[,]"
and "[t]herefore, [NDR] engaged in commercial conduct that
violates public interest and constitutes a per se violation of
[HRS] § 480-13."
NDR filed a motion to compel arbitration pursuant to
the arbitration clause contained in the Agreement. That clause
provides in part:
In the event of any controversy, claim, or dispute between
the parties arising out of or relating to this Agreement,
the parties agree to resolve all issues solely through the
use of Binding Arbitration, governed by the rules of the
American Arbitration Association ("AAA"). . . . . The
arbitrator or arbitration panel shall have the exclusive and
2/
HRS § 446-2 provides:
Debt adjusting prohibited; penalty; contracts void.
Any person who acts or offers to act as a debt adjuster in
this State shall be fined not more than $500 or imprisoned
not more than six months, or both. Any contract for debt
adjusting entered into with a person engaged in the business
for a profit shall be void and unenforceable and the debtor
may recover from the debt adjuster all sums or things
deposited with the debt adjuster and not disbursed to the
debtor's creditors.
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sole authority to resolve any dispute relating to the
interpretation, applicability, enforceability,
conscionability or formation of this Agreement and of this
arbitration requirement. . . .
In opposing the motion to compel arbitration, Sues
argued that the Agreement is unenforceable and void pursuant to
HRS § 446-2, and thus the arbitration clause contained in the
Agreement cannot be enforced. In reply, NDR argued that the
validity of the Agreement as a whole and the validity of the
arbitration clause must be considered separately, and that Sues
failed to show that the arbitration clause is unenforceable.
The Circuit Court heard NDR's motion to compel
arbitration on April 17, 2019. After hearing argument from both
sides, the court denied the motion, stating that "[HRS §] 446-2
makes it clear that any contract for debt adjusting entered into
with a person engaged in the business for a profit shall be void
and unenforceable[,]" and, therefore, the court "[cannot] find
that there is an unenforceable agreement to arbitrate." The
court subsequently issued the Order Denying Arbitration.
II. Standard of Review
The standard for appellate review of a motion to compel
arbitration is the same as a motion for summary judgment. Koolau
Radiology, Inc. v. Queen's Med. Ctr., 73 Haw. 433, 439-40, 834
P.2d 1294, 1298 (1992). The appellate court reviews "the circuit
court's grant or denial of summary judgment de novo." Querubin
v. Thronas, 107 Hawai#i 48, 56, 109 P.3d 689, 697 (2005) (quoting
Hawai#i Cmty. Fed. Credit Union v. Keka, 94 Hawai#i 213, 221, 11
P.3d 1, 9 (2000)). The de novo review is "based upon the same
evidentiary materials as were before [the trial court] in
determination of the motion." Koolau Radiology, 73 Haw. at 440,
834 P.2d at 1298 (quoting Feliciano v. Waikiki Deep Water, Inc.,
69 Haw. 605, 607, 752 P.2d 1076, 1078 (1988)) (internal quotation
marks omitted).
III. Discussion
NDR argues: "It is undisputed that Sues entered into
[the Agreement] with [NDR]," and the Agreement contains a "broad
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arbitration clause[.]" According to NDR:
When a Circuit Court is faced with a motion to compel
arbitration in accordance with an arbitration clause in a
contract, the Circuit Court is only permitted to consider
two questions: whether the agreement to arbitrate contained
within the contract is enforceable, and whether the claim is
within the scope of the arbitration clause. Any claims
regarding the validity of the entire contract may not be
determined by the Circuit Court, but must be determined by
the arbitrator if the agreement to arbitrate standing alone
is enforceable.
Here, NDR contends, "it is undisputed that [Sues's] claims are
within the scope of the arbitration clause[,]" so the only issue
is whether the arbitration clause itself is enforceable.
According to NDR, the Circuit Court erred in determining the
validity of the Agreement as a whole rather than considering only
the enforceability of the arbitration clause. NDR contends that
as a matter of substantive federal arbitration law, which applies
to this dispute involving interstate commerce, an arbitration
provision is severable from the remainder of the contract, citing
Buckeye Check Cashing, Inc. v. Cardegna, 546 U.S. 440 (2006),
Southland Corp. v. Keating, 465 U.S. 1 (1984), Prima Paint Corp.
v. Flood & Conklin Mfg. Co., 388 U.S. 395 (1967), Brown v. KFC
Nat'l Mgmt. Co., 82 Hawai#i 226, 921 P.2d 146 (1996), and Lee v.
Heftel, 81 Hawai#i 1, 911 P.2d 721 (1996). NDR concludes that,
because "Sues presented no challenge to the arbitration clause
standing alone[,]" that clause must be enforced.
Sues, on the other hand, starts with the proposition
that "[a]rbitration is a matter of contract[,]" and "[i]f there
is no contract, the court cannot order arbitration." Sues
continues:
[T]he issue of whether there is a valid and enforceable
contract here has already been determined by the Hawaii
legislature through legislation [i.e., HRS § 446-2] that
states that the contract upon which NDR relies is void. It
does not leave it to courts (or an arbitrator) to decide
under common law that a contract may eventually be declared
void or voidable.
Here, Sues contends, the entire Agreement is void under HRS
§ 446-2. "[T]herefore[,] all of the provisions within it,
including the arbitration provision cannot be severed out and
enforced."
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"When presented with a motion to compel arbitration,
the court is limited to answering two questions: 1) whether an
arbitration agreement exists between the parties; and 2) if so,
whether the subject matter of the dispute is arbitrable under
such agreement."3/ Brown, 82 Hawai#i at 238, 921 P.2d at 158(quoting Koolau Radiology, 73 Haw. at 445, 834 P.2d at 1300)
(brackets omitted). Given Sues's arguments on appeal – that the
entire Agreement is void and severance of the arbitration
provision is not appropriate4/ – our focus is on the first
question, whether an arbitration agreement exists between the
parties.
A court determines the validity and enforceability of
an arbitration agreement based on three elements: "(1) it must
be in writing; (2) it must be unambiguous as to the intent to
submit [the dispute] to arbitration; and (3) there must be
bilateral consideration." Gabriel v. Island Pacific Academy,
Inc., 140 Hawai#i 325, 334, 400 P.3d 526, 535 (2017) (quoting
Douglass v. Pflueger Hawaii, Inc., 110 Hawai#i 520, 531, 135 P.3d
129, 140 (2006)).
There is no dispute that the Gabriel elements are met
in this case: the arbitration provision is in writing, there is
an unambiguous intent to submit the dispute to arbitration, and
there is bilateral consideration. The arbitration clause in the
Agreement expressly states in part: "In the event of any
controversy, claim, or dispute between the parties arising out of
or relating to this Agreement, the parties agree to resolve all
issues solely through the use of Binding Arbitration, governed by
the rules of the American Arbitration Association ("AAA")."
The crux of this appeal is whether HRS § 446-2, which
voids "[a]ny contract for debt adjusting entered into with a
3/
The Agreement here contains a choice of law provision stating that
it "shall be governed by the law of the State of New York[.]" In its opening
brief, NDR relies primarily on federal and Hawai #i law, but also cites New
York authority, as applicable, and notes that "[t]here are no material
differences among federal, Hawai#i and New York law on the issues raised in
this appeal." Sues relies on federal and Hawai #i law. Under these
circumstances, we apply federal (see infra note 5) and Hawai #i law, as
applicable, in determining this appeal.
4/
Sues does not dispute that the subject matter of the Amended
Complaint falls within the scope of the arbitration provision.
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person engaged in the business for a profit," voids the
arbitration provision in the Agreement. Because Sues's argument
is not a specific challenge to the validity of the arbitration
provision, we conclude that under the prevailing case law, the
Circuit Court erred in failing to sever and enforce the
arbitration clause.
We recently discussed the prevailing case law in Inoue
v. Harbor Legal Group, No. CAAP-XX-XXXXXXX, 2021 WL 1700940, at
*1 (Haw. App. Apr. 29, 2021) (Mem. Op.), where we affirmed the
trial court's order compelling arbitration in similar
circumstances. There, we described the controlling precedent as
follows:
In Buckeye, the plaintiffs entered deferred-payment
transactions with the defendant Buckeye Check Cashing, Inc.,
in which plaintiffs received cash in exchange for a personal
check in the amount of the cash plus a finance charge. For
each transaction there was an agreement that contained an
arbitration provision. The plaintiffs filed a class action
lawsuit in Florida state court "alleging that Buckeye
charged usurious interest rates and that the Agreement
violated various Florida lending and consumer-protection
laws, rendering it criminal on its face." 546 U.S. at 443.
Buckeye sought to compel arbitration. The trial court
denied the motion to compel arbitration, the Florida court
of appeal reversed, the Florida Supreme Court reversed the
appellate court, and the case was accepted for review by the
U.S. Supreme Court. Id.The U.S. Supreme Court stated the issue before it as
follows: "We decide whether a court or an arbitrator should
consider the claim that a contract containing an arbitration
provision is void for illegality." Id. at 442. The court
first noted the application of the Federal Arbitration Act
(FAA),5/ stating:
To overcome judicial resistance to arbitration,
Congress enacted the Federal Arbitration Act (FAA), 9
U.S.C. §§ 1–16. Section 2 embodies the national policy
favoring arbitration and places arbitration agreements
on equal footing with all other contracts:
5/
As noted in Inoue:
The FAA applies to written arbitration provisions in
"any maritime transaction or a contract evidencing a
transaction involving commerce[.]" 9 U.S.C. § 2 (1976).
Thus, it "rests on the authority of Congress to enact
substantive rules under the Commerce Clause[,]" and the
substantive rules of the FAA apply in state and federal
courts. Southland Corp., 465 U.S. at 11, 12.
2021 WL 1700940, at *3 n.3. As in Inoue, no party disputes that the FAA
applies in this case.
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"A written provision in ... a contract ... to
settle by arbitration a controversy thereafter
arising out of such contract ... or an agreement
in writing to submit to arbitration an existing
controversy arising out of such a contract ...
shall be valid, irrevocable, and enforceable,
save upon such grounds as exist at law or in
equity for the revocation of any contract."
Id. at 443-44.
The court then explained:
Challenges to the validity of arbitration agreements
"upon such grounds as exist at law or in equity for
the revocation of any contract" can be divided into
two types. One type challenges specifically the
validity of the agreement to arbitrate. See, e.g.,
Southland Corp. v. Keating, 465 U.S. 1, 4–5, 104 S.Ct.
852, 79 L.Ed.2d 1 (1984) (challenging the agreement to
arbitrate as void under California law insofar as it
purported to cover claims brought under the state
Franchise Investment Law). The other challenges the
contract as a whole, either on a ground that directly
affects the entire agreement (e.g., the agreement was
fraudulently induced), or on the ground that the
illegality of one of the contract's provisions renders
the whole contract invalid. Respondents' claim is of
this second type. The crux of the complaint is that
the contract as a whole (including its arbitration
provision) is rendered invalid by the usurious finance
charge.
In Prima Paint Corp. v. Flood & Conklin Mfg. Co. , 388
U.S. 395, 87 S.Ct. 1801, 18 L.Ed.2d 1270 (1967), we
addressed the question of who—court or arbitrator—
decides these two types of challenges. The issue in
the case was "whether a claim of fraud in the
inducement of the entire contract is to be resolved by
the federal court, or whether the matter is to be
referred to the arbitrators." Id., at 402, 87 S.Ct.
1801. Guided by § 4 of the FAA, we held that "if the
claim is fraud in the inducement of the arbitration
clause itself—an issue which goes to the making of the
agreement to arbitrate—the federal court may proceed
to adjudicate it. But the statutory language does not
permit the federal court to consider claims of fraud
in the inducement of the contract generally." Id., at
403–404, 87 S.Ct. 1801 (internal quotation marks and
footnote omitted). We rejected the view that the
question of "severability" was one of state law, so
that if state law held the arbitration provision not
to be severable a challenge to the contract as a whole
would be decided by the court. See id., at 400,
402–403, 87 S.Ct. 1801.
Subsequently, in Southland Corp., we held that the FAA
"create[d] a body of federal substantive law," which
was "applicable in state and federal courts." 465
U.S., at 12, 104 S.Ct. 852 (internal quotation marks
omitted). We rejected the view that state law could
bar enforcement of § 2, even in the context of
state-law claims brought in state court. See id., at
10–14, 104 S.Ct. 852; see also Allied–Bruce Terminix
Cos. v. Dobson, 513 U.S. 265, 270–273, 115 S.Ct. 834,
130 L.Ed.2d 753 (1995).
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. . .
Prima Paint and Southland answer the question
presented here by establishing three propositions.
First, as a matter of substantive federal arbitration
law, an arbitration provision is severable from the
remainder of the contract. Second, unless the
challenge is to the arbitration clause itself, the
issue of the contract's validity is considered by the
arbitrator in the first instance. Third, this
arbitration law applies in state as well as federal
courts. The parties have not requested, and we do not
undertake, reconsideration of those holdings. Applying
them to this case, we conclude that because
respondents challenge the Agreement, but not
specifically its arbitration provisions, those
provisions are enforceable apart from the remainder of
the contract. The challenge should therefore be
considered by an arbitrator, not a court.
Id. at 444-46 (emphases added) (footnotes omitted).
In Lee v. Heftel, 81 Hawai#i 1, 911 P.2d 721 (1996),
the appellants challenged a trial court's order compelling
arbitration, asserting that fraud in the inducement was
grounds to revoke the subject real estate contract such that
the contract's arbitration clause was not enforceable. Id.
at 2, 911 P.2d at 722. The Hawai#i Supreme Court analyzed
Prima Paint and other federal case law and held that, "where
no claim is made that fraud was directed to the arbitration
clause itself, a broad arbitration clause will be held to
encompass arbitration of the claim that the contract itself
was induced by fraud." Id. at 4, 911 P.2d at 724 (quoting
Prima Paint, 388 U.S. at 404).
Further, although not directly addressing the issue
raised in this appeal, the Hawai#i Supreme Court in Siopes
[v. Kaiser Found. Health Plan, Inc., 130 Hawai #i 437, 457
n.28, 312 P.3d 869, 889 n.28 (2013),] recognized that an
arbitration provision is severable from the rest of a
contract, including as recognized in Buckeye. In Siopes,
the Hawai#i Supreme Court stated:
In Brown, this court recognized that "[f]or almost
forty years, arbitration agreements have been
regarded, as a matter of federal law, as severable and
distinct from the underlying agreement." 82 Hawai #i at
245, 921 P.2d at 165. The court held that generally,
"an arbitration agreement is severable from the
writing in which it is embedded." Id. at 246, 921 P.2d
at 166. See Buckeye Check Cashing, Inc. v. Cardegna ,
546 U.S. 440, 445, 126 S.Ct. 1204, 163 L.Ed.2d 1038(2006) ("as a matter of substantive federal
arbitration law, an arbitration provision is severable
from the remainder of the contract"); Richard A. Lord,
21 Williston on Contracts 245 (4th ed. 2001)
("Ordinarily, an arbitration clause will be treated as
a separate contract, and severable from the main body
of the contract. Thus, whenever possible, an
arbitration clause will be held severable ....")
(footnote omitted).
130 Hawai#i at 457 n.28, 312 P.3d 889 n.28.
Inoue, 2021 WL 1700940, at *3-5 (some emphases added, footnote
renumbered and altered).
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Given the prevailing case authority and Sues's failure
to challenge the arbitration provision itself, we conclude that
the Circuit Court erred in not severing the arbitration clause
from the rest of the Agreement and enforcing the agreement to
arbitrate. Accordingly, the Circuit Court erred in denying NDR's
motion to compel arbitration.
IV. Conclusion
For the reasons discussed above, we vacate the June 4,
2019 "Order Denying 'Defendant [NDR's] Motion to Compel
Arbitration, to Stay Proceedings, or, in the Alternative, to
Dismiss the Amended Class Action Complaint, Filed on January 8,
2019,' Filed March 13, 2019," entered in the Circuit Court of the
First Circuit. The case is remanded to the Circuit Court with
instructions to enter an order granting NDR's motion to compel
arbitration.
DATED: Honolulu, Hawai#i, May 14, 2021.
On the briefs: /s/ Katherine G. Leonard
Presiding Judge
Andrew J. Lautenbach, and
John H. Pelzer and Beth-Ann
E. Krimsky (Pro Hac Vice), /s/ Clyde J. Wadsworth
for Defendant-Appellant. Associate Judge
Justin A. Brackett,
for Plaintiff-Appellee. /s/ Karen T. Nakasone
Associate Judge
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