James Dillon v. BMO Harris Bank, N.A.
PUBLISHED AUTHORED OPINION filed. Originating case number: 1:13-cv-00897-CCE-LPA. . [16-1362]
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UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
Plaintiff - Appellee,
BMO HARRIS BANK, N.A.,
Defendant – Appellant,
FOUR OAKS BANK & TRUST COMPANY; GENERATIONS FEDERAL
CREDIT UNION; BAY CITIES BANK,
Appeal from the United States District Court for the Middle District of North Carolina, at
Greensboro. Catherine C. Eagles, District Judge. (1:13−cv−00897−CCE−LPA)
Argued: March 24, 2017
Decided: May 10, 2017
Before DUNCAN, KEENAN, and THACKER, Circuit Judges.
Affirmed by published opinion. Judge Keenan wrote the opinion, in which Judge
Duncan and Judge Thacker joined.
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ARGUED: Kevin Scott Ranlett, MAYER BROWN LLP, Washington, D.C., for
Appellant. Hassan A. Zavareei, TYCKO & ZAVAREEI LLP, Washington, D.C., for
Appellee. ON BRIEF: Lucia Nale, Debra Bogo-Ernst, MAYER BROWN LLP,
Chicago, Illinois; Mary K. Mandeville, ALEXANDER RICKS PLLC, Charlotte, North
Carolina, for Appellant. Norman E. Siegel, Steve Six, J. Austin Moore, STUEVE
SIEGEL HANSON LLP, Kansas City, Missouri; Jeffrey M. Ostrow, KOPELOWITZ
OSTROW P.A., Fort Lauderdale, Florida; Darren T. Kaplan, DARREN KAPLAN LAW
FIRM, P.C., New York, New York; F. Hill Allen, THARRINGTON SMITH, L.L.P.,
Raleigh, North Carolina; Jeffrey D. Kaliel, TYCKO & ZAVAREEI LLP, Washington,
D.C., for Appellee.
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BARBARA MILANO KEENAN, Circuit Judge:
In this appeal, we consider the enforceability of an arbitration agreement included
in the terms of a “payday loan” obtained over the internet. Plaintiff James Dillon brought
this civil action against defendant BMO Harris Bank, N.A. (BMO Harris), alleging that
BMO Harris violated the Racketeer Influenced and Corrupt Organizations Act (RICO),
18 U.S.C. § 1961 et seq., when BMO Harris used its role within a network of financial
institutions “to conduct and participate in the collection of unlawful payday loans.”
Relying on the Federal Arbitration Act (FAA), BMO Harris sought to enforce an
arbitration agreement for the loan at issue, which was entered into by Dillon and the
lender, Great Plains Lending, LLC (Great Plains).
The district court held that the
arbitration agreement was unenforceable under this Court’s opinion in Hayes v. Delbert
Services Corp., 811 F.3d 666 (4th Cir. 2016), and denied BMO Harris’ motion to compel
arbitration. BMO Harris appeals from the district court’s order. Upon our review, we
hold that the arbitration agreement between Dillon and Great Plains is unenforceable, and
we affirm the district court’s order denying BMO Harris’ motion.
James Dillon is a resident of North Carolina. In December 2012, Dillon applied
for and received a “payday loan” 1 through the website of Great Plains, a lender wholly
“Payday loans” are short-term, unsecured consumer loans for small amounts.
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owned by the Otoe-Missouria Tribe of Indians. Although North Carolina usury law
generally prohibits interest rates in excess of 16%, N.C. Gen. Stat. § 24-1.1, Great Plains
has no physical presence in North Carolina and charged an interest rate of 440.18% for
Dillon’s loan. Dillon authorized Great Plains to deposit and withdraw funds in Dillon’s
bank account through the Automated Clearing House Network (ACH Network), a
transaction processing system that facilitates electronic transfer of funds between
financial institutions, usually on behalf of account holders.
In order to complete the loan transaction, Dillon electronically signed a contract
(the Great Plains Agreement) that contained: (1) terms governing the loan (the underlying
loan agreement); and (2) an agreement to submit disputes to arbitration (the arbitration
agreement). The Great Plains Agreement included choice of law provisions both in the
underlying loan agreement and in the arbitration agreement.
These choice of law
provisions required the application of Otoe-Missouria tribal law and disclaimed the
application of state or federal law. For example, the Great Plains Agreement by its terms
was “subject solely to the exclusive laws and jurisdiction of the Otoe-Missouria Tribe of
Indians, a federally recognized Indian Tribe,” and provided that “no other state or federal
law or regulation shall apply to this Agreement, its enforcement or interpretation.”
https://www.consumerfinance.gov/askcfpb/1567/what-payday-loan.html (last visited Apr.
3, 2017). These loans generally carry high interest rates, sometimes in excess of 400%.
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Similarly, the arbitration agreement within the Great Plains Agreement provided
that “any dispute . . . will be resolved by arbitration in accordance with the law of the
Otoe-Missouria Tribe of Indians,” and instructed the arbitrator to “apply the laws of the
Otoe-Missouria Tribe of Indians.” For borrowers who opt out of arbitration within 60
days of receiving the loan, “any disputes . . . shall nonetheless be governed under the
laws of the Otoe-Missouria Tribe of Indians and must be brought within the court system
Immediately below the arbitration agreement, another choice of law provision in
the Great Plains Agreement provided that “[t]his Agreement and the Agreement to
Arbitrate are governed by . . . the laws of the Otoe-Missouria Tribe,” and “[n]either this
Agreement nor the Lender is subject to the laws of any state of the United States.” The
Great Plains Agreement signature page also required that Dillon agree to the following
term: “I further understand, acknowledge and agree that this loan is governed by the laws
of the Otoe-Missouria Tribe of Indians and is not subject to the provisions or protections
of the laws of my home state or any other state.”
Dillon later filed a putative class action complaint in the district court, claiming
that Great Plains and other tribal payday lenders had issued numerous unlawful loans.
Instead of directly suing the tribal payday lenders, including Great Plains, for violating
state usury laws, Dillon sued the financial institutions that facilitated these payday
lending transactions over the ACH Network. Dillon alleged that the ACH Network was
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an “enterprise,” and that several of its members, including BMO Harris, conducted and
participated in the “collection of unlawful debts” in violation of the federal RICO Act. 2
In the district court, BMO Harris sought to compel arbitration pursuant to the
Great Plains Agreement. 3 See Dillon v. BMO Harris Bank, N.A., 787 F.3d 707, 711 (4th
Cir. 2015). While the merits of BMO Harris’ motion to compel arbitration were pending
in the district court, this Court decided Hayes v. Delbert Services Corp., 811 F.3d 666
(4th Cir. 2016). In Hayes, we reviewed a loan agreement between a consumer and
Western Sky Financial, LLC (Western Sky), a payday lender organized under the laws of
the Cheyenne River Sioux Tribe. Id. at 668. The loan agreement at issue in that case (the
Western Sky Agreement) contained an arbitration clause that we held was unenforceable
as being in violation of public policy. Id. at 675–76.
After we issued our opinion in Hayes, the district court evaluated the language of
the Great Plains Agreement in light of the Hayes decision. The district court concluded
that the Great Plains Agreement is “like the contract in Hayes” and “denies the
applicability of all federal and state law.” Accordingly, the district court held that the
arbitration agreement was unenforceable, and denied BMO Harris’ renewed motion to
Dillon also asserted claims against other financial institutions, but the claims
against BMO Harris are the only claims at issue in this appeal.
The district court initially denied the motion to compel arbitration, holding that
BMO Harris had failed to authenticate the purported loan agreement, and later denied
BMO Harris’ motion for reconsideration. Dillon, 787 F.3d at 711–12. We vacated the
district court’s order, and remanded the case with instructions to consider the merits of
the motion to compel arbitration. Id. at 716.
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compel arbitration. BMO Harris appeals from the district court’s order denying the
The FAA grants this Court jurisdiction to review a district court order denying a
motion to compel arbitration. 9 U.S.C. § 16; see also Dillon, 787 F.3d at 714. We
review de novo the enforceability of an arbitration provision, and apply a “strong federal
policy in favor of enforcing arbitration agreements.” Hayes, 811 F.3d at 671 (quoting
Dean Witter Reynolds, Inc. v. Byrd, 470 U.S. 213, 217 (1985)).
Under the FAA, 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. Courts therefore must enforce arbitration agreements “on an equal footing
with other contracts.” AT&T Mobility LLC v. Concepcion, 563 U.S. 333, 339 (2011)
(internal citations omitted). The FAA preserves state law contract defenses unless such
defenses “rely on the uniqueness of an agreement to arbitrate” and are applied “in a
fashion that disfavors arbitration.” Id. at 341–42.
Consistent with these contract principles, the Supreme Court has recognized that
arbitration agreements that operate “as a prospective waiver of a party’s right to pursue
statutory remedies” are not enforceable because they are in violation of public policy.
See Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614, 637 n.19
(1985); see also Am. Express Co. v. Italian Colors Rest., 133 S. Ct. 2304, 2310 (2013);
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14 Penn Plaza LLC v. Pyett, 556 U.S. 247, 273–74 (2009); Gilmer v. Interstate/Johnson
Lane Corp., 500 U.S. 20, 28 (1991). Under this “prospective waiver” doctrine, courts
will not enforce an arbitration agreement if doing so would prevent a litigant from
vindicating federal substantive statutory rights. See Am. Express Co., 133 S. Ct. at 2310;
14 Penn Plaza, 556 U.S. at 273–74; Gilmer, 500 U.S. at 28.
A foreign choice of law provision, of itself, will not trigger application of the
prospective waiver doctrine. See Mitsubishi, 473 U.S. at 637 n.19. Instead, a court first
must examine whether, as a matter of law, the “choice-of-forum and choice-of-law
clauses operate in tandem as a prospective waiver of a party’s right to pursue statutory
remedies.” Id. When there is uncertainty whether the foreign choice of law would
preclude otherwise applicable federal substantive statutory remedies, the arbitrator should
determine in the first instance whether the choice of law provision would deprive a party
of those remedies. See Vimar Seguros y Reaseguros, S.A. v. M/V Sky Reefer, 515 U.S.
528, 540-41 (1995); Aggarao v. MOL Ship Mgmt. Co., 675 F.3d 355, 371-73 (4th Cir.
2012). In such a case, the prospective waiver issue would not become ripe for final
determination until the federal court is asked to enforce the arbitrator’s decision. Vimar,
515 U.S. at 540-41; Aggarao, 675 F.3d at 371-73.
In Hayes, we applied the prospective waiver doctrine to the Western Sky
Agreement governing another internet payday loan. There, we examined a choice of law
provision that disclaimed the application of “any law other than the law of the Cheyenne
River Sioux Tribe of Indians to this Agreement.” Id. at 675. We observed that this
language “almost surreptitiously waives a potential claimant’s federal rights through the
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guise of a choice of law clause” and “flatly and categorically renounce[s] the authority of
the federal statutes.” Id. We held that such language took the “plainly forbidden” step of
prospectively waiving federal substantive rights. Id. We therefore concluded that the
challenged choice of law provision was unenforceable as a matter of law. Id.
We also held that the offending choice of law provision was not severable from
the rest of the arbitration agreement, because the choice of law provision went to the
“essence” of the contract. Id. at 676. We concluded that “one of the animating purposes
of the arbitration agreement was to ensure that [the lender] could engage in lending and
collection practices free from the strictures of any federal law.” Id. We further observed
that in addition to the above deficiencies in the arbitration agreement, the underlying loan
agreement contained a “brazen” disclaimer that “no United States state or federal law
applies to this Agreement.” Id. This additional disclaimer lent further support to our
conclusion that the arbitration agreement was part of an “integrated scheme to contravene
public policy.” Id. (quoting Graham Oil Co. v. ARCO Prods. Co., 43 F.3d 1244, 1249
(9th Cir. 1994)). We therefore applied the prospective waiver doctrine and held that the
entire arbitration provision of the Western Sky Agreement was unenforceable. Id.
We turn now to consider the Great Plains Agreement at issue in this appeal. BMO
Harris argues that the Great Plains Agreement does not implicate the prospective waiver
doctrine, because Dillon failed to show that the choice of law provision would actually
deprive him of any federal remedies. According to BMO Harris, any ambiguities that
may arise in application of the choice of law provision should be resolved by the
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arbitrator in the first instance. Thus, BMO Harris urges us to defer consideration of the
prospective waiver doctrine until after the arbitrator construes the choice of law provision
and decides whether any federal remedies remain available to Dillon.
In response, Dillon asserts that the prospective waiver issue is ripe for our review
at this stage of the litigation. He contends that there is no uncertainty regarding the effect
of the choice of law provision, because that provision effects an unambiguous and
categorical waiver of federal statutory rights. Therefore, Dillon argues, the choice of law
provision is unenforceable under our decision in Hayes.
We agree with Dillon’s
The Great Plains Agreement at issue in this appeal contains many of the same
choice of law provisions as the Western Sky Agreement that we held unenforceable in
Hayes. The Great Plains arbitration agreement provides:
THIS AGREEMENT TO ARBITRATE IS MADE PURSUANT TO A
TRANSACTION INVOLVING THE INDIAN COMMERCE CLAUSE
OF THE CONSTITUTION OF THE UNITED STATES OF AMERICA,
AND SHALL BE GOVERNED BY THE LAW OF THE OTOEMISSOURIA TRIBE OF INDIANS. The arbitrator will apply the laws of
the Otoe-Missouria Tribe of Indians and the terms of this Agreement . . . .
Apart from the designated tribe, this language is identical to the related terms of the
arbitration agreement that we reviewed in Hayes.
See 811 F.3d at 675.
provision that appears in both agreements is a section titled “GOVERNING LAW,”
which provides that “[t]his Agreement and the Agreement to Arbitrate are governed by
[tribal law]” and “[n]either this Agreement nor the Lender is subject to the laws of any
state of the United States.” See id. at 669–71.
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We hold that the above provisions in the Great Plains Agreement are not
distinguishable in substance from the related provisions in the Western Sky Agreement
that we held unenforceable in Hayes. The arbitration agreement in this case implicitly
accomplishes what the Western Sky Agreement explicitly stated, namely, that the
arbitrator shall not allow for the application of any law other than tribal law. See id. at
670. Just as we did in Hayes, we interpret these terms in the arbitration agreement as an
unambiguous attempt to apply tribal law to the exclusion of federal and state law. See id.
Additionally, other terms in the Great Plains Agreement evince an explicit attempt
to disavow the application of federal or state law to any part of the contract or its parties.
Those terms include the following statements:
By executing this Agreement, you hereby . . . further agree that no other
state or federal law or regulation shall apply to this Agreement, its
enforcement or interpretation.
Our inclusion of these disclosures does not mean that we . . . consent to
application of state or federal law to us, to the loan, or this Agreement.
Neither this Agreement nor the Lender is subject to the laws of any state of
the United States.
I further understand, acknowledge and agree that this loan is governed by
the laws of the Otoe-Missouria Tribe of Indians and is not subject to the
provisions or protections of the laws of my home state or any other state.
These terms throughout the underlying loan agreement further illustrate that the choice of
law provision in the arbitration agreement “disavow[s] the application of all state and
federal law” and “unambiguously forbids an arbitrator from even applying the applicable
law.” Id. at 668, 670; see also 17A Am. Jur. 2d Contracts § 326 (2016) (“When deciding
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whether an agreement is ambiguous, particular words should be considered, not as if
isolated from the context, but in the light of the obligation as a whole . . . .”). Because the
effect of the arbitration agreement is unambiguous in the context of the whole contract,
we conclude that the arbitration agreement functions as a prospective waiver of federal
statutory rights and, therefore, is unenforceable as a matter of law. See Hayes, 811 F.3d
Our conclusion is not altered by BMO Harris’ alternative request that we
effectively sever the choice of law provisions from the arbitration agreement, and accept
BMO Harris’ concession to the application of federal substantive law in arbitration
notwithstanding the unambiguous choice of tribal law in the arbitration agreement. BMO
Harris argues that this concession would ensure that Dillon have access in arbitration to
any federal substantive rights, thereby removing the chief policy rationale for application
of the prospective waiver doctrine.
We find no merit in this argument. In essence, BMO Harris seeks to rewrite the
unenforceable foreign choice of law provision in order to save the remainder of the
arbitration agreement. As we discussed in Hayes, such a result is untenable. Unlawful
portions of a contract may be severed only if: (1) the unlawful provision is not central or
essential to the parties’ agreement; and (2) the party seeking to enforce the remainder
negotiated the agreement in good faith. 8 Williston on Contracts § 19:70 (4th ed. 1993 &
Supp. 2010); Restatement (Second) of Contracts § 184 (1981).
As we observed
regarding the nearly identical provisions at issue in Hayes, “the offending provisions go
to the core of the arbitration agreement.” 811 F.3d at 676. Great Plains purposefully
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drafted the choice of law provisions in the arbitration agreement to avoid the application
of state and federal consumer protection laws. See id. at 675–76. Because these choice
of law provisions were essential to the purpose of the arbitration agreement, BMO Harris’
consent to application of federal law would defeat the purpose of the arbitration
agreement in its entirety. See 8 Williston on Contracts § 19:70; Restatement (Second) of
Contracts § 184.
Additionally, when a party uses its superior bargaining power to extract a promise
that offends public policy, courts generally opt not to redraft an agreement to enforce
another promise in that contract. Restatement (Second) of Contracts § 184 cmt. b. In the
present case, Great Plains obtained the terms in the arbitration agreement through its
“dominant bargaining power” in a calculated attempt to avoid the application of state and
federal law. See id. Because Great Plains did not negotiate these terms in good faith, we
decline to give effect to this “integrated scheme to contravene public policy.” Hayes, 811
F.3d at 676 (quoting Graham Oil Co., 43 F.3d at 1249); see also Restatement (Second) of
Contracts § 184 cmt. b. Accordingly, we hold that the entire arbitration agreement is
In summary, we conclude that the Great Plains Agreement contains unenforceable
choice of law provisions, which are not severable from the broader arbitration agreement
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and render the entire arbitration agreement unenforceable. Accordingly, we affirm the
district court’s order denying BMO Harris’ renewed motion to compel arbitration. 4
In this interlocutory appeal, we need not consider BMO Harris’ arguments that
Dillon’s federal claims should fail on their merits. The district court will have an
opportunity to decide those issues in the first instance.
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