Kenneth Allen, et al v. Regions Bank

Filing

Case: 09-60705

Document: 00511200413

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Date Filed: 08/11/2010

IN THE UNITED STATES COURT OF APPEALS United States Court of Appeals FOR THE FIFTH CIRCUIT Fifth Circuit FILED
August 11, 2010 N o . 09-60705 Lyle W. Cayce Clerk

K E N N E T H ALLEN; MINNIE ALLEN, P la in t iffs - Appellees v. R E G I O N S BANK, a successor of First American National Bank, o p e r a t in g as Deposit Guaranty National Bank; UNION SECURITY LIFE I N S U R A N C E CO, a foreign corporation, D e fe n d a n t s - Appellants

A p p e a l from the United States District Court for the Southern District of Mississippi USDC No. 2:09-CV-70

B e fo r e DENNIS, OWEN, and SOUTHWICK, Circuit Judges. P E R CURIAM:* A bank and insurance company appeal a district court's decision to deny t h e ir motions to compel arbitration. They argue the arbitrator and not the d is t r ic t court was to determine the gateway issue of arbitrability. In light of U n ite d States Supreme Court authority handed down after the district court's ju d g m e n t , we REVERSE and REMAND.

Pursuant to 5TH CIR. R. 47.5, the court has determined that this opinion should not be published and is not precedent except under the limited circumstances set forth in 5TH CIR. R. 47.5.4.

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No. 09-60705 I . FACTS K e n n e t h Allen and Minnie Allen obtained a home equity loan from First A m e r ic a n National Bank in October 1999. The loan was secured by a deed of t r u s t on the Allen's property in Jayess, Mississippi. The bank withheld funds fr o m the loan to purchase credit life and disability insurance. AmSouth Bank became the successor to First American in December 1999. I n 2004, Mr. Allen contacted AmSouth to make a claim under the disability in s u r a n c e . AmSouth denied that there was any disability insurance policy. In 2 0 0 8 , Mr. Allen was diagnosed with cancer, and he made a new claim. By then, R e g io n s Bank was AmSouth's successor. Regions and Union Security Life

I n s u r a n c e Company now were the ones to deny there was an insurance policy. I n April 2009, the Allens filed suit in the United States District Court for t h e Southern District of Mississippi. Regions and Union Security were named a s defendants. The Allens alleged breach of trust, fraud and misrepresentation, b r e a c h of the insurance agreement, and bad faith. Regions's response was to file a motion to compel arbitration. There was n o arbitration provision in the agreements executed for the 1999 home equity lo a n . In 2001, though, the Allens opened what AmSouth called a Demand D e p o s i t Account. At that time, they signed a document binding them to the t e r m s of the AmSouth Customer Agreement. The agreement contained a clause r e q u ir in g arbitration of any dispute between them. Regions became the legal s u c c e s s o r to AmSouth in November 2006. A transition for a changeover of a c c o u n t s proceeded in subsequent months. In October 2007, Regions mailed the A lle n s an explanation of the effects of the merger. A lengthy Consumer

D is c lo s u r e Booklet was included, stating that it constituted the new agreement c o v e r in g "deposit accounts." We will refer to the booklet as the "Regions

A g r e e m e n t ." After a bold-font reference to "Binding Arbitration," the booklet s a id the arbitration provision shall "also apply to any account, contract, loan, 2

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No. 09-60705 t r a n s a c t io n , business, contact, interaction or relationship you may have" with t h e bank. The manner in which customers would be bound by the new terms w a s set out, and it is not contested that the Allens accepted the terms. T h is is part of the arbitration provision: A R B I T R A T I O N AND WAIVER OF JURY TRIAL. Except as e x p r e s s ly provided below, you and we agree that either party may e le c t to resolve by BINDING ARBITRATION any controversy, c la im , counterclaim, dispute, or disagreement between you and us, w h e t h e r arising before or after the effective date of this Agreement (a n y "Claim"). This includes, but is not limited to, any controversy, c la im , counterclaim, dispute or disagreement arising out of, in c o n n e c t io n with or relating to any one or more of the following: (1) t h e interpretation, execution, administration, amendment or m o d ific a t io n of the Agreement; (2) any account; (3) any charge or c o s t incurred pursuant to the Agreement; (4) the collection of any a m o u n t s due under the Agreement or any account; (5) any alleged c o n t r a c t or tort arising out of or relating in any way to the A g r e e m e n t , any account, any transaction, any advertisement or s o lic it a t io n , or your business interaction, or relationship with us; (6) a n y breach of any provision of the Agreement; (7) any statements or r e p r e s e n ta t io n s made to you with respect to the Agreement, any a c c o u n t , any transaction, any advertisement or solicitation, or your b u s in e s s , interaction, or relationship with us; or (8) any of the fo r e g o in g arising out of, in connection with or relating to any a g r e e m e n t which relates to the Agreement, any account, any t r a n s a c t io n or your business, interaction or relationship with us. T h e provision also stated that a "dispute regarding whether a particular c o n t r o v e r s y is subject to arbitration, including any claim of unconscionability a n d any dispute over the scope or validity of this agreement to arbitrate disputes o r of this entire Agreement, shall be decided by the arbitrator(s)." The motion to compel arbitration was denied by the district court. The c o u r t held that the Regions Agreement did not unambiguously modify the loan a g r e e m e n t. There was an enforceable arbitration clause as to deposit accounts, b u t that clause did not apply to the loan agreement. This appeal followed.

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No. 09-60705 I I . DISCUSSION A . Arbitration of Arbitrability Dispute T h e parties agree that the Federal Arbitration Act ("FAA") applies. 9 U .S .C . §§ 1-16. Section 4 of the FAA allows a party to petition for an order c o m p e llin g arbitration when there has been a "failure, neglect, or refusal of a n o t h e r to arbitrate under a written agreement for arbitration." Id. § 4. A court s h a ll order arbitration "in accordance with the terms of the agreement" provided it is "satisfied that the making of the agreement for arbitration or the failure to c o m p ly therewith is not in issue . . . ." Id. The district court denied Regions's m o t io n to compel arbitration because the "making of the agreement for a r b it r a t io n " was in issue. There is, though, no dispute that an arbitration a g r e e m e n t between the parties exists. Its reach is the question. I n this appeal, we are not deciding whether this dispute is covered by the a r b it r a t io n clause. Instead, we are deciding whether the district court properly h e ld that it should decide that issue. The general rule is that the issue of w h e t h e r there is an agreement to arbitrate a particular dispute is for a court to d e c id e . AT&T Techs., Inc. v. Commc'ns Workers of Am., 475 U.S. 643, 649 (1 9 8 6 ). However, the issue of arbitrability is for an arbitrator when the evidence c le a r ly demonstrates that was the parties' agreement. First Options of Chi., Inc. v . Kaplan, 514 U.S. 938, 944-45 (1995). The district court, relying on First Options, said that the issue of a r b it r a b ilit y must have been clearly and unmistakably given to the arbitrator. T h e court then cited caselaw that when the issue is whether an arbitration a g r e e m e n t even exists, the courts must decide. E.g., Will-Drill Res., Inc. v. S a m s o n Res. Co., 352 F.3d 211, 218 (5th Cir. 2003). In that precedent, the party s e e k in g to avoid arbitration alleged the contract with the arbitration provision n e v e r came into effect because all the necessary signatures were never acquired.

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No. 09-60705 I d . at 212. Contract formation is not involved here, though, as the Allens agree t h e r e is a valid contract with the arbitration provision. The district court also employed the analysis of a Mississippi Supreme C o u r t decision addressing an AmSouth agreement with its customers. See A m S o u th Bank v. Quimby, 963 So. 2d 1145 (Miss. 2007). The Quimby court held t h a t amendments to the agreements the customers initially entered with the b a n k did not have sufficiently clear language to apply retroactively. Id. at 1150. Only the later agreements had the First Options clause, which required a r b it r a t io n of issues of arbitrability. Id. at 1154. The state court also found that t h e applicability of the arbitration provision to "accounts" with the bank did not w it h sufficient clarity reach the line of credit that Quimby had with the bank a n d for which he had a credit disability policy. Id. at 1151. The Quimby court u p h e ld the trial court's denial of a motion to compel arbitration. Id. at 1156. T h e district court acknowledged that the Regions Agreement used broad la n g u a g e to state that the arbitration provisions applied to all relations with its c u s t o m e r s . The court also found, though, that the cover letter which referred to " d e p o s it accounts" created an implication that the lengthy enclosure only applied t o accounts. From that language, ambiguity fatal to Regions resulted. T o the extent the validity of the agreement is an issue, we note the Allens d o not allege arbitration to be invalid due to unconscionability or other such d e fe c t . There are two kinds of "validity" disputes that arise under of the FAA: " O n e type challenges specifically the validity of the agreement to a r b itr a t e , " and "[t]he other challenges the contract as a whole, e it h e r on a ground that directly affects the entire agreement (e.g., t h e agreement was fraudulently induced), or on the ground that the ille g a lit y of one of the contract's provisions renders the whole c o n t r a c t invalid." R e n t-A - C e n t e r , West, Inc. v. Jackson, 130 S. Ct. 2772, 2778 (2010) (quoting B u c k e y e Check Cashing, Inc. v. Cardegna, 546 U.S. 440, 444 (2006)). 5

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No. 09-60705 T h e importance of these categories is due to Section 2 of the FAA. Section 2 allows arbitration if the "written provision" that mandates the arbitration is n o t subject to revocation under the usual grounds in law and equity. Id. (citing 9 U.S.C. § 2). If it is another provision of the contract, or the contract as a whole, t h a t is contested, the court may still require arbitration of that dispute because t h e arbitration provision itself is not challenged. Id. Under the severability r u le , "a challenge to the validity of the contract as a whole, and not specifically t o the arbitration clause, must go to the arbitrator." Buckeye, 546 U.S. at 449. The first type of challenge, the validity of the arbitration provision being a s s e r t e d , might raise fraud in the inducement. Id. at 444-45 (citing Prima Paint C o r p . v. Flood & Conklin Mfg. Co., 388 U.S. 395, 403-04 (1967)). The Allens do n o t argue that the arbitration provision is invalid for such reasons, only that it is inapplicable for interpretative reasons arising largely under state law. The second type of validity challenge, which here would be to the loan a g r e e m e n t or another contract between the Allens and Regions of which a r b it r a t io n is just a part, has not been made. Regardless, a challenge of this s e c o n d type would not avoid arbitration. See Rent-A-Center, 130 S. Ct. at 2778. Rent-A-Center added to these principles by resolving a case in which the e n tir e agreement was one simply for arbitration. The arbitration clause was not c o n t a in e d in an employment or loan or other agreement. The Court held that in s u c h a circumstance, the type of challenge that a court could hear must be to the v a lid it y of the specific provision in the arbitration agreement. Id. at 2779. In R e n t-A -C e n te r , the specific provision being contested was the one that clearly a n d unmistakably gave to the arbitrator the right to resolve issues of a r b it r a b ilit y . Id. The plaintiff challenged the entire arbitration agreement as u n c o n s c io n a b le and not the delegation provision, the latter being the "written p r o v is io n " compelling arbitration. Id. Consequently, because the delegation

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No. 09-60705 p r o v is io n was not challenged as unconscionable, the possible invalidity of the e n tir e contract was for the arbitrator to decide. Id. at 2780-81. T u r n in g to our case, the Allens have always argued that the manner in w h ic h the different agreements were written did not lead clearly to the a p p lic a t io n of the arbitration provision to the consumer loan dispute. That is not a challenge to the validity of the agreement but to its applicability. T h e district court decided that the arbitration agreement that arose from t h e transactions involving the Allens and their succession of banks did not " v a lid ly " reach the dispute over disability insurance that was to be acquired at t h e time of a 1999 home equity loan. It was found to be of limited reach in light o f Quimby. It is certainly common use of language to say that arbitration does n o t "validly" apply to the dispute, but the agreement itself, as far as it reached, w a s never found to be invalid nor was it even challenged as being invalid. When we asked for submissions from each party after Rent-A-Center was r e le a s e d , the Allens alleged that "they never concluded an arbitration agreement w i t h Regions Bank." This appears to be an attempt to claim this dispute fits w it h in the category that the Supreme Court has said is for the courts, that the a g r e e m e n t was not "concluded" because the contract was never signed, or the s ig n a t o r y did not have authority to bind or had insufficient mental capacity. Rent-A-Center, 130 S. Ct. at 2778 n.2 (citing Buckeye, 546 U.S. at 444 n.1). An e x a m in a t io n of the arguments in the district court and in the appellate briefing r e v e a l that there has never been an issue made of whether the contract was " c o n c lu d e d ." There also has not been an argument that the arbitration

a g r e e m e n t itself or the delegation language was invalid, that it was u n c o n s c io n a b le , or otherwise unenforceable. It is too late to raise such issues n o w . Id. at 2781 (plaintiff's new argument of unconscionability was "too late" a n d was not considered).

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No. 09-60705 A ll of this analysis about the nature of the claim of invalidity should not c a u s e us to lose sight of an important caveat. The parties must have clearly in t e n d e d for issues of arbitrability to be arbitrated. Id. at 2778 n.1. Otherwise, t h e scope of the arbitration agreement is for the court to decide just as the d is t r ic t court did here. First Options, 514 U.S. at 944-45. As quoted already, the R e g io n s Agreement was clear: "Any dispute regarding whether a particular c o n t r o v e r s y is subject to arbitration . . . shall be decided by the arbitrator(s)." The Allens accepted this agreement by continuing to use their deposit accounts w it h Regions and by signing signature cards. This was sufficient clarity to d e m a n d arbitration of arbitrability. A n y ambiguities regarding the scope of an arbitration clause are resolved in favor of coverage. Volt Info. Sciences, Inc. v. Bd. of Trs. of Leland Stanford Jr. U n iv ., 489 U.S. 468, 475-76 (1989). The arbitration agreement unmistakably c o m m a n d s that disputes as to its applicability are for the arbitrator. We conclude that the motion to compel arbitration should have been g r a n t e d . The question the district court answered is for the arbitrator. B. Arbitration of Dispute Involving Union Security, a Non-signatory A separate issue is raised of whether the insurance company that allegedly im p r o p e r ly refused to pay the claim may also compel arbitration. That company, U n io n Security, was a non-signatory to the Regions Agreement. The district court did not need to address the separate issues involving U n io n Security. Once the district court held that Regions could not compel a r b it r a t io n , it followed that Union Security could not either. A r g u m e n t s that were presented but not resolved in district court should b e considered first by that court. KSLA-TV, Inc. v. Radio Corp. of Am., 693 F.2d 5 4 4 , 546 (5th Cir. 1982). We return this question to the district court.

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No. 09-60705 C . Stay of Proceedings Union Security argues that this proceeding should be stayed regardless of w h e t h e r the Allens are compelled to arbitrate their claims against them. The A lle n s do not address the assertion. S e c t io n 3 of the FAA provides for a stay of litigation when the issues are " r e fe r a b le to arbitration under an agreement in writing . . . ." 9 U.S.C. § 3. The c o u r t "shall on application of one of the parties stay the trial of the action until s u c h arbitration has been had in accordance with the terms of the agreement." Id. A set of considerations exist for making the decision. See Waste Mgmt., Inc. v . Residuos Industriales Multiquim, S.A. de C.V., 372 F.3d 339, 343 (5th Cir. 2 0 0 4 ). We leave it to the district court to decide the question of a stay. W e REVERSE and REMAND for proceedings consistent with this opinion.

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