FLUKE v. CASHCALL, INC.
Filing
52
MEMORANDUM AND/OR OPINION. SIGNED BY HONORABLE HARVEY BARTLE, III ON 5/26/11. 5/27/11 ENTERED AND COPIES E-MAILED.(mbh, )
IN THE UNITED STATES DISTRICT COURT
FOR THE EASTERN DISTRICT OF PENNSYLVANIA
KEVIN FLUKE
v.
CASHCALL, INC.
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CIVIL ACTION
NO. 08-5776
MEMORANDUM
Bartle, C.J.
May 26, 2011
Before the court is the motion of plaintiff Kevin Fluke
to vacate and/or modify an arbitration award made under the
Federal Arbitration Act ("FAA").1
Plaintiff Kevin Fluke filed a putative class action
lawsuit against defendant CashCall, Inc. ("CashCall") in the
Court of Common Pleas of Philadelphia County.
Fluke sought to
recover statutory damages available under Pennsylvania law for
usurious interest rates CashCall allegedly charged Pennsylvania
borrowers on loans of $35,000 or less.
CashCall timely removed
the action based on this court's diversity jurisdiction.
We have
jurisdiction over this matter because Fluke, a member of the
putative class, is of diverse citizenship from CashCall and the
case met the requirements of 28 U.S.C. § 1332(d)(2), including
the amount of more than $5 million in controversy.2
1.
On
At present, CashCall has not moved to confirm the award.
2. Fluke is a resident of Pennsylvania and CashCall is a
California corporation with its principal place of business
(continued...)
CashCall's motion, the court compelled Fluke to comply with a
provision in his borrowing agreement requiring him to arbitrate
his claims individually and not as part of a class.
In the
subsequent arbitration, the arbitrator found in favor of CashCall
and against Fluke.
I.
In June 2007, Fluke, a resident of Pennsylvania,
borrowed $2,600 from the First Bank of Delaware ("First Bank").
This unsecured loan was marketed to Fluke over the internet by
CashCall, Inc. ("CashCall").
Under the terms of the promissory
note, Fluke could repay this debt over three and a half years,
that is, 42 months.3
Of the amount borrowed, $75 was treated as
a pre-paid origination fee.
Thus, Fluke received $2,525 of the
$2,600 he borrowed.
As required by federal law, the promissory note Fluke
signed carried a Truth in Lending Act disclosure statement.
15 U.S.C. §§ 1601-16.
See
According to the disclosure, Fluke was to
borrow $2,525.00 at an annual interest rate of 99.16% and pay a
total "finance charge" (i.e., interest) of $6,596.77 over 42
months.
In borrowing $2,525, Fluke would repay CashCall a total
of $9,121.77. The note also contains a provision requiring Fluke
2.(...continued)
there.
3. Fluke would pay $244.28 in the first month, $216.55 for forty
months, and $215.49 in the forty-second month. First Bank would
also charge Fluke an additional $15 if a payment was more than 15
days late. The loan did not include a prepayment penalty.
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to arbitrate any disputes that arise with the holder of the note
individually and not as part of a class.
See Fluke v. CashCall,
Inc., Case No. 08-5776, slip op. at 13-14 (E.D. Pa. May 21,
2009).
After First Bank loaned the money to Fluke, First Bank
assigned the promissory note to CashCall.4
The parties agree
that CashCall "serviced" the note, which appears to mean that
CashCall collected Fluke's payments.
Fluke paid CashCall
$2,840.00 over 13 months and then ceased making payments.
Of the
amount Fluke paid, CashCall applied $2,659.12 to interest and
$183.76 to principal.
When Fluke stopped making payments,
CashCall threatened a collection action.
Soon thereafter, Fluke filed this lawsuit.
Fluke
alleged that the interest rate that CashCall charged him and
other similarly-situated borrowers violates the Pennsylvania Loan
Interest and Protection Law and the Pennsylvania Consumer
Discount Company Act.5
7 P.S. § 6203.A; 41 P.S. §§ 201, 502.
4. The note was clearly drafted with the intention that First
Bank would lend Fluke money and then assign the note to CashCall.
The note defines the "Holder" of the note as including First
Bank's "marketing, servicing, and collection representatives and
agents." The note specifically refers to CashCall as a
"marketing agent." The note also invites borrowers to contact
CashCall if it has a complaint and provides CashCall's contact
information. The First Bank promissory note is dated June 27,
2007. Fluke received a notice that his debt had been assigned to
CashCall on June 30, 2007.
5.
CashCall has not counterclaimed to recover any money that
may be due under the promissory note.
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In arbitration, CashCall argued it was not liable under
Pennsylvania's usury laws because federal law as set forth in 12
U.S.C. § 1831d authorized First Bank to charge an out-of-state
borrower such as Fluke any interest rate that it could validly
charge a Delaware borrower.6
See generally Greenwood Trust Co.
v. Massachusetts, 971 F.2d 818, 826-28 (1st Cir. 1992).
The
parties agreed that Delaware statutes authorize Delawarechartered banks such as First Bank to charge a borrower any
agreed-upon interest rate.
See 5 DEL. CODE ANN. §§ 963, 965.
Fluke countered that a 99.16% interest rate is unconscionable and
therefore outside the scope of § 1831d.
The arbitrator found the 99.16% interest rate was not
unconscionable under Delaware law and denied Fluke any recovery.
In his motion to vacate and/or modify that award, Fluke argues
that the arbitrator's decision is not supported by substantial
evidence and that the arbitrator manifestly disregarded the law
in performing his analysis.
6.
Section 1831d(a) provides in pertinent part:
In order to prevent discrimination against
State-chartered insured depository institutions ... 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, take, receive, reserve, and charge on any
loan or discount made, or upon any note, bill of
exchange, or other evidence of debt, interest ... at
the rate allowed by the laws of the State, territory,
or district where the bank is located.
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II.
The promissory note requires any dispute between Fluke
and CashCall to be arbitrated pursuant to the Federal Arbitration
Act ("FAA"), 9 U.S.C. §§ 1 et seq.
The FAA specifies four
grounds for setting aside an arbitrator's award.
§ 10(a).
9 U.S.C.
These four grounds are:
(1) where the award was procured by
corruption, fraud, or undue means;
(2) where there was evident partiality or
corruption in the arbitrators, or either of
them;
(3) where the arbitrators were guilty of
misconduct in refusing to postpone the
hearing, upon sufficient cause shown, or in
refusing to hear evidence pertinent and
material to the controversy; or of any other
misbehavior by which the rights of any party
have been prejudiced; or
(4) where the arbitrators exceeded their
powers, or so imperfectly executed them that
a mutual, final, and definite award upon the
subject matter submitted was not made.
Id.
The statute also provides three circumstances in which a
court may modify or correct an arbitrator's award:
(a) Where there was an evident material
miscalculation of figures or an evident
material mistake in the description of any
person, thing, or property referred to in the
award.
(b) Where the arbitrators have awarded upon a
matter not submitted to them, unless it is a
matter not affecting the merits of the
decision upon the matter submitted.
(c) Where the award is imperfect in matter of
form not affecting the merits of the
controversy.
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Id. at § 11.
The Supreme Court has held that § 10 and § 11 of
the FAA are the exclusive grounds for vacating and modifying an
arbitrator's award.
Hall St. Assocs. LLC v. Mattel, Inc., 552
U.S. 579-80, 583-84 (2008).
Fluke argues that the arbitrator's award is unsupported
by substantial evidence.
The promissory note Fluke signed states
that the arbitrator's award "will be supported by substantial
evidence and must be consistent with this Agreement and
applicable law or may be set aside by a court upon judicial
review."
Section 10(a) of the FAA does not permit a court to
vacate an arbitration award on the ground that it is unsupported
by substantial evidence.
The Supreme Court has specifically held
that contracts between litigants cannot authorize federal courts
to vacate arbitration awards on this basis.
Id.
Thus, Fluke's
argument lacks merit.
Fluke also asserts that the award at issue must be set
aside due to the arbitrator's "manifest disregard of the law."
Both the Supreme Court and our Court of Appeals have specifically
declined to resolve whether manifest disregard of the law remains
a valid basis for vacatur after the Supreme Court's Hall Street
decision.
Stolt-Nielsen S.A. v. AnimalFeeds Int'l Corp., 130
S. Ct. 1758, 1768 n.3 (2010); Paul Green, 389 Fed. App'x at 176
n.5.
The Courts of Appeals for the Second and Ninth Circuits
have held that an arbitrator engaging in manifest disregard of
the law exceeds his or her powers within the meaning of
§ 10(a)(4) of the FAA.
Paul Green, 389 Fed. App'x at 177 n.6;
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see Comedy Club Inc. v. Improv W. Assocs., 553 F.3d 1277, 1290
(9th Cir. 2009); Stolt-Nielsen SA v. AnimalFeeds Int'l Corp., 548
F.3d 85, 93-95 (2d Cir. 2008), overruled on other grounds, --U.S. ----, 130 S. Ct. 1758 (2010).
On the other hand, the Courts
of Appeals for the Fifth and Eleventh Circuits have taken the
opposite view, that is that "manifest disregard of the law" does
not survive Hall Street as a grounds for vacating an arbitrator's
award.
Frazier v. CitiFinancial Corp., LLC, 604 F.3d 1313, 1324
(11th Cir. 2010); Citigroup Global Mkts., Inc. v. Bacon, 562 F.3d
349, 357 (5th Cir. 2009).
Prior to Hall Street, our Court of Appeals accepted
manifest disregard of the law as a basis for setting aside an
arbitration award although it has not had occasion to opine on
the subject since that time.
176.
See Paul Green, 389 Fed. App'x at
Even if manifest disregard of the law survives under
§ 10(a)(4) of the FAA, it is available only in those "exceedingly
narrow" circumstances in which an "arbitrator (1) knew of the
relevant legal principle, (2) appreciated that this principle
controlled the outcome of the disputed issue, and (3) nonetheless
willfully flouted the governing law by refusing to apply it."
Paul Green, 389 Fed. App'x at 176; Metromedia Energy, Inc. v.
Ensearch Energy Servs., Inc., 409 F.3d 574, 578 (3d Cir. 2005).
An arbitrator's manifest disregard for the law is distinct from a
merely erroneous application of the law.
Even an arbitrator's
incorrect legal conclusion is entitled to deference.
Local 863
Int'l Bhd. v. Jersey Coast Egg Producers, 773 F.2d 530, 533 (3d
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Cir. 1985); see Commc'n Consultant, Inc. v. Nextel Commc'n of
Mid-A., Inc., 146 Fed. App'x. 550, 553 (3d Cir. 2005).
Our Court
of Appeals has stated "that there must be absolutely no support
at all in the record justifying the arbitrator's determinations
for a court to deny enforcement of an award."
News Am. Publ'ns,
Inc. Daily Racing Form Div. v. Newark Typographical Union, Local
103, 918 F.2d 21, 24 (3d Cir. 1990) (internal citations omitted).
Fluke's pre-arbitration memorandum explained Delaware's
law of unconscionability and urged the arbitrator to find that a
99.16% interest rate is unconscionable.
Citing a leading
Delaware Supreme Court decision, Fluke urges that a contract is
unconscionable if a party uses its superior bargaining power to
obtain terms that are "so one-sided as to be oppressive."
See
Graham v. State Farm Mut. Auto. Ins. Co., 565 A.2d 908, 912-13
(Del. 1989).
We are constrained to find, however, that the
arbitrator did not manifestly disregard the law in concluding the
interest rate at issue was not unconscionable.
Delaware statutes
specifically authorize lenders to charge borrowers such as Fluke
any agreed-upon interest rate, and Fluke cited no cases in which
a Delaware court found a particular interest rate unconscionable.
See 5 DEL. CODE ANN. § 965.
The arbitrator did not "willfully
flout" any law he was obliged to apply.
Paul Green, 389 Fed.
App'x at 176-77.
We are not unsympathetic to Fluke's argument that an
interest rate of 99.16% is unconscionable.
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Yet, we may not
substitute our judgment for that of the arbitrator.
Publ'ns, 918 F.2d at 24.
See News Am.
Assuming that a manifest disregard of
the law remains a valid grounds for vacating an arbitration
award, the arbitrator here did not manifestly disregard the law
in denying Fluke relief.
Accordingly, we cannot grant the relief
Fluke seeks.
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