Judge Neil P. Olack, United States Bankruptcy Judge.
This matter came before the Court for hearing on October 25, 2017 (the "Hearing"),
This Court has jurisdiction over the parties to and the subject matter of this Adversary pursuant to 28 U.S.C. § 1334. Notice of the Motion to Dismiss or to Compel Arbitration was proper under the circumstances.
1. On November 8, 2016, the Debtor entered into the Installment Loan Agreement and Disclosure Statement (the "Loan Agreement") with Tower Loan (Ex. 1). The Debtor financed $4,481.98 with a 37.36% annual rate of interest to be paid in twenty-six (26) equal installments of $254.00 for a total payment to Tower Loan of $6,604.00. (Id.) Additionally, the Debtor obtained from Tower Loan credit life insurance at $228.94 per annum, credit disability insurance at $303.78 per annum, and credit property insurance at $429.26 per annum. (Id.)
2. The Loan Agreement consists of one (1) page and does not contain a merger clause.
3. The reverse side of the Loan Agreement contains the Arbitration Agreement (the "First Arbitration Agreement") (Ex. 1). The First Arbitration Agreement "applies to all claims and disputes between [b]orrower and [l]ender," including "[t]he loan [b]orrower is obtaining from [l]ender today and any other loans or retail installment contracts with [l]ender" and "[a]ny insurance purchased in connection with this loan or any previous loan or retail installment sales contract." (Ex. 1).
4. The Loan Agreement provides that "[t]he construction, validity, and enforcement of this loan agreement shall be governed by the laws of the State of Mississippi, without regard to the principles of conflicts of laws." (Ex. 1).
5. In Tower Loan's Brief, Tower Loan asserts that the First Arbitration Agreement contains a delegation clause.
6. On January 17, 2017, the Debtor filed a petition for relief under chapter 7 of the U.S. Bankruptcy Code (Bankr. Dkt. 1).
7. On May 12, 2017, the Debtor filed the Complaint in this Adversary alleging that Tower Loan violated the Truth in Lending Act, 15 U.S.C. § 1600 et seq., and Regulation 2 by providing misleading and incorrect disclosures on the Loan Agreement (Adv. Dkt. 1 at 4-5). For example, the Debtor alleges that Tower Loan did not pay to the appropriate insurance company the amounts required for the Debtor's life insurance, disability insurance, and property insurance (Adv. Dkt. 1 at 3, ¶ 15). The Debtor further asserts that Tower Loan "received an undisclosed commission from these charges." (Id.)
8. On June 22, 2017, Tower Loan filed the Answer and Affirmative Defenses to Complaint [Adv. Proc. Dkt. # 3] [sic] (Adv. Dkt. 6). Tower Loan filed the Amended Answer and Affirmative Defenses to Complaint [Adv. Proc. Dkt. # 3] [sic] (the "Amended Answer") on October 30, 2017, denying that it violated the Truth in Lending Act (Adv. Dkt. 22).
9. On July 6, 2017, Tower Loan filed the Motion to Dismiss or to Compel Arbitration. In support of dismissal, Tower Loan asserted that the chapter 7 trustee (the "Trustee") is the only party with standing to pursue the Debtor's claims against Tower Loan because those claims became property of the estate upon commencement of the Bankruptcy Case (Adv.
10. On September 26, 2017, the Trustee filed the Notice of Ratification of Real Party in Interest (Adv. Dkt. 16).
11. On September 26, 2017, the Debtor filed the Debtor's Response. In support of denying dismissal, the Debtor asserted that the Trustee, as the real party in interest, ratified the Adversary. In support of litigation, the Debtor asserted that it was unclear whether he actually agreed to the arbitration agreement and that procedural unconscionability precluded enforcing the First Arbitration Agreement. The Debtor attached the Affidavit of Chuck Wills to the Debtor's Response.
12. On October 10, 2017, Tower Loan filed Tower Loan's Reply withdrawing its contention that the Debtor lacked standing. Tower Loan further asserted that the Parties formed a valid agreement to arbitrate and that the First Arbitration Agreement is not unconscionable. Additionally, Tower Loan argued that unconscionability is an issue for the arbitrator to decide since the First Arbitration Agreement contains a delegation clause.
13. At the Hearing, the Parties presented to the Court, for the first time, the Endorsement to Require Binding Arbitration (the "Second Arbitration Agreement") (together with the First Arbitration Agreement, the "Arbitration Agreements") (Ex. 2). The Second Arbitration Agreement "applies to all claims and disputes between [b]orrower and the [c]ompany," including "the loan [b]orrower is obtaining from the lender today, any other loans or retail installment contracts with the [l]ender," and "any insurance purchased from the [c]ompany in connection with the loan or any previous loan or retail installment sales contract." (Ex. 2). Tower Loan explained that the Second Arbitration Agreement makes up the "additional pages" referenced in the Loan Agreement's Arbitration Disclaimer.
14. The Arbitration Agreements contain conflicting arbitration provisions. The conflicts involve: (1) the number of arbitrators,
15. At the Hearing, the Debtor argued that because the Arbitration Agreements govern "all claims and disputes between the Parties" but contain different and conflicting terms, there was no meeting of the minds between the Parties with respect to arbitration.
The Supreme Court of the United States has long acknowledged "a national policy favoring arbitration when the parties contract for that mode of dispute resolution." Preston v. Ferrer, 552 U.S. 346, 349, 128 S.Ct. 978, 169 L.Ed.2d 917 (2008). Indeed, the Federal Arbitration Act (FAA) provides that "[a] written provision in ... a contract evidencing a transaction involving commerce to settle by arbitration a controversy thereafter arising out of such contract ... shall be 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. With this policy in mind, however, "courts must place arbitration agreements on an equal footing with other contracts ... and enforce them according to their terms." AT & T Mobility LLC v. Concepcion, 563 U.S. 333, 339, 131 S.Ct. 1740, 179 L.Ed.2d 742 (2011); see Buckeye Check Cashing, Inc. v. Cardegna, 546 U.S. 440, 443, 126 S.Ct. 1204, 163 L.Ed.2d 1038 (2006); Volt Info. Scis., Inc. v. Bd. of Trs. of the Leland Stanford Junior Univ., 489 U.S. 468, 478, 109 S.Ct. 1248, 103 L.Ed.2d 488 (1989).
Thus, the enforcement of an arbitration agreement is a matter of both contract formation and contract interpretation. Kubala v. Supreme Prod. Srvs., Inc., 830 F.3d 199, 201 (5th Cir. 2016). The Fifth
Here, Tower Loan contends that the First Arbitration Agreement contains a valid and enforceable delegation clause (Adv. Dkt. 9). As a result, the Court will address two issues: first, whether the Parties entered into a valid agreement to arbitrate a set of claims; and second, whether that agreement contains a delegation clause requiring the Parties' claims to proceed to arbitration "for gateway rulings on threshold arbitrability issues." Id.
The "federal policy favoring arbitration does not apply to the determination of whether there is a valid agreement to arbitrate between the parties." Fleetwood Enters., Inc. v. Gaskamp, 280 F.3d 1069, 1073-74 (5th Cir. 2002); see also Volt Info. Scis., Inc., 489 U.S. at 478, 109 S.Ct. 1248 ("[T]he FAA does not require parties to arbitrate when they have not agreed to do so."). Instead, state contract law determines whether parties entered into a valid agreement to arbitrate a set of claims. Kubala, 830 F.3d at 202. Since the Loan Agreement provides that Mississippi law governs "[t]he construction, validity and enforcement of th[e] loan agreement" and the Parties directed the Court to Mississippi law in their pleadings and at the Hearing, the Court will apply Mississippi law to determine whether the Parties entered into a valid agreement to arbitrate their claims.
Under Mississippi law, "[a] contract is unenforceable if the material terms are not sufficiently definite." Rotenberry v. Hooker, 864 So.2d 266, 270 (Miss. 2003). A contract is sufficiently definite when it contains enough information to "enable the court under proper rules of construction to ascertain its terms." Hunt v. Coker, 741 So.2d 1011, 1014 (Miss. 1999) (quoting Leach v. Tingle, 586 So.2d 799, 802 (Miss. 1991)). Additionally, a meeting of the minds is essential for an agreement to be valid and binding upon the parties. Davis v. Davis (Estate of Davis), 832 So.2d 534, 537 (Miss. App. Ct. 2001); see Union Planters Bank, Nat'l Ass'n v. Rogers, 912 So.2d 116, 120 (Miss. 2005) ("A cardinal rule of construction of a contract is to ascertain the mutual intentions of the parties."). While no Mississippi court
In Ragab v. Howard, 841 F.3d 1134 (10th Cir. 2016), the Tenth Circuit Court of Appeals held that "conflicting details in the multiple arbitration provisions indicate that there was no meeting of the minds with respect to arbitration." Id. at 1138. In Ragab, the parties entered into a business relationship evidenced by six agreements containing conflicting arbitration provisions. Id. at 1136. The conflicts involved the following: "(1) which rules will govern,
Upon review, the Tenth Circuit applied Colorado law to determine whether the parties agreed to arbitrate. Id. at 1137. The applicable state law required the parties to achieve a meeting of the minds with respect to the agreement and agree on all essential terms. Id. The Tenth Circuit looked to the New Jersey court's decision in NAACP of Camden County East v. Foulke Management Corporation, 421 N.J.Super. 404, 24 A.3d 777 (2011), for guidance on whether the parties achieved a meeting of the minds on the decision to arbitrate their claims.
In NAACP, the parties presented the court with three agreements that each contained an arbitration provision. NAACP of Camden Cty. E., 24 A.3d at 781-82. Similar
Based on these conflicts, the New Jersey court found that "the arbitration provisions... [were] too plagued with confusing terms and inconsistencies to put a reasonable consumer on fair notice of their intended meaning." Id. at 794. Thus, the New Jersey court held that the conflicting arbitration provisions were "unenforceable for lack of mutual assent." Id. at 798. Because of NAACP's factual similarities to Ragab and the Supreme Court of the United States' finding in AT & T Mobility LLC that "the FAA does not require an arbitration provision to be enforced if the provision is defective for reasons other than public policy or unconscionability," the Tenth Circuit adopted the reasoning of the court in NAACP and affirmed the district court's decision, holding that the parties did not achieve a meeting of the minds with respect to arbitration.
Associate Justice Neil Gorsuch, former Circuit Judge for the Tenth Circuit Court of Appeals, dissented in Ragab, arguing that the parties formed a valid agreement to arbitrate their claims. Ragab, 841 F.3d at 1139 (Gorsuch, J., dissenting). As a preliminary matter, Justice Gorsuch noted that Ragab involved sophisticated parties to a commercial deal. In fact, plaintiff's counsel drafted three of the agreements containing arbitration clauses. Id. While acknowledging that the agreements differed on "the details concerning how arbitration should proceed," Justice Gorsuch argued that "treating the procedural details surrounding the arbitration ... as nonessential terms would do a good deal more to `effectuate[ ] the intent of the parties'... itself always the goal of contract interpretation." Id. (citing Lane v. Urgitus, 145 P.3d 672, 677 (Colo. 2006)). To do this, Justice Gorsuch proposed two courses of action. First, the plaintiff could initiate arbitration under the agreement of his
Next, Justice Gorsuch explained a "battle of the forms" analogy where "purchasers and vendors agree to transact but each side memorializes the deal on its own standard forms." Id. at 1140. When these forms contain conflicting terms, they "knock each other out but do not void the contract." Id. Under the Uniform Commercial Code, "a meeting of the minds occurs with respect to the fundamentals of the deal even if not with respect to the details." Id. Since the case involved sophisticated parties who mutually contributed to drafting the agreements, Justice Gorsuch argued that a "battle of the forms" approach would better serve the parties' intent to arbitrate their claims rather than "allowing the plaintiff to escape the consequences of a choice he once so clearly preferred but now simply regrets." Id.
To protect consumers, New Jersey courts stress a "need for clarity" in arbitration agreements and take "particular care" in assessing mutual asset because of a consumer's inferior bargaining power. Id.; see NAACP of Camden Cty. E., 24 A.3d at 790-91, 97. Justice Gorsuch, however, did not find NAACP persuasive because Ragab "involve[d] parties to a commercial, not a consumer, transaction, with contracts actively negotiated by both sides, not contracts of adhesion thrust upon the plaintiff." Ragab, 841 F.3d at 1140. When a state has not adopted a public policy statute requiring clarity in a consumer contract, Justice Gorsuch argues that the court should further the national policy favoring arbitration and not create barriers to arbitration, particularly in a commercial setting where the parties are represented by counsel and "have so clearly and repeatedly demonstrated their desire to arbitrate." Id. Justice Gorsuch did not provide any citations to cases where courts compelled arbitration when an agreement contained materially inconsistent and conflicting arbitration provisions. With NAACP, Ragab, and Justice Gorsuch's dissent in Ragab in mind, the Court now turns to the Adversary to determine precisely the same issue — whether the Parties formed a valid agreement to arbitrate their claims.
In its opening remarks at the Hearing, Tower Loan argued that the First Arbitration Agreement contains a delegation clause and, therefore, the Court's analysis is limited to whether the Parties entered into a valid agreement to arbitrate their claims and whether the agreement actually contains a delegation clause requiring the claims to proceed to arbitration for gateway rulings.
After reviewing the Loan Agreement and the Arbitration Agreements, the Court finds that the Arbitration Agreements govern claims against Tower Loan both arising under the Loan Agreement and out of insurance policies. For example, the First Arbitration Agreement "applies to all claims and disputes between [b]orrower and [l]ender ... includ[ing] ... all claims and disputes arising out of ... [t]he loan [b]orrower is obtaining from [l]ender today and ... [a]ny insurance purchased in connection with this loan." (Ex. 1, ¶ 1) (emphasis added). Additionally, the First Arbitration Agreement "applies to all disputes and claims between [b]orrower and [l]ender, [l]ender's agents, employees, affiliated corporations and the employees or agents of these affiliated companies." (Id. ¶ 2) (emphasis added). The lender is defined as Tower Loan of Mississippi, LLC, and the affiliated companies include, without limitation, "American Federated Insurance Company, American Federated Life Insurance Company, First Tower Loan LLC, Tower Loan of Mississippi LLC, Gulfco of Mississippi LLC, Gulfco of Alabama LLC, Gulfco of Louisiana LLC, Tower Loan of Missouri LLC, and First
Similar to the courts in Ragab and NAACP, the Court finds that the Arbitration Agreements contain several material conflicts and inconsistencies. The conflicts and inconsistencies concern the following: (1) the number of arbitrators, (2) how the arbitrator(s) will be selected, (3) the notice required to arbitrate, (4) the location of the arbitration, (5) who pays the costs of the arbitration, (6) who would be entitled to attorneys' fees and on what showing, and (7) when arbitration proceedings need not be initiated. The Court will address each in turn.
First, the First Arbitration Agreement provides that "[t]he dispute shall be heard by a single arbitrator." (Ex. 1, ¶ 4). The Second Arbitration Agreement, however, permits a party to request "a panel of three arbitrators instead of a single arbitrator." (Ex. 2, ¶ 4). Thus, the Arbitration Agreements are inconsistent.
Second, and similar to Ragab, the First Arbitration Agreement provides that "[i]f an answering statement is filed and the parties cannot agree upon the arbitrator, then the provisions of the Federal Arbitration Act (9 U.S.C. § 5), shall apply." (Ex. 1, ¶ 4). Under this provision, "the court shall designate and appoint an arbitrator or arbitrators or umpire, as the case may require, who shall act under the said agreement with the same force and effect as if he or they had been specifically named therein." 9 U.S.C. § 5. In the Second Arbitration Agreement, however, "[i]f an answering statement is filed and the parties cannot agree upon [the] arbitrator, the National Arbitration Forum
Third, and similar to Ragab, the First Arbitration Agreement requires a thirty (30)-day notice period before proceeding to arbitration (Ex. 1, ¶ 3), whereas the Second Arbitration Agreement requires only twenty (20) days (Ex. 2, ¶ 3). Additionally, under the Arbitration Agreements, if a party files an answering statement after the expiration of the notice period, the opposing party selects the arbitrator. (Ex. 1, ¶ 4; Ex. 2, ¶ 4). Thus, the Arbitration Agreements conflict with each other.
Fourth, and similar to NAACP, the First Arbitration Agreement provides that "[t]he arbitration shall be held in Rankin County, Mississippi, unless the [b]orrower requests in the demand for arbitration or the answering statement, the arbitration to be held in his, her, or its county of residence or principal place of business." (Ex. 1, ¶ 5). The Second Arbitration Agreement, however, provides automatically for the arbitration to be held in the borrower's county of residence (Ex. 2, ¶ 5). The Arbitration Agreements, therefore, are inconsistent.
Fifth, and similar to Ragab and NAACP, the First Arbitration Agreement provides that the "[l]ender shall pay the arbitrator's fees and expenses for the first two days of hearings." (Ex. 1, ¶ 4) Further, the First Arbitration Agreement provides that "[i]n his decision or award, the arbitrator shall direct the parties to pay his or her fees and other costs according to the relative fault of the parties." (Id.) Thus, the First Arbitration Agreement is internally inconsistent. While the document requires Tower Loan to pay the arbitrator's fees and expenses for the first two days of hearings, the arbitrator is also required to apportion his fees and costs between the Parties in accordance with their relative fault. In theory, then, the Debtor could be responsible for paying the entirety of the arbitrator's fees and costs. Additionally, the Second Arbitration Agreement provides that "the [c]ompany shall pay all costs of the arbitration," excluding attorneys, experts, and witness fees and expenses (Ex. 2, ¶ 4). The Arbitration Agreements, therefore, conflict with each other. The Court is unable to discern whether Tower Loan pays none, some, or all of the costs under the Arbitration Agreements.
Seventh, the First Arbitration Agreement does not require the lender "to initiate arbitration proceedings for collection matters of $10,000 or less or before repossessing collateral or foreclosing upon real property. However, disputes arising out of or relating to foreclosure or repossession of collateral shall be arbitrated." (Ex. 1, ¶ 8). The Second Arbitration Agreement contains no such carve out. The Arbitration Agreements, therefore, are inconsistent and suggest that all material terms are not "sufficiently definite."
While Justice Gorsuch raised many concerns in Ragab, the Court can distinguish his dissent from the issues raised in the Adversary. First, the Debtor is not a sophisticated party. The Debtor is a truck driver and mechanic who was not represented by counsel when he signed the Arbitration Agreements (Adv. Dkt. 17). Further, and unlike the plaintiff in Ragab, the Debtor did not participate in the negotiation or drafting of the Loan Agreement and the Arbitration Agreements — these documents were created by Tower Loan. Accordingly, the claims in the Adversary arise out of a consumer, rather than a commercial, transaction. Second, and unlike the defendants in Ragab, Tower Loan has not acknowledged that the Debtor's claims fall within the scope of the Second Arbitration Agreement. Instead, Tower Loan maintains that the Second Arbitration Agreement governs only claims against insurance companies arising out of insurance policies. Tower Loan desires to proceed exclusively under the First Arbitration Agreement. The Debtor, therefore, "would [not] be free to initiate arbitration under the terms of whichever ... agreement[ ] he prefers." See Ragab, 841 F.3d at 1139 (Gorsuch, J., dissenting). Additionally, the Arbitration Agreements each contain both favorable and unfavorable provisions with respect to the Debtor. For the Debtor to proceed unprejudiced, he would need to "pick and choose" provisions from each agreement to govern the arbitration. Third, while courts have compelled arbitration where the agreement included only a provision requiring arbitration,
Turning to Tower Loan's argument at the Hearing, Mississippi recognizes the duty-to-read doctrine. See Russell v. Performance Toyota, Inc., 826 So.2d 719, 726 (Miss. 2002) ("In Mississippi, a person is charged with knowing the contents of any document that he executes."); see also Cont'l Jewelry Co. v. Joseph, 140 Miss. 582, 105 So. 639, 639 (1925) ("A person cannot avoid a written contract which he has entered into on the ground that he did not read it or have it read to him, and that he supposed its terms were different, unless he was induced not to read it or have it read to him by fraudulent representations made to him by the other party, on which he was entitled to rely."). While the Parties did not present to the Court any evidence of fraudulent misrepresentation on behalf of Tower Loan, the Arbitration Agreements contain numerous materially inconsistent and conflicting provisions. As a result, a prudent purchaser reading the Arbitration Agreements would likely obtain only a generalized sense that arbitration would resolve his or her claims because the Arbitration Agreements "do not plainly convey — with precision and consistency — what the exact terms and conditions of that arbitration process would be." NAACP of Camden Cty. E., 24 A.3d at 794. Since Mississippi law requires a contract's material terms to be "sufficiently definite," the Court follows Ragab and finds that the conflicting and inconsistent Arbitration Agreements indicate that the Parties did not achieve a meeting of the minds with respect to arbitration — the dispute could be governed by one or three arbitrators; either the court or a dispute resolution company that has since been renamed and no longer services consumer arbitration disputes will choose the arbitrator if the Parties cannot agree on a candidate; the notice period to deliver an answering statement to the other party is either thirty (30) days or twenty (20) days, and there are consequences if the answering statement is not timely filed; the Debtor might be required to request that the arbitration be held in his county of residence; Tower Loan might pay no costs, two days of costs, or all costs of the arbitration; the Debtor might be responsible for paying all attorneys, experts, and witness fees; and Tower Loan might not be bound to arbitrate claims for collection matters of $10,000 or less, before repossessing collateral or foreclosing upon real property.
Because the Court finds that no valid agreement to arbitrate exists, it does not need to reach the issue of whether the Arbitration Agreement actually contains a delegation clause requiring the Parties' claims to proceed to arbitration for the arbitrator to decide gateway arbitrability issues.
For the above and foregoing reasons, the Court concludes that no actual agreement to arbitrate exists because the Parties did not achieve a meeting of the minds as to how to arbitrate claims under the Arbitration Agreements. A separate final judgment shall be entered in accordance with Rules 7054 and 9021 of the Federal Rules of Bankruptcy Procedure.
