Kevin R. Huennekens, UNITED STATES BANKRUPTCY JUDGE.
Before the Court in this adversary proceeding (the "Adversary Proceeding") is a Motion to Compel
The United States Bankruptcy Court for the Eastern District of Virginia (the
Count II of the Amended Complaint wholly implicates the allowance and disallowance of claims against the estate as it objects to Allied's claim on the grounds that it arises out of a null and void contract, which would disallow the claim under section 502(b)(1) of Title 11 of the United States Code (the "Bankruptcy Code"). See 11 U.S.C. § 502(b)(1) (Claims against the estate are allowed except to the extent they are "unenforceable against the debtor and property of the debtor, under any agreement or applicable law."). Count III involves not only the allowance or disallowance of claims against the estate but also counterclaims under Virginia's usury laws against persons filing claims against the estate. Thus, Counts II and III are core proceedings under 28 U.S.C. § 157(b)(2) such that the Court retains jurisdiction to hear and decide these claims.
Venue is appropriate in this Court pursuant to 28 U.S.C. §§ 1408 and 1409. A substantial part of the events or omissions giving rise to the claims asserted in the Amended Complaint against Allied took place in this judicial district.
The Debtor is a salaried employee of the U.S. Probation Office. Am. Compl. ¶ 21. Allied, a Delaware limited liability company, offers "short-term, small-dollar loans to Virginians that mimic payday loans but are in the form of open-end credit plans." Id. ¶¶ 10, 15. Cerastes, LLC ("Cerastes") is a co-defendant in this action and a Delaware limited liability company that "buy[s] defaulted consumer accounts from debt sellers where the debtor has filed for Chapter 13 bankruptcy protection" and then "prosecute[s] Proofs of Claims on those accounts." Id. ¶¶ 17-18.
In July 2016, the Debtor submitted an application to Allied requesting a loan in the amount of $1500. Mot. to Compel ¶ 6. On July 25, 2016, the Debtor executed a line of credit agreement with Allied (the "Credit Agreement"). Am. Compl. ¶ 22. Under the terms of the Credit Agreement, Allied agreed to loan the Debtor $1500 in cash, and the Debtor agreed to repay the $1500 along with interest accruing at a rate of 0.75% per day, which equates to an
Mot. to Compel Ex. B, at 2.
On January 11, 2017, (the "Petition Date") the Debtor filed a voluntary petition under chapter 13 of the Bankruptcy Code in this Court (the "Bankruptcy Case"). On March 21, 2017, Allied filed proof of claim 8-1 in the Bankruptcy Case in the amount of $2756.92 for "Money loaned" ("Claim 8-1"). The Debtor filed her initial objection to Claim 8-1 on August 29, 2017, alleging that Allied had "neither attached a copy of the writing upon which the claim is based nor a statement of the circumstances of the loss or destruction of such writing" in contravention of Rule 3001 of the Federal Rules of Bankruptcy Procedure (the "Bankruptcy Rules"). Obj. Claim No. 8-1 & Mem. Supp. Thereof ¶ 13, In re Taylor, No. 17-30142-KRH (Bankr. E.D. Va.), ECF No. 29. On September 1, 2017, the Court entered an order confirming the Debtor's chapter 13 plan. Order Confirming Plan, In re Taylor, No. 17-30142-KRH
On September 28, 2017, Cerastes filed a transfer of claim, indicating that Allied had transferred Claim 8-1 to Cerastes. Transfer Claim Other Than Security, In re Taylor, No. 17-30142-KRH (Bankr. E.D. Va.), ECF No. 38.
On January 15, 2018, the Debtor initiated this Adversary Proceeding by filing a complaint against Allied and Cerastes. Compl. Objecting Claim No. 8-1 & No. 8-2, Damages, Costs, & Att'y Fees Pursuant FDCPA 15 U.S.C. § 1692, Classwide Rel., Declaratory Rel., Injunctive Rel., & Equit. Rel. Pursuant 11 U.S.C. § 105, ECF No. 1 ("Original Complaint").
On March 15, 2018, the Debtor filed the Amended Complaint. The Amended Complaint contained five counts. Count I objects to Claims 8-1 and 8-2 on the grounds that fees and interest were assessed after the Petition Date, the claims were not properly identified as open-end credit, and Claim 8-2 falsely asserted that no interest or fees had been added. Count II seeks to disallow the claims pursuant to section 502(b)(1) of the Bankruptcy Code because they are unenforceable under Virginia Law governing consumer finance and because they neither provide the writing underlying the claims nor provide all information required for a claim based on open-end credit as required by Bankruptcy Rule 3001. Count II also seeks to assert a class claim objection against Allied on behalf of other similarly situated debtors in the Eastern District of Virginia.
On March 29, 2018, the Court received, among other filings, (i) Allied's Motion to Dismiss the Amended Complaint, Mot. Dismiss Pursuant Fed. R. Civ. P. 12(b)(1) & 12(b)(6); & Mem. P. & A., ECF No. 35 ("Allied's Motion to Dismiss"),
On April 12, 2018, the Debtor filed several responses, including a response to the Motion to Compel. Pls.' Mem. Opp'n Def. Allied's Mot. Compel Arb., ECF No. 47. Allied filed replies to the Debtor's responses on April 19, 2018. See Allied's Reply Supp. Mot. Entry Order Staying Adv. Pro. & Compelling Arb., ECF No. 53. The Court set a hearing on, among other motions, Allied's Motion to Dismiss and the Motion to Compel for July 24, 2018. Prior to the hearing on July 24, 2018, Allied submitted a new motion asking the Court to certify the questions of state law, pertinent to Counts II and III of the Amended Complaint, to the Supreme Court of Virginia. See Mot. Certif. Questions State Law; & Mem. P. & A., ECF No. 71 ("Motion for Certification").
On August 31, 2018, the Supreme Court of Virginia respectfully declined to accept the certified questions of state law that the Court had submitted to it. See Letter, ECF No. 81. On September 18, 2018, the Supreme Court of Virginia denied Allied's motion for reconsideration of the certification of questions of state law. See Letter, ECF No. 88.
On November 8, 2018, the Virginia Attorney General filed a motion to intervene and file pleadings in intervention in this Adversary Proceeding. Commonwealth's Mot. Leave File Pleadings Interven., ECF No. 108 ("Motion to Intervene"). The Virginia Attorney General alleged that it met the criteria for intervening in this Adversary Proceeding under Federal Rule of Civil Procedure 24(b) as incorporated by Bankruptcy Rule 7024. Mot. to Intervene 1. The Virginia Attorney General attached as an exhibit its proposed complaint in intervention, which seeks disallowance of Allied's claim against the Debtor for violation of Virginia consumer finance laws and Virginia usury law and seeks relief from Allied in the form of "restitution, civil penalties, attorney's fees and costs, as well as injunctive relief" arising out of Allied's "loans that the Commonwealth alleges are void." Id. Ex. A, at 2. Specifically, the Virginia Attorney General asserts that Allied extended loans to debtors that violated Virginia's consumer finance statutes and filed proofs of claim in bankruptcy proceedings based on those illegal lending arrangements. Id. On November 13, 2018, Allied filed an objection to the Virginia Attorney General's Motion to Intervene. Allied's Prelim. Obj. & Reserv. Rights Regarding Commonwealth's Mot. Leave File Pleadings Interven., ECF No. 109.
At the Hearing, after entertaining arguments from all parties, the Court granted the Motion to Intervene, permitting the Virginia Attorney General to intervene in this Adversary Proceeding. The Court also denied the Motion to Compel. The Court took Allied's Motion to Dismiss under advisement and granted Cerastes's Motion to Dismiss with respect to Count V of the Amended Complaint.
In its Motion to Compel, Allied asks the Court to stay this Adversary Proceeding and refer Counts II and III of the Debtor's Amended Complaint to arbitration "pursuant to the agreement to arbitrate set forth in the [Credit] Agreement." Mot. to Compel ¶ 13. The Motion to Compel also asks the Court to determine that Counts II and III are "non-core proceedings that are otherwise related to a case under title 11." Id. ¶ 14. At the Hearing, the Court denied the Motion to Compel because Counts II and III are constitutionally core claims. As such, referring the claims to
The Federal Arbitration Act provides that written contracts to arbitrate "shall be valid, irrevocable, and enforceable, save upon grounds as exist at law or equity for the revocation of any contract."
Arbitration agreements, though "on an equal footing with other contracts," are not inviolate. Id. at 339, 131 S.Ct. 1740. A party seeking to prevent enforcement of an arbitration agreement must show that "Congress has evinced an intention to preclude a waiver of judicial remedies for the statutory rights at issue." Green Tree Fin. Corp.-Ala. v. Randolph, 531 U.S. 79, 90, 121 S.Ct. 513, 148 L.Ed.2d 373 (2000). A court may deduce such congressional intent from "(1) the statute's text; (2) its legislative history; or (3) `an inherent conflict between arbitration and the statute's underlying purposes.'" CashCall, 781 F.3d at 71 (quoting Shearson/Am. Express, Inc. v. McMahon, 482 U.S. 220, 227, 107 S.Ct. 2332, 96 L.Ed.2d 185 (1987)). Upon discovery of congressional intent to preserve judicial remedies for the statutory rights at issue, the court has the discretion to withhold arbitration, a decision subject to an abuse of discretion standard of review at the appellate level. Id. at 71-72.
In Moses v. CashCall, the United States Court of Appeals for the Fourth Circuit applied this framework in the bankruptcy context. The Fourth Circuit recognized that sending a constitutionally core claim to arbitration pursuant to an arbitration agreement would "inherently conflict with the purposes of the Bankruptcy Code." Id. at 72. See also Anderson v. CreditOne Bank, N.A. (In re Anderson), 884 F.3d 382, 387 (2d Cir. 2018) ("If the matter involves a core proceeding, the bankruptcy court is tasked with engaging in a `particularized inquiry into the nature of the claim and the facts of the specific bankruptcy.'" (quoting MBNA Am. Bank, N.A. v. Hill, 436 F.3d 104, 108 (2d Cir. 2006))).
28 U.S.C. §§ 157(b)(1) categorizes bankruptcy proceedings as either core or non-core proceedings. A bankruptcy court can hear and determine core bankruptcy proceedings arising under Title 11 or arising in a case under Title 11. These include the "allowance or disallowance of claims against the estate" and "counterclaims by the estate against persons filing claims against the estate." CashCall, 781
The Fourth Circuit recognized the distinction the Supreme Court had drawn in Stern v. Marshall, 564 U.S. 462, 131 S.Ct. 2594, 180 L.Ed.2d 475 (2011), between constitutionally core and constitutionally non-core bankruptcy proceedings. Id. at 69-70. In Stern v. Marshall, the Supreme Court segmented counterclaims into two new categories: constitutionally core claims on the one hand and statutorily core but constitutionally non-core claims on the other. 564 U.S. at 499, 131 S.Ct. 2594. Article III of the United States Constitution prohibits bankruptcy courts from issuing final orders concerning counterclaims that are not constitutionally core. Id. The counterclaim must "stem[ ] from the bankruptcy itself or would necessarily be resolved in the claims allowance process" in order to be considered constitutionally core. Id. In the wake of Stern, a statutorily core but constitutionally non-core counterclaim — a so-called "Stern Claim" — must be treated "as if it were statutorily non-core." CashCall, 781 F.3d at 70; see also Exec. Benefits Ins. Agency v. Arkison, 573 U.S. 25, 134 S.Ct. 2165, 189 L.Ed.2d 83 (2014).
In CashCall, on facts strikingly similar to those presented in the case at bar, a loan servicer filed a motion asking the bankruptcy court to compel arbitration for two of a debtor's claims: a claim to declare the loan between the loan servicer and debtor illegal and void under North Carolina law and a claim to obtain damages for the loan servicer's debt collection practices. Id. at 68. The Fourth Circuit held that the first claim was constitutionally core because "the validity of the Loan Agreement `would necessarily be resolved' in adjudicating CashCall's proof of claim and Moses' objections thereto." Id. at 70 (quoting Stern, 564 U.S. at 499, 131 S.Ct. 2594). Constitutionally core claims strike at the heart of the bankruptcy process Congress has established through the Bankruptcy Code, which is designed to "provide debtors and creditors with `the prompt and effectual administration and settlement of the ... estate'" and "centralize disputes over the debtor's assets and obligations in one forum." Id. at 72 (quoting Katchen v. Landy, 382 U.S. 323, 328, 86 S.Ct. 467, 15 L.Ed.2d 391 (1966)). Therefore, the bankruptcy court's refusal to refer the debtor's objection to the allowance of CashCall's claim to arbitration was proper because arbitration "would `substantially interfere' with [the debtor's] efforts to reorganize" and would "inherently conflict" with the purposes of the Bankruptcy Code and with Congress's intent in enacting the Bankruptcy Code. Id. at 73 (quoting Phillips v. Congelton, L.L.C. (In re White Mountain Mining Co.), 403 F.3d 164, 169-70 (4th Cir. 2005)).
The Fourth Circuit held that the second claim in CashCall, a counterclaim seeking
Of importance to the Fourth Circuit was that the counterclaim was not related to the debtor's proof of claim. The counterclaim involved "an allegation that CashCall sought to collect on an invalid debt." Id. at 85. The constitutionally non-core litigation surrounding the counterclaim was "entirely peripheral to the core claim" dealing with the allowance of the proof of claim. Id. at 86. The counterclaim would not necessarily be resolved in the claims allowance process but would "require detailed and time-consuming findings regarding CashCall's conduct in trying to collect on the loan, other violations of the state statute, and damages like emotional distress." Id. at 85. Although tangentially related to the constitutionally core function of the bankruptcy court to administer the claims allowance process, the counterclaim primarily implicated the collection process, not "whether an individual was owed money by a debtor." Id. The Fourth Circuit concluded there was "no reason to believe that arbitration in these circumstances would substantially interfere with Moses's bankruptcy and present an inherent conflict with the purposes of the Bankruptcy Code." Id. at 86.
Based on this analysis of the Fourth Circuit's opinion in CashCall, the Court finds that Counts II and III of the Amended Complaint present constitutionally core claims and that referring those core claims to arbitration would inherently conflict with the purposes of the Bankruptcy Code in contravention of Fourth Circuit precedent. The Debtor asks the Court in Count II of her Amended Complaint to disallow Allied's claim because it is unenforceable under Virginia law. Am. Compl. ¶ 101. The Debtor alleges that Allied charged her 273.75% interest plus an origination fee of $100.00. Id. ¶ 92. The Debtor maintains that because Allied did not obtain a consumer finance license and does not otherwise qualify under the exception provided by section 6.2-312(A) of the Virginia Code, Allied's loan to her is null and void. Id. ¶¶ 89-91, 93-99. The Debtor also requests in Count II that the Court certify a class of similarly situated claimants under Federal Rule of Civil Procedure 23(a) as incorporated by Bankruptcy Rule 7023. Id. ¶¶ 79-88; see also Fed. R. Bankr. P. 7023.
The relief requested in Count II is substantially similar to that requested in the first claim in CashCall, which "sought a declaratory judgment that CashCall's loan was illegal and unenforceable, in violation of N.C. Gen. Stat. § 24-1.1(c) and § 53-166(a)." 781 F.3d at 69 (per curiam); see Am. Compl. ¶ 99 ("Under Va. Code § 6.2-1541(A), the loan was void and is uncollectible against the Plaintiff or her estate in any amount."). Like the first claim in CashCall, Count II is constitutionally core because this issue involves the claim allowance process and the Debtor's objection to Allied's proof of claim. Count II concerns the validity of the very Credit Agreement that undergirds Allied's claim in the Bankruptcy Case. "[R]esolution of [the Debtor's] claim that the Loan Agreement ... was illegal could directly impact claims against her estate and her plan for financial reorganization...." CashCall, 781 F.3d at 72. Accordingly, it would conflict with Congress's intent in enacting the Bankruptcy Code to refer this claim, which directly pertains to the Debtor's plan of reorganization and the claims allowance process of the bankruptcy court, to arbitration under the terms of Arbitration Provision.
In Count III, the Debtor asks the Court to determine that Allied's credit was usurious such that it is not entitled to any interest pursuant to section 6.2-304 of the Virginia Code. Am. Compl. ¶¶ 105-16. Like Count II, it also seeks to certify a class of claimants similarly situated to the Debtor under Federal Rule of Civil Procedure 23(a). Id. Upon certification, the Debtor asks the Court for "injunctive relief or declaratory relief with respect to the Usury Class as a whole." Id. ¶ 115.
Count III attacks the loans Allied made to the Debtor and to other similarly situated debtors as null and void under section 6.2-1541 of the Virginia Code, which would invalidate the contract Allied is using as the basis for its claims. Count III also asks the Court to find that "Allied knowingly filed Proofs of Claim on null and void loans, attempting to collect debts that cannot be enforced against debtors in bankruptcy pursuant to 11 U.S.C. § 502(b)(1)." Id. ¶ 115. Count III is readily distinguishable from the CashCall counterclaim. The CashCall counterclaim involved a completely separate cause of action arising out of the creditor's purported violation of applicable state consumer finance statute for improper collection efforts — over and above just filing the proof of claim. A determination on the first core count "that the underlying Loan Agreement was illegal" was not outcome determinative of whether CashCall's collection efforts "inherently violate[d] the North Carolina Debt Collection Act." CashCall, 781 F.3d at 70-71. Rather, the CashCall counterclaim "regarding CashCall's conduct in trying to collect on the loan, other violations of the state statute, and damages like emotional distress ... [was] unrelated to the Defendant's proof of claim and [was] only related to the bankruptcy case in that if successful, the bankruptcy estate will recover any non-exempt funds and disburse them to claims in accordance with the bankruptcy code." Id. at 85-86 (Gregory, J., concurring) (internal citations omitted).
Unlike the counterclaim in CashCall, which the Fourth Circuit deemed to be
Count III would necessarily be resolved by the Court in the claims allowance process when considering Allied's proofs of claim.
The Court also denied the Motion to Compel for a second reason. A court should not compel arbitration in scenarios where it would hinder the ability of an agency to pursue the relief it is statutorily charged with seeking. In light of the Court's decision to grant the Virginia Attorney General's Motion to Intervene in this Adversary Proceeding, referring Counts II and III to arbitration would violate the Supreme Court's explicit command in EEOC v. Waffle House, Inc. 534 U.S. 279, 295-96, 122 S.Ct. 754, 151 L.Ed.2d 755 (2002).
For the foregoing reasons, the Motion to Compel is denied. A separate order shall issue.
While the Debtor objects to Allied's claim and requests relief on behalf of her herself in Counts II and III of the Amended Complaint, she also requests class certification on the grounds that other debtors in the Eastern District of Virginia have been similarly affected by Allied's common course of conducting business by allegedly charging interest in excess of the legal limit. The Court has not yet addressed the issue of class certification on either Count II or Count III.
Mot. for Certification ¶¶ 23-24.