Update: SCOTUS denied certiorari: Henry v. Cash Biz, LP, 551 S.W.3d 111 (Tex. Feb. 23, 2018), cert. denied by Henry v. Cash Biz, LP, 2018 U.S. LEXIS 4478 (U.S., Oct 1, 2018)
CREDIT ACCESS BUSINESS MODEL TEXAS-STYLE:
CREDIT ACCESS BUSINESS MODEL TEXAS-STYLE:
CRIMINAL BAD-CHECK PROSECUTION FOR THEE, ARBITRATION FOR ME
Texas Supreme Court parted ways with Fifth Circuit in concluding in customers' action against payday lender that payday lender had not waived right to enforce arbitration agreement by utilizing the criminal justice system in aid of debt collection after deliberately depositing borrowers' post-dated checks that they knew would bounce after borrower's default on short-term loans. See Cert Petition in Henry v. Cash Biz. Online docket for SCOTUS case no. 17-1716.
See prior post on this blog: Seeing No Evil Texas Supreme Court blesses diversion of lawsuit against payday lender over egregious criminal collection tactics into private arbitration. Henry v. Cash Biz, No. 16-0854, 2018 WL 1022838 (Tex. Feb. 23, 2018).
QUESTION PRESENTED TO THE U.S. SUPREME COURT
IN HIAWATHA HENRY ET AL VS. CASH BIZ, L.P. ET AL
Whether the Texas Supreme Court erred in holding –in conflict with the Fifth Circuit Court of Appeals, the Nevada Supreme Court, and intermediary courts of appeals in Maryland and Utah - that Cash Biz did not waive its right to arbitration by substantially invoking the judicial process when it illegally filed criminal charges against Borrowers to recover civil debt, while ignoring its own forced arbitration clause which requires arbitration for “(f) all claims asserted by us against you, including claims for money damages to collect any sum we claim you owe us and/or the Lender.”
Here is the link to the --> Petition for Certiorari in Henry v. Cash Biz.
Link to --> Texas Supreme Court docket for Henry v. Cash Biz .
Also see --> Amicus Curiae Brief by Texas Appleseed in payday lender arbitration case in support of Petitioners (Borrowers)
TEXAS SUPREME COURT OPINION
IN HENRY V. CASH BIZ, LP
HIAWATHA HENRY, ADDIE HARRIS, MONTRAY NORRIS, AND ROOSEVELT COLEMAN, JR., ON BEHALF OF THEMSELVES AND FOR ALL OTHER SIMILARLY SITUATED, Petitioners,
CASH BIZ, LP, CASH ZONE, LLC D/B/A CASH BIZ, AND REDWOOD FINANCIALS, LLC, Respondents.
Supreme Court of Texas.
Edward S. Hubbard, Patrick E. Gaas, for Cash Biz, L.P., Respondent.
H. Mark Burck, Daniel R. Dutko, for All Similarly Situated Plaintiffs, Petitioner.
H. Mark Burck, Daniel R. Dutko, for Montray Norris, Petitioner.
H. Mark Burck, Daniel R. Dutko, for Hiawatha Henry, Petitioner.
Daniel R. Dutko, H. Mark Burck, for Addie Harris, Petitioner.
Ricardo G. Cedillo, for Texas Appleseed, Amicus Curiae.
H. Mark Burck, Daniel R. Dutko, for Roosevelt Coleman, Jr., Petitioner.
Patrick E. Gaas, Edward S. Hubbard, for Cash Zone, LLC d/b/a Cash Biz, Respondent.
Patrick E. Gaas, Edward S. Hubbard, Sumit Kumar Arora, for Redwood Financials, LLC, Respondent.
On Petition for Review from the Court of Appeals for the Fourth District of Texas.
JUSTICE JOHNSON delivered the opinion of the Court, in which CHIEF JUSTICE HECHT, JUSTICE GREEN, JUSTICE GUZMAN, JUSTICE LEHRMANN, JUSTICE BOYD, JUSTICE DEVINE, and JUSTICE BROWN joined.
JUSTICE BLACKLOCK did not participate in the decision.
PHIL JOHNSON, Justice.
This case involves an arbitration provision in short-term loan contracts. The questions presented are whether the borrowers' claims against the lender come within the arbitration provision and, if so, whether the lender waived its right to arbitrate by providing information to the district attorney that checks written to the lender by the borrowers had been returned for insufficient funds. The court of appeals answered the first question "yes," and the second, "no." We affirm.
Cash Biz, LP is a registered Texas credit services organization that assists customers in obtaining short-term loans. See TEX. FIN. CODE ch. 393. Hiawatha Henry, Addie Harris, Montray Norris, and Roosevelt Coleman, Jr. (collectively, the Borrowers) contracted with Cash Biz for such loans. Each of the loan contracts contains an identical Waiver of Jury Trial and Arbitration Provision. It provides that "all disputes . . . shall be resolved by binding arbitration only on an individual basis with you." The contracts further provide that
the words "dispute" and "disputes" are given the broadest possible meaning and include, without limitation (a) all claims, disputes, or controversies arising from or relating directly or indirectly to the signing of this Arbitration Provision, the validity and scope of this Arbitration Provision and any claim or attempt to set aside this Arbitration Provision; (b) all federal or state law claims, disputes or controversies, arising from or relating directly or indirectly to this Disclosure Statement (including the Arbitration Provision), . . . (c) all counterclaims, cross-claims and third party claims; (d) all common law claims, based on contract, tort, fraud, or intentional torts; (e) all claims based on a violation of any state or federal constitution, statute or regulation; . . . (f) . . . claims for money damages to collect any sum we claim you owe us and/or the Lender; (g) all claims asserted by you individually against us . . . including claims for money damages and/or equitable or injunctive relief; (h) all claims asserted on your behalf by another person; (I) all claims asserted by you as a private attorney general, as a representative and member of a class of persons, or in any other representative capacity, against us . . .; and/or (j) all claims arising from or relating directly or indirectly to the disclosure by us . . . of any non-public personal information about you.
As security for the loans, the Borrowers provided postdated personal checks made out to Cash Biz for the amount of the loan plus a finance charge. After the Borrowers defaulted on the loans, Cash Biz deposited their checks. The checks, predictably, were returned for insufficient funds. The parties do not disagree that the Borrowers were charged with issuance of bad checks, see TEX. PENAL CODE § 32.41, and that the charges were eventually dismissed. But they disagree about what the record shows as to whether Cash Biz simply forwarded information about the Borrowers and their returned checks to the district attorney as Cash Biz maintains it did, or somehow actually filed criminal charges, as the Borrowers argue Cash Biz did.
In any event, the Borrowers sued Cash Biz, Redwood Financials, LLC, and Cash Zone LLC, d/b/a Cash Biz (collectively, Cash Biz) on behalf of themselves and a proposed class of similarly situated borrowers. They claimed that Cash Biz wrongfully used the criminal justice system to collect unpaid loans by filing false charges against them. The Borrowers asserted causes of action for malicious prosecution, fraud, and violations of the Deceptive Trade Practices Act, Consumer Protection Act, and the Finance Code. Cash Biz responded by filing a motion to compel arbitration. It argued that the loan documents—including the contracts—comprised the basis of the Borrowers' claims because the claims arose out of Cash Biz's attempts to collect the loans. Further, according to Cash Biz, the broad arbitration provision waived the Borrowers' right to file a class action lawsuit. The Borrowers countered that the arbitration clause was inapplicable because they were not suing on the contract. Rather, their allegations related solely to Cash Biz's illegal use of the criminal justice system to enforce civil debts. The Borrowers also contended that even if the arbitration and class action waiver provisions applied, Cash Biz's "filing of criminal charges," participating in criminal trials, and obtaining "criminal judgments" substantially invoked the judicial process and therefore waived its right to enforce the provisions.
The trial court denied Cash Biz's motion. The court agreed with the Borrowers that (1) their allegations related solely to Cash Biz's use of the criminal justice system so the arbitration clause was inapplicable, and (2) Cash Biz waived its right to arbitration by substantially invoking the judicial process.
Cash Biz filed an interlocutory appeal. The court of appeals reversed. ___ S.W.3d ___, ___ (Tex. App.-San Antonio 2016). The appeals court first determined that the Borrowers' claims fell within the scope of the arbitration provision because the Borrowers' allegations were factually intertwined with the loan contracts. Thus, the broad definition of "dispute" in the arbitration provision encompassed the claims. Id. at ___. The court next concluded that Cash Biz did not waive its right to enforce the arbitration provision because "Cash Biz's filing of a criminal complaint [did] not rise to the extent of active engagement in litigation that Texas courts have consistently held to be specific and deliberate actions inconsistent with a right to arbitrate or that display an intent to resolve a dispute through litigation." Id. Justice Martinez disagreed, maintaining that Cash Biz substantially invoked the judicial process by deliberately and repeatedly invoking the criminal justice system. Id. at ___ (Martinez, J., dissenting).
In this Court, the Borrowers assert the same substantive arguments that they did in the court of appeals. That is, they first argue that Cash Biz failed to meet its burden to prove their claims are within the scope of the arbitration agreement. In the alternative, they maintain that if the claims fall within the scope of the agreement, Cash Biz waived its right to arbitration by substantially invoking the judicial process to their prejudice by filing criminal charges against them.
Cash Biz responds, as it did in the courts below, that it met its burden to prove the arbitration agreement encompasses the claims and that the Borrowers failed to meet their burden to prove it waived its right to arbitrate. Further, it contends that the Borrowers produced no evidence to prove they were actually prejudiced by any of its actions. Finally, Cash Biz asserts that the trial court erred by not enforcing the contractual waiver-of-class-action provision.
II. Law and Standard of Review
The Federal Arbitration Act (FAA) generally governs arbitration provisions in contracts involving interstate commerce. In re Rubiola, 334 S.W.3d 220, 223 (Tex. 2011) (citing 9 U.S.C. § 2). The loan contracts specifically provide that the arbitration provision at issue here is governed by the FAA, and neither party argues otherwise. Under the FAA, a presumption exists favoring agreements to arbitrate. In re FirstMerit Bank, N.A., 52 S.W.3d 749, 753 (Tex. 2001). A party seeking to compel arbitration must establish the existence of a valid arbitration agreement and that the claims at issue fall within the scope of that agreement. Venture Cotton Coop. v. Freeman, 435 S.W.3d 222, 227 (Tex. 2014). If the party seeking to compel arbitration meets this burden, the burden then shifts, and to avoid arbitration, the party opposing it must prove an affirmative defense to the provision's enforcement, such as waiver. Id. "[A]ny doubts concerning the scope of arbitrable issues should be resolved in favor of arbitration, whether the problem at hand is the construction of the contract language itself or an allegation of waiver, delay, or a like defense to arbitrability." In re Serv. Corp. Intern., 85 S.W.3d 171, 174 (Tex. 2002) (citing Moses H. Cone Mem'l Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 24-25 (1983)).
We review a trial court's order denying a motion to compel arbitration for abuse of discretion. In re Labatt Food Serv., L.P., 279 S.W.3d 640, 642-43 (Tex. 2009). We defer to the trial court's factual determinations if they are supported by evidence but review its legal determinations de novo. Id. Whether the claims in dispute fall within the scope of a valid arbitration agreement and whether a party waived its right to arbitrate are questions of law, which are reviewed de novo. Id.; Perry Homes v. Cull, 258 S.W.3d 580, 598 & n.102 (Tex. 2008).
A. Are the Claims Within the Scope of the Arbitration Agreement?
The Borrowers assert that their claims are not within the scope of the arbitration provision because the claims relate solely to Cash Biz's illegal use of the criminal justice system. They also contend that all the damages claimed are based solely on criminal fines, jail time, and loss of reputation related to the criminal charges, rather than breach of contract.
Both Texas policy and federal policy favor arbitration. In re FirstMerit Bank, 52 S.W.3d at 753. Thus, courts "resolve any doubts about an arbitration agreement's scope in favor of arbitration." Id. Further, in deciding questions like those before us, courts focus on the factual allegations and not on the legal causes of action asserted. Id. at 754. The presumption in favor of arbitration "is so compelling that a court should not deny arbitration `unless it can be said with positive assurance that an arbitration clause is not susceptible of an interpretation which would cover the dispute at issue.'" Prudential Sec. Inc. v. Marshall, 909 S.W.2d 896, 899 (Tex. 1995) (quoting Neal v. Hardee's Food Sys., Inc., 918 F.2d 34, 37 (5th Cir. 1990)). Further, the scope of an arbitration clause that includes all "disputes," and not just claims, is very broad and encompasses more than claims "based solely on rights originating exclusively from the contract." See Pinto Tech. Ventures, L.P. v. Sheldon, 526 S.W.3d 428, 439 (Tex. 2017) (examining a forum-selection clause and noting the analogies between such clauses and arbitration agreements).
Here, the arbitration agreement applies to "all disputes" and specifies that "`dispute' and `disputes' are given the broadest possible meaning and include, without limitation . . . all claims, disputes, or controversies arising from or relating directly or indirectly to the signing of this Arbitration Provision." Given the presumption favoring arbitration and the policy of construing arbitration clauses broadly as noted above, it follows that the arbitration clause here applies—just as it says—to all disputes, even those relating only indirectly to the loan agreements.
The Borrowers asserted that after they missed payments, Cash Biz deposited their postdated checks; the checks were returned for insufficient funds; Cash Biz threatened the Borrowers with criminal prosecution unless the loans were repaid; and when the Borrowers failed to pay, Cash Biz indeed pursued charges for issuance of bad checks. The Borrowers allege that when Cash Biz entered into the loan agreements, it failed to disclose the possibility that if the personal checks were presented to the banks for payment and were not paid, criminal prosecutions would follow.
The Borrowers' claims are not for breach of any specific obligations under the loan contracts. Nevertheless, their claims are based on the manner in which Cash Biz pursued collection of loans and are at least indirectly related to the contracts the Borrowers signed obligating them to repay the loans. Therefore, we agree with Cash Biz that the Borrowers' claims are within the scope of the arbitration provision.
In light of the foregoing, the Borrowers must arbitrate their claims unless they prove the affirmative defense on which they rely, that Cash Biz waived its right to arbitrate disputes. See Freeman, 435 S.W.3d at 227.
The Borrowers assert that Cash Biz impliedly waived its right to arbitration by its conduct, not that it expressly waived the right. To establish the implied waiver that they rely on—substantial invocation of the judicial process—the Borrowers had the burden to prove that (1) Cash Biz substantially invoked the judicial process in a manner inconsistent with its claimed right to compel arbitration, and (2) the Borrowers suffered actual prejudice as a result of the inconsistent conduct. G.T. Leach Builders, LLC v. Sapphire V.P., LP, 458 S.W.3d 502, 511-12 (Tex. 2015); Perry Homes, 258 S.W.3d at 589-90.
As to whether a party has substantially invoked the judicial process, courts consider a wide variety of factors and look to the specifics of each case. G.T. Leach Builders, LLC, 458 S.W.3d at 512. The necessary conduct must go beyond merely filing suit or seeking initial discovery. Perry Homes, 258 S.W.3d at 590. We have declined to conclude that the right to arbitrate was waived in all but the most unequivocal of circumstances. Compare id. at 595-96 (holding that the plaintiffs waived the right to arbitrate by participating in extensive discovery including hundreds of requests for production and interrogatories, then requesting arbitration fourteen months after filing suit and only four days prior to the scheduled trial date), with G.T. Leach Builders, LLC, 458 S.W.3d at 512 (holding plaintiffs did not waive arbitration by asserting counterclaims; seeking change of venue; filing motions to designate responsible third parties, for continuance, and to quash depositions; designating experts; and waiting six months to move for arbitration), In re Fleetwood Homes of Tex., L.P., 257 S.W.3d 692, 694 (Tex. 2008) (holding party did not waive arbitration by noticing deposition, serving written discovery, and waiting eight months to move for arbitration), In re Bruce Terminix Co., 988 S.W.2d 702, 703-04 (Tex. 1998) (holding arbitration was not waived by sending eighteen interrogatories and nineteen requests for production and waiting six months to seek arbitration).
Here, the factors generally examined to determine waiver—how much discovery has been conducted, who initiated it, and whether it relates to the merits; how much time and expense has been incurred in litigation; and the proximity in time between a trial setting and the filing of the motion seeking arbitration—may serve as guideposts. See Perry Homes, 258 S.W.3d at 590-92. But those factors are not wholly on point because the conduct in question in this case involves the criminal justice system.
In attempting to meet their burden, the Borrowers introduced a list of cases and case summaries for criminal prosecutions in a Harris County Justice of the Peace Court. Cash Biz was named "complainant" in many of these cases, including those of the named Borrowers. The complaints resulted in criminal charges against the Borrowers for "issuance of a bad check." The Borrowers assert that without the information from Cash Biz, no criminal prosecutions would have occurred. And although the Borrowers argued, and continue to argue, that Cash Biz filed criminal complaints against them, the record does not reflect that it did. Rather, the record contains an affidavit from a Cash Biz representative, David Flanagan, in which he stated in part as follows:
Cash Biz simply left the information entirely to the discretion of the district attorney, and any action taken by the district attorney thereafter was made completely on his/her own. Cash Biz did not make any formal charges, did not participate in any criminal trial, and did not obtain criminal judgments. Similarly, Cash Biz was neither a witness in any criminal proceeding nor was it asked to appear in any such proceeding.
The Borrowers do not attack Flanagan's affidavit or reference evidence contradicting the statements in it. The Borrowers argue that the court of appeals did not consider all of the evidence, but the only information they provided to the trial court apart from case summaries consisted of news reports and online magazine articles stemming from a Texas Appleseed investigation. Those documents indicate that Texas Appleseed, an Austin-based organization that advocates for the poor, investigated payday lenders and discussed what it labeled as questionable practices by many of these businesses, including Cash Biz. But the reports—assuming they were properly before the trial court—do not refer to evidence of conduct by Cash Biz beyond providing information to the district attorney as was set out in Flanagan's affidavit. And while the Borrowers argue that the court of appeals failed to defer to the trial court's factual determinations that Cash Biz "participated in criminal trials [and] obtained criminal judgments," we agree with the appellate court that these findings are not supported by legally sufficient evidence. See In re Labatt Food Serv., L.P., 279 S.W.3d at 643 (holding that deference to trial court findings is limited to those supported by the record). The Borrowers simply provided no evidence of any actions by Cash Biz related to the criminal charges other than evidence that Cash Biz was the complainant in them. This evidence alone does not meet the Borrowers' burden to prove that Cash Biz substantially invoked the judicial process.
The Borrowers reference Principal Investments, Inc. v. Harrison in which a lender filed more than 16,000 individual collection actions in justice of the peace courts and obtained default judgments against many of the borrowers. 366 P.3d 688, 690-91 (Nev. 2016). The Supreme Court of Nevada held that the lender waived its right to arbitrate by initiating the collection actions and inviting the borrowers to appear and defend on the merits of the claims. Id. Here, in contrast, the evidence shows only that Cash Biz informed the district attorney of the checks returned for insufficient funds. Thus, the district attorney, not Cash Biz, ultimately made the decision to prosecute or not prosecute in a particular case.
The Borrowers also point to In re Christus Spohn Health System Corp. to support their position that a lender's actions within the criminal justice system can waive its rights within the civil justice system. 231 S.W.3d 475 (Tex. App.-Corpus Christi 2007, no pet.). In that case, after a murder in a hospital parking lot, the victim's husband filed a civil suit against the hospital, and the hospital moved to compel arbitration. Id. at 481. The trial court denied the motion because the hospital had sought an order of contempt against the husband's counsel during the criminal proceedings. Id. The appeals court explained that while it ordinarily "would not consider actions in a separate cause as indicative of waiver," the hospital's actions were "part of its strategic plan of defense in the underlying matter that would be inconsistent with a right to arbitrate." Id. The Borrowers contend that Cash Biz's actions mirror that of the hospital—the criminal proceedings arising from Cash Biz's contacts with the district attorney were part of a strategic plan to collect on the debts owed.
Without passing judgment on the decision in In re Christus Spohn Health System Corp., a no petition case, Cash Biz's conduct in this case consisted solely of providing information to the district attorney and letting the chips fall where they may. We have no doubt that Cash Biz hoped that the falling chips would result in the borrowers paying their loans. But the Borrowers did not present evidence that Cash Biz went beyond providing truthful information to the district attorney. Cash Biz's conduct arguably demonstrates an intent to cause the district attorney to initiate a judicial proceeding. But even so, it is not more than initiating litigation, which we have held does not substantially invoke the judicial process and waive the right to arbitrate. Perry Homes, 258 S.W.3d at 590.
We conclude that Cash Biz did not substantially invoke the judicial process. Accordingly, we need not address whether the Borrowers were actually prejudiced by Cash Biz's conduct.
We recognize that our opinion does not accord with the decision in Vine v. PLS Financial Services, Inc., 689 F. App'x 800 (5th Cir. 2017) (per curiam). There, as did Cash Biz here, a short-term lender had borrowers sign postdated checks, which were presented for payment after the borrowers defaulted. Id. at 801. When the checks were not paid, the lender submitted the unpaid checks and affidavits to the local district attorneys. Id. The Vine court declined to follow the decision of the court of appeals in this case. Id. at 806. Rather, it concluded that the lender's actions in submitting affidavits to prosecuting attorneys waived its right to enforce the arbitration agreement. Id.
With due respect, and recognizing that it is important for federal and state law to be as consistent as possible in this area where we have concurrent jurisdiction, we agree with the dissenting justice in Vine. Id. at 807 (Higginson, J., dissenting). We conclude, as he did, that although some lenders may be "gaming the system" by taking actions like the lenders took there and as Cash Biz took here, more is required for waiver of a contractual right to arbitrate. Id.
The claims brought by the Borrowers fell within the scope of the arbitration agreement and there was no evidence to support the trial court's finding that Cash Biz waived its right to arbitrate.
We affirm the judgment of the court of appeals.
 After this case was argued, we received notice that Cash Biz had filed for bankruptcy; thus, the appeal was stayed. See TEX. R. APP. P. 8.2; see also 11 U.S.C. § 362(a). The bankruptcy court has lifted the stay for purposes of our issuing an opinion.
FIFTH CIRCUIT OPINION IN
Vine v. PLS Financial Services, Inc., 689 F. App'x 800 (5th Cir. 2017) (per curiam).
LUCINDA VINE; KRISTY POND, Plaintiffs-Appellees,
PLS FINANCIAL SERVICES, INCORPORATED; PLS LOAN STORE OF TEXAS, INCORPORATED, Defendants-Appellants.
United States Court of Appeals, Fifth Circuit.
Richard Andrew Bonner, for Defendant-Appellant.
Mark Norman Osborn, for Defendant-Appellant.
Howard Mark Burck, for Plaintiff-Appellee.
Ricardo Gonzalez Cedillo, for Defendant-Appellant.
Jose Abelardo Howard-Gonzalez, for Defendant-Appellant.
Daniel Raymond Dutko, for Plaintiff-Appellee.
Shelly W. Rivas, for Defendant-Appellant.
Appeals from the United States District Court for the Western District of Texas, USDC No. 3:16-CV-31.
Before: BARKSDALE, GRAVES, and HIGGINSON, Circuit Judges.
Appellants PLS Financial Services, Inc., and PLS Loan Store of Texas, Inc. (collectively "PLS"), appeal the district court's denial of its motion to dismiss and to compel arbitration. Because PLS substantially invoked the judicial process to the detriment or prejudice of Appellees Lucinda Vine and Kristy Pond when it submitted false worthless check affidavits, we AFFIRM the judgment of the district court.
PLS's business is to provide short-term loans to customers. To obtain loans, PLS customers must present blank or post-dated checks for the amount borrowed plus a finance charge and a credit-access-business fee. They must also sign PLS's Loan Disclosure, Promissory Note and Security Agreement and a Credit Services Agreement (the "Agreement"), which requires arbitration of all "disputes." The Agreement states:
For purposes of this Waiver of Jury Trial and Arbitration Provision . . . the words "dispute" and "disputes" are given the broadest possible meaning and include, without limitation (a) all claims, disputes, or controversies arising from or relating directly or indirectly to signing of this Arbitration Provision, the validity and scope of this Arbitration Provision, the validity and scope of this Arbitration Provision and any claim or attempt to set aside this Arbitration Provision . . . .
Vine and Pond allege that during the loan application process, PLS asked them for blank or post-dated checks, but assured them that the checks would not be cashed and would only be used to verify checking accounts. However, PLS cashed the checks as soon as Vine and Pond defaulted on their loans, and then submitted worthless check affidavits to local district attorneys' offices when the checks bounced. According to Vine and Pond, PLS's actions were part of a regular strategy whereby PLS submitted false worthless check affidavits to achieve repayment of the loans and to avoid arbitrating any collection actions. In addition, Vine and Pond allege that PLS knew that its submission of false worthless check affidavits violated Texas law. See Tex. Fin. Code §§ 393.201(c) and 292.301.
Soon after submission of the worthless check affidavits, Vine and Pond received letters from their local district attorneys' offices, notifying them that they would need to pay restitution to PLS and statutory fees or face criminal proceedings on theft by check charges.
On January 26, 2016, Vine and Pond initiated the present class action against PLS on behalf of themselves and all similarly-situated plaintiffs, alleging: (1) malicious prosecution; (2) Texas Deceptive Trade Practices Act violations; (3) fraud; and (4) Texas Finance Code § 392.301 violations. On March 23, 2016, PLS moved to dismiss the proceedings and compel Vine and Pond to arbitrate their claims pursuant to the Agreement. On June 6, 2016, the district court denied PLS's motion to dismiss, stating that, even if Plaintiffs had agreed to arbitration, PLS had waived its right to compel them to do so by submitting the worthless check affidavits. PLS appeals from the district court's denial of their motion to dismiss and to compel arbitration.
STANDARD OF REVIEW
"We review the issue of whether a party's conduct amounts to a waiver of arbitration de novo." Subway Equip. Leasing Corp. v. Forte, 169 F.3d 324, 326 (5th Cir. 1999). A motion to compel arbitration is generally treated as a motion to dismiss. See Suburban Leisure Ctr., Inc. v. AMF Bowling Prods., Inc., 468 F.3d 523, 525 (8th Cir. 2006). Consequently, we accept Vine and Pond's well-pleaded facts as true and view them in the light most favorable to them. Id.
PLS makes three arguments on appeal. It contends that the district court erred by: (1) deciding whether PLS waived its right to compel arbitration by participating in litigation conduct; (2) ignoring the parties' express agreement to arbitrate all disputes, including any litigation-conduct waiver claims; and (3) concluding that PLS waived its right to arbitrate by submitting worthless check affidavits. None of these arguments are persuasive.
First, the district court did not err by deciding the litigation-conduct waiver. In Tristar Fin. Ins. Agency v. Equicredit Corp. of Am., 97 F. App'x 465, 464 (5th Cir. 2004), we recognized that when "waiver . . . depends on the conduct of the parties before the district court," "the court, not the arbitrator, is in the best position to decide whether the conduct amounts to a waiver under applicable law." Here, the district court's waiver decision depended on the conduct of PLS—a party to the litigation. Consequently, the district court was "in the best position" to decide the litigation-conduct waiver. Id.
PLS contends that the Supreme Court's decision in BG Group, PLC v. Republic of Argentina, 134 S. Ct. 1198 (2014), abrogates any persuasive effect of our Tristardecision. In BG Group, the Supreme Court stated that courts should decide issues "such as whether the parties are bound by a given arbitration clause, or whether an arbitration clause in a concededly binding contract applies to a particular type of controversy." BG Group, 134 S. Ct. at 1206 (quotations omitted). But arbitrators should decide questions "about the meaning and application of particular procedural preconditions for the use of arbitration." Id. at 1207. Because BG Group defines "claims `of waiver, delay, or a like defense to arbitrability'" as procedural, PLS argues that litigation-conduct waiver should be decided by an arbitrator, and not a court. See id. at 1202 (quoting Moses H. Cone Memorial Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 25 (1983)). PLS notes that in Howsam v. Dean Witter Reynolds, Inc., 537 U.S. 79, 84 (2002) (quoting Moses H. Cone Memorial Hospital, 460 U.S. at 25), the Supreme Court also stated that "claims `of waiver, delay, or a like defense to arbitrability'" are procedural and thus arbitrator-committed.
Despite the surface appeal of this argument, a careful reading of BG Group and Howsam demonstrates that it is misguided. When confronted with the identical language in Howsam, the Third Circuit stated:
Properly considered within the context of the entire opinion . . . we believe it becomes clear that the Court was referring only to waiver, delay, or like defenses arising from non-compliance with contractual conditions precedent to arbitration . . . and not to claims of waiver based on active litigation in court.
See Ehleiter v. Grapetree Shores, Inc., 482 F.3d 207, 219 (3d Cir. 2007). Unlike other types of waiver, litigation-conduct waiver "implicates courts' authority to control judicialprocedures or to resolve issues . . . arising from judicial conduct." Id. (emphasis in the original). Consequently, because "parties would expect the court to decide [litigation-conduct waiver] itself," the Third Circuit was unconvinced that the Supreme Court had meant for arbitrators, and not courts, to presumptively decide litigation-conduct waiver. The majority of our sister circuits agree. See Marie v. Allied Home Mortg. Corp., 402 F.3d 1, 14 (1st Cir. 2005) ("We hold that the Supreme Court . . . did not intend to disturb the traditional rule that waiver by conduct, at least due to litigation-related activity, is presumptively an issue for the court."); Grigsby & Assocs., Inc. v. M. Sec. Inv., 664 F.3d 1350, 1353 (11th Cir. 2011) (same); JPD, Inc. v. Chronimed Holdings, Inc., 539 F.3d 388, 393 (6th Cir. 2008) (same); Martin v. Yasuda, 829 F.3d 1118, 1122-23 (9th Cir. 2016)(same). But see Nat'l Am. Ins. Co. v. Transamerica Occidental Life Ins. Co., 328 F.3d 462, 466 (8th Cir. 2003) (holding that all waiver challenges should be committed to an arbitrator). We note that a majority of the decisions addressing litigation-conduct waiver pre-date BG Group, but the logic of those decisions interpreting Howsam is equally applicable to BG Group. Consequently, the district court did not err.
Second, the parties' express agreement does not address litigation-conduct waiver. As a preliminary matter, PLS waived this issue by raising it for the first time in its motion to reconsider. See LeClerc v. Webb, 419 F.3d 405, 412 n.13 (5th Cir. 2005) ("A motion for reconsideration may not be used to . . . introduce new arguments."). However, even if PLS had not waived the issue, we would reach the same conclusion.
While the language of an arbitration agreement can displace the presumption that a court should decide an issue, "[a]n issue that is presumptively for the court to decide will be referred to the arbitrator for determination only where the parties' arbitration agreement contains `clear and unmistakable evidence' of such an intent." See Ehleiter,482 F.3d at 221 (quoting First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938, 944 (1995)).
Here, we do not find "clear and unmistakable evidence" that the parties intended to arbitrate litigation-conduct waiver. Id. Though the parties' agreement requires arbitration of "any claim or attempt to set aside this Arbitration Provision," it does not explicitly mention litigation-conduct waiver. See Principal Investments, Inc. v. Cassandra Harrison,366 P.3d 688, 696 (Nev. 2016) ("Had Rapid Cash intended to delegate litigation-conduct waiver to the arbitrator, rather than the court, the agreements could and should have been written to say that explicitly."). Furthermore, we "cannot interpret the Agreement's silence regarding who decides the waiver issue here `as giving the arbitrators that power for doing so . . . [would] force [an] unwilling part[y] to arbitrate a matter he reasonably would have thought a judge, not an arbitrator, would decide.'" Ehleiter, 482 F.3d at 222(quoting First Options, 514 U.S. at 945). Because the Agreement does not contain "clear and unmistakable evidence" of an intent to arbitrate the instant litigation-conduct waiver issue, the district court did not err. Id. at 221.
Third, the district court correctly found that Vine and Pond plausibly alleged that PLS waived arbitration when it submitted false worthless check affidavits. "The question of what constitutes a waiver of the right of arbitration depends on the facts of each case." Tenneco Resins, Inc. v. Davy Int'l AG, 770 F.2d 416, 420 (5th Cir. 1985). "Waiver will be found when the party seeking arbitration substantially invokes the judicial process to the detriment or prejudice of the other party." Subway Equipment Leasing Corp., 169 F.3d at 326 (quoting Miller Brewing Co. v. Fort Worth Distrib. Co., 781 F.2d 494, 497 (5th Cir. 1986)).
A party substantially invokes the judicial process when it "engage[s] in some overt act in court that evinces a desire to resolve the arbitration dispute through litigation." Id. "We use the term [invoke] to describe the act of implementing or enforcing the judicial process, not the act of calling upon for support or assistance, as say, one would invoke a spirit or the elements." Id.
As the district court noted, whether PLS sufficiently implemented the criminal justice system to its own benefit such that its conduct constitutes a substantial invocation of the judicial process is a matter of first impression before this Court. On this narrow issue, we find no guidance from any of our sister circuits.
Here, Vine and Pond allege that PLS systematically engaged in a strategy of submitting worthless check affidavits that falsely stated that borrowers had committed theft by check. In addition, Vine and Pond claim that PLS submitted these false affidavits solely to achieve repayment of loans and to avoid arbitrating any collection actions. According to Vine and Pond, PLS also knew that the affidavits violated Texas law. Texas law does not permit a lender to "threaten or pursue criminal charges against a consumer related to a check . . . in the absence of forgery, fraud, theft, or other criminal conduct." See Tex. Fin. Code § 393.201(c); see also Tex. Fin. Code § 392.301.
Documents incorporated by reference into Vine and Pond's complaint also show the mechanics of PLS's alleged course of conduct. One of the affidavits submitted by PLS and a letter received by a borrower from her local district attorney's office show that the district attorney's office sent out the letter the day after it stamped the corresponding PLS affidavit as "received." This comparison plausibly suggests that when the local district attorney's office sent out its letter requesting restitution, it relied solely on PLS's representations that the customer had committed theft by check. These documents also suggest that the district attorney's office may not have exercised robust discretion in reviewing PLS's affidavits before initiating criminal proceedings against PLS customers. As the district court noted,
If what Plaintiffs allege is true, Defendants conduct is merely a pretext to obtain a favorable ruling, which Defendants can then use in either defending or prosecuting a lawsuit brought by or against Plaintiffs in an arbitration proceeding.
Moreover, if true, PLS's conduct is inconsistent with a right to arbitrate.
In determining whether PLS's alleged actions are consistent with a right to arbitrate, three state-court decisions are instructive. In Principal Investments, 366 P.3d at 690-91,the Nevada Supreme Court found that Defendant Rapid Cash waived its right to arbitrate when it secured thousands of default judgments against the named plaintiffs and other borrowers by submitting false affidavits prepared by its process server. The court explained:
"By initiating a collection action in justice court, Rapid Cash waived its right to arbitrate to the extent of inviting its borrower to appear and defend on the merits of that claim." Id. at 697. It also stated:
If the judgment Rapid Cash obtained was the project of fraud or criminal misconduct and is unenforceable for that reason, it would be unfairly prejudicial to the judgment debtor to require arbitration of claims seeking to set that judgment aside, to enjoin its enforcement, and otherwise to remediate its improper entry.
Id. at 697-98.
The Texas Court of Appeals decision in In re Christus Spohn Heath Sys. Corp., 231 S.W.3d 475 (Tex. App.-Corpus Christi 2007, no pet.), is also instructive here. Christus Spohn was a premises liability case arising out of a murder in a hospital parking lot. When the murder victim's husband filed a civil lawsuit against the hospital, the hospital moved to compel arbitration. Id. at 481. However, the court denied the hospital's motion because the hospital had sought an order of contempt against the husband's counsel during the criminal proceedings. Id. The court explained that while "ordinarily [it] would not consider actions in a separate cause as indicative of waiver," the hospital's actions were "part of its strategic plan of defense in the underlying matter that would be inconsistent with a right to arbitrate." Id.
As in Christus Spohn, PLS allegedly submitted the false worthless check affidavits as "part of its strategic plan of defense in the underlying matter" to achieve loan repayment. See Christus Spohn, 231 S.W.3d at 481. As in Principal Investments, PLS allegedly derived benefit by engaging the criminal justice system through improper conduct. If it is true that PLS's submission of worthless check affidavits was fraudulent, "it would be unfairly prejudicial to [Vine, Pond, and similarly situated borrowers] to require arbitration of claims . . . to remediate [the] improper entry" of the affidavits. See Principal Investments, 366 P.3d at 690. Thus, Vine and Pond have plausibly alleged that PLS waived its right to arbitrate when it submitted false worthless check affidavits.
Nevertheless, PLS argues that we should follow the Texas Court of Appeals decision in Cash Biz, LP v. Henry et al., 2016 WL 4013794 (Tex. App.-San Antonio 2016, pet. filed). In Cash Biz, the court found that Defendant Cash Biz did not waive its right to arbitrate when it "contacted the applicable local district attorneys and submitted information necessary to make a criminal complaint." Cash Biz, 2016 WL 4013794, at *2. The court stated that "courts consistently evaluate a party's conduct after suit is filed to determine whether it waived its right to arbitration. Here, the parties focus on Cash Biz's conduct in a separate proceeding before the underlying litigation was filed by the Borrowing Parties." Id. at *8 (emphasis in the original). The court also reasoned that "[i]n Texas, the filing of criminal charges and initiation of criminal process is the discretion of the prosecuting attorney." Id. Consequently, the preliminary act of "filing of suit or initiation of litigation is not `substantial invocation of judicial process.'" Id. (quoting G.T. Leach Builders, LLC v. Sapphire V.P., LP, 458 S.W.3d 502, 512 (Tex. 2015)).
However, despite the obvious factual similarities between Cash Biz and this case, we decline to follow Cash Biz for the following reasons: As the dissent in Cash Biz aptly noted, here, "we are presented with the unique situation of a civil lawsuit and a criminal proceeding, both of which arise out of the same civil debt." Cash Biz, 2016 WL 4013794, at *10 (Martinez, J., dissenting). Moreover, it is alleged that the criminal proceedings were an integral component of PLS's litigation strategy to collect on outstanding debt. If PLS attempted to "game the system" by initiating theft by check proceedings in place of submitting collection actions to an arbitrator, PLS should not be allowed "a second bite at the apple through arbitration" to resolve related issues. See Cargill Ferrous Int'l v. SEA PHX. MV, 325 F.3d 695, 701 (5th Cir. 2003) ("Under the facts of this case, it is clear Serene is not gaming the system by seeking a win at trial, and in the case of loss, anticipating a second bite at the apple through arbitration.").
In addition, we also agree with the Cash Biz dissent that the majority in that case did not sufficiently consider the critical role that the Defendant played in the criminal proceedings as the complainant. See Cash Biz, 2016 WL 4013794, at *10 (Martinez, J., dissenting) ("[W]hile the formal parties in a criminal proceeding are the defendant and the State of Texas, the victim or complaintant [sic] has a personal interest in the prosecution and thus plays a unique role in criminal proceedings."). Here, Vine and Pond allege that PLS had a great "personal interest in the prosecution" as it constituted a means to achieve repayment of its loans while avoiding arbitration. Furthermore, documents incorporated by reference into Vine and Pond's complaint arguably show that PLS drove all theft by check criminal proceedings when it submitted the worthless check affidavits to local district attorneys' offices. In other words, had PLS not submitted the worthless check affidavits, "no criminal prosecution would have occurred." See id. at *9 (Martinez, J., dissenting).
Therefore, by allegedly submitting false worthless check affidavits, PLS "invoke[d] the judicial process to the extent it litigate[d] a specific claim it subsequently [sought] to arbitrate." See Subway Equip. Leasing Corp., 169 F.3d at 328. As the district court made clear, "Defendants have initiated a process that invites Texas district attorneys' offices to address issues that are at stake in the instant action." Most obviously, all claims involve whether PLS misled or threatened Vine, Pond, and the class of PLS customers they purport to represent in order to obtain outstanding debt owed to PLS.
Vine and Pond have also demonstrated detriment or prejudice from PLS's submission of worthless check affidavits. "Prejudice in the context of arbitration waiver refers to delay, expense, and damage to a party's legal position." Nicholas v. KBR, Inc., 565 F.3d 904, 910 (5th Cir. 2009). Here, Vine and Pond would have borne the costs of defending against any theft by check prosecution. In addition, they would have suffered the preclusive effect of a conviction in any subsequent litigation. Consequently, they have sufficiently shown detriment or prejudice. See Subway Equip. Leasing Corp., 169 F.3d at 327.
For the reasons stated above, we AFFIRM the judgment of the district court.
STEPHEN A. HIGGINSON, Circuit Judge, dissenting.
Although I agree with the majority that the district court did not err by deciding litigation-conduct waiver, I would hold that PLS's conduct did not amount to waiver of arbitration. I believe the question is close, due largely to the unique procedural nature of theft-by-check cases—especially here, where there is evidence that PLS not only intended to force repayment of these loans by submitting worthless check affidavits, but in fact achieved that result. However, my read of our law in Subway Equipment is that more is required for a party to have "substantially invoke[d] the judicial process." Subway Equipment Leasing Corp. v. Forte, 169 F.3d 324, 326 (5th Cir. 1999).
To the extent it applies, my read of Texas law is the same. See Cash Biz, LP v. Henry,No. 04-15-00469-CV, 2016 WL 4013794, at *6 (Tex. App.-San Antonio July 27, 2016, pet. filed) ("To waive arbitration, the party must engage in some overt act in court that evince[s] a desire to resolve the arbitrable dispute through litigation rather than arbitration." (internal quotation marks and citations omitted)). Furthermore, even accepting its legal framework, I view the Nevada Supreme Court's decision in Harrisonas distinguishable due to the particularly overt and affirmative steps taken by the lender in that case, namely, "fil[ing] . . . individual collection actions in justice court" and "secur[ing] thousands of default judgments against . . . borrowers who failed to appear and defend the collection lawsuits." Principal Invs., Inc. v. Harrison, 366 P.3d 688, 690-91 (Nev. 2016).
I share the majority's discomfort that PLS may be gaming the system through its submission of the worthless check affidavits, which is inconsistent with the company's current pro-arbitration stance. As Appellees note, attempting to secure repayment through the local district attorney's office not only provides PLS with two bites at the apple, but also allows it to avoid potential costs associated with arbitration, such as arbitrator and attorney's fees. Nevertheless, I believe our law requires something more than the actions alleged here.
Accordingly, I respectfully dissent.
[*] 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.
 In ruling on motions to dismiss, courts may examine documents incorporated into the complaint by reference. See Lormand v. US Unwired, Inc., 565 F.3d 228, 251 (5th Cir. 2009).
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