The Great Consumer-Be-Bound Common-Law Do-over:
American Law Institute's Case Counting Scheme in Need of Further Reflection
Take Payday Lenders and Arbitration as a Textbook Case: What is the Majority Position on Litigation Waiver and Who Would You Say Got It Wrong?
The latest iteration of the
Restatement of the Law of Consumer Contracts (
draft) aspires to summarize majority common-law rules and trends based on “all” relevant cases in a particular area of (consumer) law.
But what is a relevant case? Which ones should be included? Which ones omitted? And should they be weighted equally, or some given more weight than others?
The utilization of the
quantitative approach in surveying the current legal landscape dotted with common-law courts has been subject of some criticism, but the notion of a “majority” view is necessarily a quantitative concept that necessarily presumes countability of discrete units (or instances of a phenomenon) and so is the concept of “trends.” The latter adds the dimension of time as a directional variable to improve upon blunt measures of frequency of occurrences within a given span of time, such as the time that has elapsed since issuance of the last Restatement.
If the purpose of the Restatement Project is to paint an accurate picture of where the law currently is, and where it is going, quantification--and plotting of data on relative frequencies of discrete legal positions (common-law rules) on the time line--is at least implicit. Even a traditional doctrinal analysis cannot seriously eschew it.
Rudimentary Empiricism in Describing the Prevailing Law: Case Counting
Before a meaningful
case count can be conducted for a particular legal question, not to mention a histogram generated to show an evolutionary pattern over time, there must be a clear definition of what qualifies to be counted.
What is the unit of analysis? Merely stating the seemingly obvious--that the unit of analysis is “the case”--does not solve all problems. For what qualifies as an eligible case? And what courts do qualify to contribute eligible cases?
The largest number of cases are processed by trial courts; only a small percentage of them reach the intermediate courts of appeals, and only very few are decided on the merit by the court of last resort. Federal district courts issue opinion orders, but their stateside counterparts rarely do so, at least not in Texas. So the populations of case opinions that can be found in repositories such as Westlaw, Lexis, Casemaker, Justia, or Google Scholar, are not a representative sample of the universe of cases. On some legal issues, an opinion is not needed because the order resolving a motion involving the issue--such as enforceability of an arbitration or forum selection--is enough to ascertain the reason for the decision.
And as for the precedent-setting cases in the state supreme court, they were and continue to be hand-picked because courts of last resort exercise discretionary review and their active docket (granted petitions are denominated "causes" in the SCOTX lingo) is anything but a random sample. The cases that reach the highest level of the judicial hierarchy and the fraction of them slated for merits briefing are atypical. No two of them are alike even on the legal issue(s), not to mention the facts, except for occasional companion cases accepted for review and disposed of contemporaneously, whether upon consolidation or otherwise.
Who articulates the law: The highest courts only, any and all courts, or any and all individual judges?
It has been suggested that the focus of inquiry in the Restatement project should be on decisions of state courts of last resort (and that overruled cases should be disregarded because they are no longer “good law” which makes eminent sense from the viewpoint of legal practice and appellate advocacy but less so from a more comprehensive view of the evolution of the substance of the law in historical context, which should also pay heed to dissents).
The courts of last resort decide a much smaller number of cases than all appellate courts taken together, and therefore do not necessarily establish binding precedent for an entire state even on important legal issues, especially those arising in connection with the adaption of new technology, or instances where existing precedent ill fits new fact patterns that could not arise in the past. The issues of first impression invariable first arise in the trial courts the move up to the next-higher level.
The intermediate appeals courts (14 in Texas) may or may not endeavor to fill the void with their published opinions (or opinions that are "unpublished" by official designation only), but their precedents only apply to their own appellate districts, and they may take contradictory positions on the same legal issues. For the same reason, federal courts have to make educated
Erie guesses when applying state law. And sometimes the intermediate appellate courts are not even consistent in following their own jurisprudence on the very same legal issue in consecutive cases.
If the State’s highest court steps in and resolves a COA split, there will no longer be majority and minority positions. There will, in most cases, only be one position for the entire state because state supreme court holdings are binding on lower courts. So there is only one case then available for bean-counting purposes, whereas there were previously several (if cases that have been overruled are excluded from the count). More fundamentally, it does not necessarily mean that the all-Republican Texas Supreme Court got it “right” when it resolved a conflict, or when it uses its power to overrule what was previously the majority position among the intermediate courts.
And what if the state supreme court creates a conflict with federal courts other than the United States Supreme Court? Should that be counted as a draw? Should the Texas Supreme Court's receive greater weight because it is a court of last resort?
Variation on a Circuit Split: A State vs. Federal Split
There is at least one example that illustrates an inter-jurisdictional incongruity of the latter variety.
In
Henry v. Cash Biz, LP, 551 S.W.3d 111 (Tex. 2018), the Texas Supreme Court ruled that a payday lender had not waived the right to arbitration by seeking the assistance of the public criminal justice system in aid of collection of a civil debt, and disapproved the trial court’s denial of arbitration in a subsequent malicious prosecution and wrongful debt collection action brought by the targeted customers. In
Vine v. PLS Financial Services, Inc., however, a federal district court and the Fifth Circuit reached the opposite conclusion in a proposed class action presenting the very same litigation waiver question under almost identical factual circumstances, 689 Fed.Appx. 800 (5th Cir. 2017) (per curiam).
How should these cases be counted? Is there a majority view or is there a draw?
If we look at courts, we have three courts as decisionmakers in
Henry, and three in
Vine, albeit for different reasons. In
Henry, the trial court denied arbitration, the intermediate court reversed and ordered arbitration, and the Texas Supreme Court affirmed the intermediate court. In
Vine, a federal district court judge denied arbitration and the Fifth Circuit affirmed the denial in an unpublished opinion. There was no further appeal, and a different federal district judge subsequently denied a motion for reconsideration (which had urged that the Texas Supreme Court’s holding in
Henry be followed) after remand and transfer from the original district court.
In
Vine, all of the involved federal judges except 1 dissenting judge on appeal ruled in favor of waiver and therefore against arbitration. In
Henry, the trial court found waiver, and 1 dissenting justice on the San Antonio court of appeal agreed. Two justices on that court voted to reverse, however, and eight members of the Texas Supreme Court sided with the majority in the court of appeals.
So what should we conclude is the majority position? Should it be based on how the highest court ruled on the matter, which would then—on the particular waiver issue in this example-- result in a tie between the State of Texas (based state common law) and the Fifth Circuit (based on federal common law).
Or should the counting and coding be based on how different courts ruled regardless of whether they were ultimately reversed? That would then result in the two appellate courts in Henry trumping one trial court (2:1) while in the federal court the win ratio would be 3:0 because the district court initially ruled for the customers, the appellate court affirmed the order denying arbitration, and a different U.S. district court judge refused to follow the Texas Supreme Court precedent and instead followed the Fifth Circuit under the law-of-the-case doctrine when the defendants filed a motion for reconsideration. On the federal side, then, we see unanimity against arbitration based on waiver while on the state side two appellate courts overruled one trial court and established the opposite position as the “correct” decision on the question presented.
But if the decision-making unit is redefined as the participating judicial decisionmaker (as opposed to the court as an institution), there is no longer unanimity on either side. As for
Vine, there was one dissent in the Fifth Circuit, while on the state side the trial court in the first instance denied the motion to compel, and one of three justices on the court of appeal agreed with that disposition.
Taking the individual judicial decisionmaker as the relevant unit of analysis, the tally is 8+2 = 10 judges in favor of arbitration vs. 2 judges against on the state side, while on the federal side the tally is 1+2+1 = 4 judges against arbitration vs. one lone dissenter who would have sent the dispute to arbitration. And if the state and federal data is combined, a larger number of jurists supported arbitration in Texas because the Fifth Circuit opinion was a panel opinion while on the Texas Supreme Court a total of eight justices participated and decided the case without a dissent or concurrence. It should also be noted that a dissent on a three-member panel means that a single member could have changed the outcome. That applies both to the San Antonio Court of Appeals and the Fifth Circuit panel in this example.
Overall, the ratio would be 11 for arbitration and 6 against based on waiver. But if the analysis is restricted to members of the high courts, the ratio shifts further in favor of the Texas Supreme Court’s resolution of the waiver issue.
So what then is the majority position on this particular sub-type of an arb. waiver, and how strong is the majority position?
The answer depends on (1) whether the scope of the inquiry is limited to highest court (in which case there is a tie between Texas and the Fifth Circuit, i.e. a state-federal split) or whether alternatively (2) all courts, or (3) all involved judicial decisionmakers, are counted in the determination of majority and minority positions in the judicial treatment of the specific common-law waiver issue.
Additionally, it should not go unmentioned that a petition for certiorari was filed in
Henry, which the U.S. Supreme Court denied. Should that count for something even though there was no further review on the merits, and if so, how much weight should the cert denial be given?
The bottom line here is that the question of determining the majority position is not as simple as it might appear at first glance. All courts are obviously not equal, nor are all judges. Some have their rulings challenged and are reversed. Others have them challenged and are not reversed. If there is no appeal, or no further appeal, the trial court ruling or panel opinion will stand even if it would or might have been reversible. The vast majority of cases processed by trial courts are not appealed. Period. And yet, they affect many more people directly than the appealed cases.
But even if judges do not prevail and are overruled, this might very well be an indication that the losing position also had merit, or at least potentially so, and that the losing position might have prevailed under different circumstances.
In our particular example here, the fact that all members of the Texas Supreme Court are Republicans and are generally reputed as favoring business interest over individuals in the cases they chose to hear, may carry explanatory power. But a majority (of 2:1) also favored the payday lender in the intermediate appellate court, while the trial court judge did not. The hypothesis that political party plays a role is plausible in a state with an elective judiciary, but it would obviously have to be tested on a much larger number of cases and issues. But the partisan-jurisprudence hypothesis may not make sense in a state with an appointed judiciary. Should precedents from both types of jurisdictions nevertheless be combined to arrive at statements about majority positions nationwide?
In the meantime,
Henry and
Vine offer a valuable opportunity to examine how the very same legal issue in a pair of cases with almost identical facts was treated by two different court systems, with opinions on both sides actually making reference to each other and acknowledging the disagreements.
LUCINDA VINE, KRISTY POND, on behalf of themselves and all others similarly situated,
v.
PLS FINANCIAL SERVICES, INC. and PLS LOAN STORE OF TEXAS, INC.
Civil Action No. 4:18-cv-450.
United States District Court, E.D. Texas, Sherman Division.
March 25, 2019.
Lucinda Vine & Kristy Pond, Plaintiffs, represented by Daniel Raymond Dutko, Rusty Hardin & Associates, LLP, H. Mark Burck, Hanszen Laporte LLP, Daniel R. Dutko, Hanszen Laporte LLP & M. Mitchell Moss, Moss Legal Group, PLLC.
PLS Financial Services, Inc. & PLS Loan Store of Texas, Inc., Defendants, represented by J. Austen Irrobali, Tillotson Law, Jeffrey Mark Tillotson, Tillotson Law & Jonathan R. Patton, Lynn Pinker Cox & Hurst LLP.
MEMORANDUM OPINION AND ORDER
AMOS L. MAZZANT, District Judge.
This matter is before the Court on Defendants PLS Financial Services, Inc. and PLS Loan Store of Texas, Inc.'s (collectively, "PLS") Motion to Reconsider Denial of Motion to Compel Arbitration and Stay [Dkt. #110], which, after careful consideration, will be denied.
BACKGROUND
PLS is a short-term loan provider. To qualify for a PLS loan, borrowers must present a post-dated or blank personal check for the amount borrowed in addition to a finance charge. PLS tells borrowers it will not deposit the check or pursue criminal charges to recover the loan. But when a borrower misses a payment, PLS will deposit the check, threaten her with criminal prosecution if the check bounces, and misrepresent to the local district attorney that her check was meant to be cashed. The borrower will then receive letters from the district attorney advising her to pay PLS or face criminal charges. Plaintiffs Lucinda Vine and Kristy Pond have filed a class action lawsuit in the Western District of Texas against PLS on behalf of borrowers who received such letters.
PLS responded by moving to compel arbitration (Dkt. #18; Dkt. #19). PLS notes that, when a borrower enters a loan contract, she agrees to arbitrate any claims against PLS. These agreements are governed by the Federal Arbitration Act. The Western District Court denied the motion, finding that PLS is not permitted to compel arbitration because PLS substantially invoked the judicial process first. It reasoned that, by informing the district attorney of Plaintiffs' bounced checks, PLS "initiated a process that invites Texas district attorneys' offices to address issues that are at stake in the instant litigation."
See Vine v. PLS Financial Srvs., Inc., 226 F.Supp.3d 719, 727-29 (W.D. Tex. 2016), aff'd, 689 F. App'x 800, 807 (5th Cir. 2017). PLS moved to reconsider the Order (Dkt. #44), unsuccessfully,
see Vine v. PLS Financial Srvs., Inc., 226 F.Supp.3d 708, 719 (W.D. Tex. 2016),[1] and appealed the decision to the Fifth Circuit. PLS argued 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."
See Vine v. PLS Financial Srvs., Inc., 689 F. App'x 800, 802 (5th Cir. 2017). But the Fifth Circuit was unpersuaded, and affirmed the decision.
See id. at 801-07.
The Texas Supreme Court has since found that a short-term loan provider does not waive its right to arbitration by submitting unpaid checks and affidavits to local district attorneys, the Fifth Circuit's decision notwithstanding.
Henry v. Cash Biz, LP, 551 S.W.3d 111, 118 (Tex. 2018), cert denied., 139 S.Ct. 184 (2018). The Western District Court indicated that the Texas Supreme Court's decision was not binding (Dkt. #117, Exhibit 2 at pp. 5-6) but invited the parties to submit briefs on whether the motion to compel arbitration should be reconsidered. PLS has since filed a second motion to reconsider in light of the Texas Supreme Court's decision in
Cash Biz. Because the case was transferred to this District before the motion was resolved, it is now before this Court.
LEGAL STANDARDS
A motion seeking reconsideration may be construed under Federal Rule of Civil Procedure 54(b), 59(e), or 60(b) depending on the circumstances. "The Fifth Circuit recently explained that `Rule 59(e) governs motions to alter or amend a final judgment,' while `Rule 54(b) allows parties to seek reconsideration of interlocutory orders and authorizes the district court to revise at any time any order or other decision that does not end the action.'"
Dolores Lozano v. Baylor Univ., No. 6:16-CV-403-RP, 2018 WL 3552351, at *1 (W.D. Tex. July 24, 2018) (quoting
Austin v. Kroger Tex., L.P., 864 F.3d 326, 336 (5th Cir. 2017)). Further, "`[i]nterlocutory orders,' such as grants of partial summary judgment, `are not within the provisions of 60(b), but are left within the plenary power of the court that rendered them to afford such relief from them as justice requires [pursuant to Rule 54(b)]."
McKay v. Novartis Pharm. Corp., 751 F.3d 694, 701 (5th Cir. 2014) (quoting
Zimzores v. Veterans Admin., 778 F.2d 264, 266 (5th Cir. 1985)) (citing
Bon Air Hotel, Inc. v. Time, Inc., 426 F.2d 585, 862 (5th Cir. 1970)).
Because this is a motion seeking reconsideration of an interlocutory order, the Court uses Federal Rule of Civil Procedure 54(b). "Federal Rule of Civil Procedure 54(b) provides that, in a case involving multiple claims or parties, `any order or other decision, however designated, that adjudicates fewer than all the claims or the rights and liabilities or fewer than all the parties . . . may be revised at any time before the entry of a judgment adjudicating all the claims and all the parties' rights and liabilities.'"
Blundell v. Home Quality Care Home Health Care, Inc., No. 3:17cv-1990-L-BN, 2018 WL 276154, at *4 (N.D. Tex. Jan. 3, 2018) (quoting FED. R. CIV. P. 54(b)). "Under Rule 54(b), `the trial court is free to reconsider and reverse its decision for any reason it deems sufficient, even in the absence of new evidence or an intervening change in or clarification of the substantive law.'"
Austin, 864 F.3d at 336 (quoting
Lavespere v. Niagara Mach. & ToolWorks, Inc., 910 F.2d 167, 185 (5th Cir. 1990), abrogated on other grounds,
Little v. Liquid Air Corp., 37 F.3d 1069, 1075 n.14 (5th Cir. 1994)).
ANALYSIS
PLS asks the Court to reconsider two Orders finding that PLS waived its right to compel arbitration by sending false affidavits against Plaintiffs to local district attorneys (the "Prior Orders"). It reasons that, although the Fifth Circuit affirmed these district court orders,
see Vine, 689 F. App'x at 802, they warrant reconsideration in light
Cash Biz, a Texas Supreme Court case that expressly disagrees with the Fifth Circuit prior decision to affirm.
See Cash Biz, 551 S.W.3d at 118-19 ("We recognize that our opinion does not accord with the decision in
Vine.").
The law-of-the-case doctrine is "subject to an exception [PLS] urge[s] here: that `there has been an intervening change of law by a controlling authority.'"
See id. at 583 (quoting
United States v. Matthews, 312 F.3d 652, 657 (2002)). But, as the Western District Court previously indicated (
see Dkt. #117, Exhibit 2 at pp. 5-6), the Texas Supreme Court's decision in
Cash Biz does not amount to an intervening change of law. The United States Supreme Court has long held that, when deciding issues unique to arbitration contracts, courts are to apply the principles established by federal common law.
See Perry v. Thomas, 482 U.S. 483, 492 n.9 (1987). The Supreme Court reasons that:
The text of § 2 provides the touchstone for choosing between state-law principles and the principles of federal common law envisioned by the passage of that statute:
An agreement to arbitrate is valid, irrevocable, and enforceable, as a matter of federal law, see Moses H. Cone Memorial Hospital v. Mercury Construction Corp., 460 U.S. 1, 24, 103 S.Ct. 927, 941, 74 L.Ed.2d 765 (1983), "save upon such grounds as exist at law or in equity for the revocation of any contract." 9 U.S.C. §
2 (emphasis added). Thus state law, whether of legislative or judicial origin, is applicable if that law arose to govern issues concerning the validity, revocability, and enforceability of contracts generally. A state-law principle that takes its meaning precisely from the fact that a contract to arbitrate is at issue does not comport with this requirement of § 2.
See id (citing
Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395, 404 (1967);
Southland Corp. v. Keating, 465 U.S. 1, 16-17 & n. 11 (1984)) (emphasis in original). Because substantial invocation doctrine applies only to agreements to arbitrate, federal substantive law applies.
See Miller Brewing Co. v. Fort Worth Distributing Co., Inc., 781 F.2d 494, 497 & n.4 (5th Cir. 1986) (citing
Prima Paint, 388 U.S. at 402-08;
In re Mercury Const. Corp., 658 F.2d 933, 938-41 (4th Cir. 1981), aff'd, Moses H. Cone Mem'l Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 23 (1983);
E.C. Ernst, Inc. v. Manhattan Const. Co. of Texas, 551 F.2d 1026, 1040 (5th Cir. 1977)) (finding that the substantial invocation doctrine is a "matter of federal substantive law").
[3] The Texas Supreme Court's decision in
Cash Biz is thus not an "intervening change in law" excepted from the law-of-the-case doctrine.
[4] See Teel, 691 F.3d at 583 (noting that the change in law must be decided by a "controlling authority").
PLS maintains that reconsideration is warranted since
Cash Biz concerns substantially similar facts and Texas Supreme Court cases remain highly persuasive authority. While that may be true, nothing suggests that the Fifth Circuit would now find that PLS did not substantially invoke the judicial process. The Fifth Circuit, in fact, expressly rejected the Texas appellate court decision affirmed in
Cash Biz "despite [its] obvious factual similarities."
See Vine, 689 F. App'x at 806. This is because:
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.
For these reasons, the Court will not disturb the Prior Orders or the Fifth Circuit's decision to affirm them.
[6]
CONCLUSION
Accordingly, Defendants' Motion to Reconsider Denial of Motion to Compel Arbitration and Stay [Dkt. #110] is DENIED.
[1] The Orders on the Motion to Compel Arbitration and the First Motion to Reconsider were entered before the case was transferred to this District.
[4] Defendants note that Plaintiff did not previously argue that federal law governs this issue. This point is not welltaken on a (second) motion to reconsider.
[5] PLS argues that the Prior Orders were "based, in part, on the incorrect notion that Defendants had initiatedcriminal proceedings against Plaintiffs" (Dkt. #110 at p.17). But, even assuming this is the case, the Court fails to see how this allegation would compel a different result. The Fifth Circuit plainly acknowledged that PLS only "initiated" the criminal proceedings by "initiat[ing] a process that invites Texas district attorneys' offices to address issues that are stake in the instant litigation." See Vine, 689 F. App'x at 806.
[6] The Court therefore does not address Plaintiffs' arguments that this case is distinguishable from Cash Biz.
551 S.W.3d 111 (2018)
Hiawatha HENRY, Addie Harris, Montray Norris, and Roosevelt Coleman, Jr., on behalf of themselves and for all other similarly situated, Petitioners,
v.
CASH BIZ, LP, Cash Zone, LLC d/b/a Cash Biz, and Redwood Financials, LLC, Respondents.
No. 16-0854.
Supreme Court of Texas.
Argued September 15, 2017.
OPINION DELIVERED: February 23, 2018.
On Petition for Review from the Court of Appeals for the Fourth District of Texas.
Ricardo G. Cedillo, Davis Cedillo & Mendoza, Inc., San Antonio TX, for Amicus Curiae.
Daniel R. Dutko, H. Mark Burck, Laporte, L.L.P., Houston TX, for Petitioners.
Edward S. Hubbard, Patrick E. Gaas, Coats, Rose, PC, Houston TX, for Respondents.
113
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.
112
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.
[1]
I. Background
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
114actually 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. 539 S.W.3d 342, ___, 2016 WL 4013794 (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 354-59 (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 115 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, 103 S.Ct. 927, 74 L.Ed.2d 765 (1983)).
III. Analysis
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
notsusceptible 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, 439 116*116 (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.
B. Waiver
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
117*117 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
118Borrowers' 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 Fed.Appx. 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
119with 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.
IV. Conclusion
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.
Justice Blacklock did not participate in the decision.
[1] 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.
LUCINDA VINE; KRISTY POND, Plaintiffs-Appellees,
v.
PLS FINANCIAL SERVICES, INCORPORATED; PLS LOAN STORE OF TEXAS, INCORPORATED, Defendants-Appellants.
No. 16-50847.
United States Court of Appeals, Fifth Circuit.
Filed May 19, 2017.
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.
BACKGROUND
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
DISCUSSION
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.
I.
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.
II.
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.
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.
III.
A.
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.
[1] 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.
B.
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.
CONCLUSION
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.
226 F.Supp.3d 719 (2016)
Lucinda VINE, Kristy Pond, on behalf themselves and for all others similarly situated, Plaintiffs,
v.
PLS FINANCIAL SERVICES, INC., and PLS Loan Store of Texas, Inc., Defendants.
EP-16-CV-31-PRM.
United States District Court, W.D. Texas, El Paso Division.
Signed June 6, 2016.
722H. Mark Burck, Daniel R. Dutko, Hanszen Laporte L.L.P., Houston, TX, M. Mitchell Moss, Finger & Thurmond, P.C., El Paso, TX, Priscilla Marquez, Scott Hulse, P.C., El Paso, TX, for Plaintiff.
Richard Andrew Bonner, Jose Abelardo Howard-Gonzalez, Mark N. Osborn, Shelly W. Rivas, Kemp Smith L.L.P., El Paso, TX, for Defendant.
MEMORANDUM OPINION AND ORDER DENYING DEFENDANTS' MOTIONS TO DISMISS AND TO COMPEL PLAINTIFFS TO ARBITRATION
PHILIP R. MARTINEZ, UNITED STATES DISTRICT JUDGE.
On this day, the Court considered Defendants PLS Financial Services, Inc. and PLS Loan Store of Texas, Inc.'s "Motion to Dismiss Proceedings and to Compel Kristy Pond to Arbitration" (ECF No. 18) [hereinafter "Pond MTD"], filed on March 23, 2016; Defendants' "Motion to Dismiss and to Compel Lucinda Vine to Arbitration" (ECF No. 19) [hereinafter "Vine MTD"], filed on March 23, 2016; Plaintiffs Lucinda Vine and Kristy Pond's
[1] "Response
723*723 and Objection to Defendants' Motions to Dismiss and Compel Plaintiffs to Arbitration" (ECF No. 25-1) [hereinafter "Response"], filed on April 22, 2016; Defendants' "Reply in Support of Motions to Dismiss and to Compel Arbitration" (ECF No. 28) [hereinafter "Reply"], filed on April 29, 2016; Plaintiffs' "Motion to Compel Discovery" (ECF No. 20), filed on April 8, 2016; and Defendants' "Response to Motion to Compel Discovery" (ECF No. 27), filed on April 28, 2016, in the above-captioned cause.
After due consideration, the Court is of the opinion that Defendants' Vine MTD and Pond MTD will be denied for the reasons that follow. The Court will also deny Plaintiffs' Motion to Compel Discovery as moot.
I. FACTUAL AND PROCEDURAL BACKGROUND
This case arises out of a dispute concerning loans and their nonpayment.
[2] Defendants provide short-term loans to borrowers who are required to present post-dated blank personal checks for the amount borrowed plus a finance charge. Pls.' First Am. Class Action Compl. 4, Mar. 11, 2016, ECF No. 17 [hereinafter "Complaint"]. According to Plaintiffs, Defendants inform borrowers that no deposit of the post-dated or blank personal checks will occur.
Id. Rather, Plaintiffs allege, Defendants make assurances that they secure these post-dated or blank personal checks to verify that the borrowers indeed have bank accounts.
Id.
Despite these assurances, Plaintiffs allege that Defendants would deposit these post-dated or blank personal checks if a borrower missed a payment. Id. This occurred despite Defendants knowing that the accounts on which the checks were drawn had insufficient funds. Id. After these checks "bounced," Defendants would threaten the delinquent borrowers with criminal prosecution. Id.
If the delinquent borrowers failed to completely repay the loan, Defendants would allegedly take these post-dated or blank personal checks to the "local district attorney's office and represent[ ] to the district attorney [that] the borrower[s] committed theft by check." Id.
Plaintiffs Vine and Pond, on behalf of themselves and for all others similarly situated, filed the instant class action lawsuit alleging (1) malicious prosecution, (2) Texas Deceptive Trade Practices Act violations, (3) fraud, and (4) Texas Finance Code § 392.301 violations. Id. at 5-7.
Defendants assert that Defendant PLS Loan Store of Texas, Inc. ("Defendant PLS Loan Store")
[3] requires all borrowers to agree and sign a Credit Services Agreement ("Agreement"). Pond MTD 2; Vine MTD 2. Defendants provide two Agreements for the Court's review: one attached to the Pond MTD and the other attached to the Vine MTD. Pond MTD Ex. Al; Vine MTD Ex. Al. While Defendants provide an Agreement with Plaintiff Pond's signature, Defendants fail to attach an executed Agreement for Plaintiff Vine.
[4] Mark McNall, Vice President of Operations
724*724 Strategy and Retail Marketing for Defendant PLS Loan Store, avers that "all PLS [Loan Store] customers were required" to sign the Agreement. Vine MTD Ex. A. According to McNall, the Agreement "form is electronically generated when a customer seeks to do business with [Defendant] PLS [Loan Store]."
Id. "However, executed [Agreements] are not electronically scanned and stored."
Id. Despite a "diligent search," Defendants have not located Plaintiff Vine's signed Agreement.
Id.
Curiously, the Agreement attached to the Pond MTD differs textually from the one attached to the Vine MTD.
A. Pond Agreement
The Pond Agreement includes an Arbitration Provision ("Pond Arbitration Provision"), which provides the following:
You acknowledge and agree that by entering this [Pond] Arbitration Provision:
(a) YOU ARE GIVING UP YOUR RIGHT TO HAVE A TRIAL BY JURY TO RESOLVE ANY DISPUTE ALLEGED AGAINST [Defendant PLS Loan Store], THE LENDER AND/OR OUR/ITS RELATED THIRD PARTIES;
(b) YOU ARE GIVING UP YOUR RIGHT TO HAVE A COURT, OTHER THAN SMALL CLAIMS TRIBUNAL, RESOLVE ANY DISPUTE ALLEGED AGAINST [Defendant PLS Loan Store], THE LENDER AND/OR OUR/ITS RELATED THIRD PARTIES; AND
(c) YOU ARE GIVING UP YOUR RIGHT TO SERVE AS A REPRESENTATIVE... OR TO PARTICIPATE AS A MEMBER OF A CLASS ... IN ANY LAWSUIT FILED AGAINST [Defendant PLS Loan Store], THE LENDER AND/OR OUR/ITS RELATED THIRD PARTIES. YOUR DISPUTE MAY NOT BE CONSOLIDATED WITH THE DISPUTE OF ANY OTHER PERSON(S) FOR ANY PURPOSE(S).
Pond MTD Ex. Al, at 3.
The Pond Arbitration Provision also defines its scope:
[T]he words "dispute" and "disputes" are given the broadest possible meaning and include, without limitation ...
(b) all federal or state law claims, disputes or controversies, arising from or relating directly or indirectly to this Agreement (including the Arbitration Provision); ...
(i) all claims asserted by you ... as a representative and member of a class of persons.
Id. at 2.
B. Vine Agreement
The Vine Agreement is similar to the Pond Agreement in certain key respects: e.g., both contain similar provisions regarding the description of services, disclosure of fees as a finance charge, recovery of collection expenses, and the governing law. Compare Pond MTD Ex. A1 with Vine MTD Ex. Al. Yet, the Arbitration Provisions in each of the Agreements differ textually. Specifically, the Vine Agreement contains an Arbitration Provision ("Vine Arbitration Provision"), which states the following: "Upon the election by you, [Defendant PLS Loan Store], or Lender, any Claim shall be resolved by binding arbitration...." Vine MTD Ex. Al, at 3.
The Vine Arbitration Provision also defines its scope:
"Claim" means any dispute, claim or controversy between you and [Defendant PLS Loan Store] and/or Lender arising from or relating to:
(a) The current credit services agreement, loan, [A]greement, or obligation...
725(d) The actions of you, [Defendant PLS Loan Store], Lender, or third parties, including claims for money damages, penalties, or equitable relief.
Vine MTD Ex. Al, at 3.
Defendants now seek to compel arbitration against both named Plaintiffs.
II. LEGAL STANDARD
A. Diversity Case
Because the present action is based on diversity jurisdiction, the Court must apply state substantive law.
Erie R.R. Co. v. Tompkins, 304 U.S. 64, 78, 58 S.Ct. 817, 82 L.Ed. 1188 (1938). "[F]ederal courts must apply the choice of law rules in the forum state in which the court sits."
Am. Int'l Specialty Lines Ins. Co. v. Canal Indem. Co., 352 F.3d 254, 260 (5th Cir. 2003). The parties also agree that Texas law controls as evidenced by Plaintiffs' Texas state law claims and Defendants' reliance on the Agreement, which contains a Texas governing law clause.
See Sharpe v. AmeriPlan Corp., 769 F.3d 909, 915 (5th Cir. 2014) (honoring the parties' agreement that Texas law controls in an arbitration provision). Consequently, the Court will apply Texas law in the instant matter.
B. Motion to Compel Arbitration
When considering a motion to compel arbitration under the Federal Arbitration Act ("FAA"), a court employs a two-step analysis. "First, a court must `determine whether the parties agreed to arbitrate the dispute in question.'"
Tittle v. Enron Corp., 463 F.3d 410, 418 (5th Cir. 2006) (quoting
Webb v. Investacorp., Inc., 89 F.3d 252, 258 (5th Cir. 1996)). "Second, a court must determine `whether legal constraints external to the parties' agreement foreclosed the arbitration of those claims.'"
Fleetwood Enters., Inc. v. Gaskamp, 280 F.3d 1069, 1073 (5th Cir. 2002) (quoting
Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, 473 U.S. 614, 628, 105 S.Ct. 3346, 87 L.Ed.2d 444 (1985)). Because no party has argued that external legal constraints have foreclosed the arbitration of the claims at issue in this case, the Court need only conduct the first step of the analysis to resolve the parties' agreement to arbitrate.
The first step of the analysis—whether the parties agreed to arbitrate the dispute in question—consists of two distinct prongs: "(1) whether there is a valid agreement to arbitrate between the parties; and (2) whether the dispute in question falls within the scope of that arbitration agreement."
Id. at 418-19 (quoting
Webb, 89 F.3d at 258).
III. DISCUSSION
A. Agreement to Arbitrate
1. Valid Agreement
The FAA "reflects a liberal federal policy favoring arbitration."
Carey v. 24 Hour Fitness, USA, Inc., 669 F.3d 202, 205 (5th Cir. 2012) (internal quotation marks and citation omitted). Still, this policy "does not apply to the determination of whether there is a valid agreement to arbitrate between the parties."
Morrison v. Amway Corp., 517 F.3d 248, 254 (5th Cir. 2008). Instead, "to determine whether an agreement to arbitrate is valid, courts apply ordinary state-law principles that govern the formation of contracts."
Carey,669 F.3d at 205 (internal quotation marks and citation omitted).
The Court, at this juncture, finds that both Plaintiffs agreed to their respective Arbitration Provisions.
See Pond MTD Ex. A1.
[5]
7262. Scope of the Arbitration Clause
"To determine the scope of the Arbitration [Provision] at issue in this case, this court must apply Texas rules of contract interpretation."
Tittle, 463 F.3d at 419. "[A] court construing a contract must read that contract in a manner that confers meaning to all of its terms, rendering the contract's terms consistent with one another."
Indem. Ins. Co. of N. Am. v. W & T Offshore, Inc., 756 F.3d 347, 351 (5th Cir. 2014) (quoting
Tittle, 463 F.3d at 419) (alteration in original). "In doing so, courts should examine and consider the entire writing in an effort to harmonize and give effect to all the provisions of the contract so that none will be rendered meaningless. No single provision taken alone will be given controlling effect; rather, all the provisions must be considered with reference to the whole instrument."
Id. at 351-52 (quoting
Tittle, 463 F.3d at 419).
In the Pond Agreement, Plaintiff Pond agreed that her "dispute" would include "all federal or state law claims, disputes or controversies, arising from or relating directly or indirectly to this Agreement (including the Arbitration Provision)." See Pond MTD Ex. Al, at 2 (emphasis added). Moreover, Plaintiff Pond agreed to arbitrate "all claims asserted by [Plaintiff Pond] ... as a representative and member of a class of persons." See id.Similarly, the Vine Arbitration Provision has broad language that encompasses "claims for money damages, penalties, or equitable relief." See Vine MTD Ex. Al, at 3.
Plaintiffs' suit arises indirectly from their alleged agreement to receive pecuniary loans. In other words, but for these contractual loans, Defendants would not have allegedly sent bounced checks to a district attorney for criminal prosecution. Thus, the scope of the Arbitration Provision encompasses Plaintiffs' "dispute" as their federal and state law claims are asserted by them as "representative[s] and member[s] of a class of persons." See Pond MTD Ex. Al, at 2.
Therefore, the Court finds that Plaintiffs' claims fall within the scope of their respective agreements.
B. Arbitration Waiver
"Although parties may have an agreement to arbitrate, `[t]he right to arbitrate a dispute, like all contractual rights, is subject to waiver.'"
Al Rushaid v. Nat'l Oilwell Varco, Inc., 757 F.3d 416, 421 (5th Cir. 2014) (quoting
Nicholas v. KBR, Inc., 565 F.3d 904, 907 (5th Cir. 2009)) (alteration in original). A party, who is seeking arbitration, may waive its right to arbitrate when it (1) "substantially invokes the judicial process" and (2) thereby causes "detriment or prejudice" to the other party.
Id. (quoting
Miller Brewing Co. v. Fort Worth Distrib. Co., 781 F.2d 494, 497 (5th Cir. 1986)). Still, in light of the FAA policy favoring arbitration, "[t]here is a strong presumption against finding a waiver of arbitration."
Id. at 421-22 (
quoting Republic Ins. Co. v. PAICO Receivables, LLC, 383 F.3d 341, 344 (5th Cir. 2004)).
7271. Substantially Invokes the Judicial Process
Plaintiffs assert that Defendants "substantially invoked the judicial process by filing criminal charges before seeking arbitration and therefore, waived its [sic] right to compel arbitration." Resp. 10. Plaintiffs contend that Defendants would submit "Worthless Check Affidavits" to district attorneys' offices across Texas. Id. at 4.
a. Invoke
To begin the inquiry on whether Defendants invoked the judicial process, the Court must examine what "invoking" entails. The Fifth Circuit has "use[d] the term [invoking] 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."
Subway Equip. Leasing Corp., 169 F.3d at 329. To invoke the judicial process, the waiving party must "engage in some overt act in court that evinces a desire to resolve the arbitrable dispute through litigation rather than arbitration."
Id.
b. Criminal Law and Arbitration
Christus Spohn was a premises liability case arising out of a murder in a hospital parking garage. Debra Slough worked as a nurse for a hospital.
In re Christus Spohn Health Sys. Corp., 231 S.W.3d at 478. Tragically, Jesus Alvarez abducted Slough from the hospital parking garage and murdered her.
Id. Slough's husband filed a civil suit against the hospital, which temporally overlapped with the criminal case against Alvarez.
Id. The hospital defendant did not ask for arbitration until the lawsuit had been pending for fourteen months, during which time "the parties [had] substantially litigated the case" by engaging in voluminous discovery.
Id. at 480.
As part of its strategy in the civil case, the hospital sought an order of contempt against the husband's counsel in the criminal case. Id. at 481. Specifically, the hospital pursued a contempt proceeding because it believed that the husband's counsel was seeking to obtain Alvarez's sworn statement. Id. The hospital aimed to prevent the husband's counsel from using Alvarez's sworn statement against the hospital in the civil trial. Id.
The Texas court of appeals noted that while it "ordinarily would not consider actions in a separate cause as indicative of waiver," the hospital's actions in the criminal case were "part of its strategic plan of defense in the underlying matter that would be inconsistent with a right to arbitrate." Id. Therefore, the Texas appellate court concluded that a party can invoke the judicial process by strategically filing a contempt motion in a related criminal matter. See id.
While instructive, this case is neither binding upon the Court nor does it compel a certain result.
c. Application
Specifically, Defendants have initiated a process that invites Texas district attorneys' offices to address issues that are at stake in the instant action. For instance, Plaintiffs' malicious prosecution claim contains the element of a plaintiff's innocence.
[6] Since Plaintiffs would likely contest the criminal charges of theft by check, the issue of their innocence would necessarily have to be litigated in this prior-filed criminal proceeding. To be sure, Plaintiffs' other three current civil claims—Texas Deceptive Trade Practices Act violations, fraud, and Texas Finance Code § 392.301 violations—all would involve Plaintiffs raising the defense in their criminal actions that Defendants misled or threatened Plaintiffs in order to obtain the amount owed. Again, this would entail claims that necessarily have to be litigated in a previously filed criminal proceeding.
The Fifth Circuit precedent does not require that a defendant litigate
identical claims to invoke the judicial process, but rather "a
specific claim it subsequently wants to arbitrate."
See Subway Equip. Leasing Corp., 169 F.3d at 328 (emphasis added). The specific claim in the instant action concerns the issue of non-payment from which all Plaintiffs' causes of actions derive.
Similar to the hospital in
Christus Spohn, Defendants have elected to accuse Plaintiffs of theft by check and initiate criminal proceedings as "part of [their] strategic plan of defense in the underlying matter that would be inconsistent with a right to arbitrate."
See In re Christus Spohn Health Sys. Corp., 231 S.W.3d at 481. 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. Defendants allegedly engaged in the overt act of representing to Texas district attorneys that Plaintiffs had committed theft by check in criminal court proceedings, which "evinces a desire to resolve the arbitrable dispute through litigation rather than arbitration."
See Subway Equip. Leasing Corp., 169 F.3d at 329.
While Defendants, unlike the hospital in
Christus Spohn, have not conducted extensive discovery, the Court finds that Defendants have sought to gain a significant benefit by engaging the criminal justice system. To be sure, Defendants are not afforded a "second bite at the apple" through arbitration.
Cf. Cargill Ferrous Int'l v. SEA PHX. MV, 325 F.3d 695, 701 (5th Cir. 2003) ("[I]t is clear [the defendant] is not gaming the system by seeking a win at trial, and in the case of a loss, anticipating a second bite at the apple through arbitration.").
The Court concludes that Defendants have invoked the judicial process by deploying the criminal justice system to litigate theft by check.
[7]
7292. Prejudice to Plaintiffs
"Prejudice in the context of arbitration waiver refers to delay, expense, and damage to a party's legal position."
Nicholas, 565 F.3d at 910. One way a defendant can damage a plaintiff's legal position is by issue preclusion, which can be applied in a civil case after a prior criminal conviction.
See Wolfson v. Baker, 623 F.2d 1074, 1077 (5th Cir. 1980) ("[T]he general doctrine of [issue preclusion], which bars relitigation of an issue actually and necessarily decided in a prior action is as applicable to the decisions of criminal courts as to those of civil jurisdiction.") (internal citations and quotation marks omitted). "Because of the existence of a higher standard of proof and greater procedural protection in a criminal prosecution, a conviction is conclusive as to an issue arising against the criminal defendant in a subsequent civil action."
United States v. Thomas,709 F.2d 968, 972 (5th Cir. 1983) (citing
In re Raiford, 695 F.2d 521, 523 (11th Cir. 1983)).
Here, Plaintiffs' legal position would be compromised in a civil action if Plaintiffs were convicted of theft by check.
See Nicholas, 565 F.3d at 910. This is true because Defendants may seek to use these criminal convictions in a successive civil action as either a sword in prosecuting their civil claims initiated by Plaintiffs or as a shield to defend themselves in a civil matter against Plaintiffs.
See Wolfson, 623 F.2d at 1077.
In addition, Plaintiffs would necessarily be required to bear the expense of defending the criminal allegations.
See Nicholas, 565 F.3d at 910. Therefore, the Court also concludes that Defendants' invocation of the judicial process has prejudiced Plaintiffs in this respect.
Because Defendants have invoked the judicial process and its use will prejudice Plaintiffs, the Court finds that Defendants have waived their right to invoke the Agreement's Arbitration Provision.
C. Motion to Compel Discovery
Plaintiffs seek to obtain pre-arbitration discovery from Defendants in an effort to challenge the arbitrability of the instant action. See Pls.' Mot. to Compel Disc. 2. Given that the Court has found an arbitration waiver, the Court will deny Plaintiffs' Motion to Compel Discovery as moot.
IV. CONCLUSION
Accordingly, IT IS ORDERED that Defendants PLS Financial Services, Inc. and PLS Loan Store of Texas, Inc.'s "Motion to Dismiss Proceedings and to Compel Kristy Pond to Arbitration" (ECF No. 18) is DENIED.
IT IS FURTHER ORDERED that Defendants PLS Financial Services, Inc. and PLS Loan Store of Texas, Inc.'s "Motion to Dismiss and to Compel Lucinda Vine to Arbitration" (ECF No. 19) is DENIED.
IT IS FURTHER ORDERED that Plaintiffs' "Motion to Compel Discovery" (ECF No. 20) is DENIED as MOOT.
[1] Plaintiffs bring this suit on behalf of themselves and for all others similarly situated.
[3] Defendants do not describe the relationship between Defendants PLS Financial Services, Inc. and PLS Loan Store of Texas, Inc.
[4] Defendants attach a blank Agreement to the Vine MTD. See Vine MTD Ex. Al.
[5] The Court need not rule on the issue of whether Plaintiff Vine as a purported nonsignatory, and those similarly situated, signed the Arbitration Provision because the Court finds that Defendants waived their right to arbitrate. See infra Part III.B. Indeed, Defendants contend that Plaintiff Vine "must have signed and agreed" to the Agreement. See Vine MTD 1. Therefore, the Court will assume, arguendo, that Plaintiff Vine did sign the Agreement. See infra Part III.B.
[7] In its Reply, Defendants argue that the "mere filing of a criminal complaint does not establish waiver of an arbitration provision." Reply 4. To support this proposition, Defendants cite a laundry-list of various published and unpublished federal district court cases and a New Jersey appellate case. See id. Yet, Defendants fail to provide any analysis or justification to convince the Court of the applicability of these cases to the instant action. Above all, none of the cases are binding on the Court nor do they compel a different result in this case.
