Consumer Finance Insights
May 15, 2017

Fourth Circuit Again Rejects Arbitration Request Under Payday Loan Agreement

On May 10, 2017, the Fourth Circuit affirmed the Middle District of North Carolina’s refusal to compel arbitration under the terms of a payday loan agreement.  In Dillon v. BMO Harris Bank, N.A., BMO Harris attempted to compel arbitration pursuant to an agreement that would have required the arbitrator to employ the law of the Otoe-Missouria tribe to the exclusion of state and federal law.  The Fourth Circuit held that the arbitration clause at issue was unenforceable because it was, effectively, a prospective waiver of the borrower’s federal law rights.  The Fourth Circuit’s decision solidifies and extends a trend in the Fourth and Eleventh Circuits of rejecting such tribal-law arbitration provisions in payday loan cases.

In Dillon, the plaintiff entered into a payday loan agreement with Great Plains Lending LLC in December 2012.  As part of that agreement, he agreed to allow Great Plains to withdraw payments from his bank account through the Automated Clearing House (ACH) system.  Op. at 4.  Moreover, he agreed to arbitrate any claims he might have in connection with the agreement subject to “the law of the Otoe-Missouria Tribe of Indians.”  Op. at 10.  Among other things, the agreement specified “[n]either this Agreement nor the Lender is subject to the laws of any state of the United States” and “no other state or federal law or regulation shall apply to this Agreement.”  Op. at 10-11.  The plaintiff ultimately sued BMO Harris—which was connected to the plaintiff’s payday loan because it processed the ACH transactions to which he consented—alleging violations of the federal Racketeer Influenced and Corrupt Practices Act (RICO).  Relying on the terms of the payday loan agreement, BMO Harris sought to compel arbitration, but the Middle District of North Carolina rejected that request.

Affirming the District Court’s decision, the Fourth Circuit looked to Supreme Court precedent and its recent Hayes v. Delbert Services Corp. decision.  The court first recognized the strong federal policy favoring arbitration, but explained that traditional principles of contract interpretation applied to arbitration agreements.  Under Supreme Court precedent, one such principle is that such agreements are unenforceable when they “operate ‘as a prospective waiver of a party’s right to pursue statutory remedies.’”  Op. at 7.  The court explained that it had recently applied that principle in Hayes to void an arbitration agreement that included a choice of law provision that disclaimed the application of any law other than that of the Cheyenne River Sioux Tribe of Indians.  The court held that the arbitration agreement was unenforceable in Dillon for the same reason.  Examining the text of the agreement, it found several provisions that evinced an effort to avoid the application of state and federal law, running afoul of the “prospective waiver” doctrine.

Dillon is yet another in a line of cases rejecting arbitration agreements that seek to apply only tribal law.  The decision provides some guidance to those drafting similar arbitration agreements as well as litigation-strategy guidance for financial services companies faced with tangential-liability suits that implicate such agreements.

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