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MacDonald v. CashCall, Inc.

United States District Court, D. New Jersey

April 28, 2017

JOHN S. MACDONALD, Plaintiff,
v.
CASHCALL, INC, et al., Defendants.

          OPINION

          MADELINE COX ARLEO, UNITED STATES DISTRICT JUDGE

         THIS MATTER comes before the Court by way of Defendants CashCall, Inc. (“CashCall”), WS Funding, LLC (“WS Funding”), Delbert Services Corp. (“Delbert”), and J. Paul Reddam's (“Reddam”) (collectively, “Defendants”) motion to compel arbitration, or alternatively, to dismiss Plaintiff John S. MacDonald's (“Plaintiff”) Complaint. Dkt. No. 11. For the reasons set forth below, the motion to compel arbitration is DENIED and the motion to dismiss is GRANTED in part and DENIED in part.

         I. Background[1]

         The instant case concerns the controversial lending practices of Defendants and non-party Western Sky Financial, LLC (“Western Sky”), which work together to issue high-interest payday loans to customers across the United States. Western Sky, the entity that initially issues the loans, is owned by Martin Webb, a member of the Cheyenne River Sioux Tribe of South Dakota (“CRST”). Based in large part on this tribal affiliation, Defendants seek to enforce numerous provisions in borrowers' loan agreements that attempt to, among other things, restrict borrowers' remedies to arbitration, compel the adjudication of disputes before the CRST, mandate the application of CRST law, and waive any application of state or federal law. Yet Plaintiff argues that Defendants' claims of tribal affiliation are a sham, and nothing more than a front to enable Defendants to circumvent the application of state and federal laws. He urges the Court not to enforce these provisions.

         A. Facts of the Case

         Plaintiff's experience epitomizes Defendants' lending scheme. On December 18, 2012, Plaintiff borrowed $5, 000 from Western Sky's website, which he accessed from a computer located in New Jersey. Compl. ¶ 38. As part of that process, Plaintiff executed the “Western Sky Consumer Loan Agreement” (the “Loan Agreement”). Id. Pursuant to the Loan Agreement, Plaintiff would receive the loan subject to certain fees and an Annual Percentage Rate of 116.73%. Id. ¶ 39. Over the seven-year life of the loan, the finance charge would be $35, 994.28. Id.

         On December 26, 2012, Plaintiff was notified that Western Sky had assigned his loan to WS Funding, and that CashCall would handle the servicing of the loan and collect the first payment. Id. ¶ 40. On August 13, 2013, Plaintiff was informed that Delbert would take over servicing of the loan. Id. ¶ 41. As of April 2016, Defendants had collected a total of $15, 493.00 from Plaintiff on his $5, 000 loan. Id. ¶ 42. This included $38.50 in principal, $15, 256.65 in interest, and $197.85 in fees. Id. At the time of the filing of the Complaint, Plaintiff still owed more than $7, 833.91. Id.

         If Plaintiff wished to challenge any aspect of the Loan Agreement, he would have to comply with a number of important provisions. Most notably, the Loan Agreement contained an arbitration clause, which provided as follows:

You agree that any Dispute, except as provided below, will be resolved by Arbitration, which shall be conducted by the Cheyenne River Sioux Tribal Nation by an authorized representative in accordance with its consumer dispute rules and the terms of this Agreement.

         Loan Agreement at 8.[2] The Loan Agreement also featured a forum selection clause, which stated, among other things, that the contract was “subject solely to the exclusive laws and jurisdiction of the Cheyenne River Sioux Tribe, Cheyenne River Indian Reservation.” Id. at 2. In addition, a choice-of-law clause provided that the Loan Agreement “shall be subject to and construed in accordance only with the provisions of the laws of the Cheyenne River Sioux Tribe, and that no United States state or federal law applies to this Agreement.” Id. at 7.

         None of the Defendants have a connection to the CRST. CashCall is a Delaware corporation with its principal place of business located in Orange, California. Compl. ¶ 7. Reddam is its President, CEO, sole director, and sole owner. Id. WS Funding is a wholly owned subsidiary of CashCall, and Reddam serves as its president. Id. ¶ 8. Delbert is a Nevada corporation with its principal place of business located in Las Vegas, and Reddam serves as its sole director and owner. Id. ¶ 9. Reddam is a resident of California. Id. ¶ 6.

         On May 17, 2016, Plaintiff filed the instant Complaint. Plaintiff's primary contention is that the loans at issue are void because the collection of a usurious rate of interest violates New Jersey law, and that Defendants' attempts to contractually circumvent the application of federal and state law should not be enforced. To that end, the Complaint asserts a variety of federal and state claims, including under: (1) New Jersey usury laws, see N.J. Stat. Ann. § 31:1-1; (2) the New Jersey Consumer Finance Licensing Act (“CFLA”), N.J. Stat. Ann. §§ 17:11C-1, et seq.; (3) the New Jersey Consumer Fraud Act (“CFA”), N.J. Stat. Ann. §§ 56:8-1, et seq.; (4) restitution and unjust enrichment; (5) a declaration that the forum selection and choice of law clauses do not apply, that the arbitration clause is void, and that any purported class waiver is void; and (6) the federal Racketeer Influenced and Corrupt Organizations Act (“RICO”), 18 U.S.C. § 1961, et seq.[3] See Compl. ¶¶ 55-91.

         On September 9, 2016, Defendants moved to compel arbitration, or alternatively, to dismiss. Defendants argue that: (1) the Loan Agreement's arbitration provisions, including a delegation clause that requires that the issue of arbitrability be submitted to an arbitrator, should be enforced, and all of Plaintiff's claims submitted to arbitration; (2) the Complaint should be dismissed for improper venue because the Agreement's forum selection clause requires adjudication in the CRST Tribal Court or, in the alternative, the Court should abstain from hearing Plaintiff's claims until the CRST Court has had an opportunity to consider the venue question; (3) Plaintiff's state law claims must be dismissed because the Agreement's choice-of-law provision requires the application of CRST law; (4) Counts I, II, III, IV, and VI of the Complaint should be dismissed for failure to state a claim; and (5) Defendant Reddam should be dismissed because the Court lacks personal jurisdiction over him. Each will be discussed in turn.

         B. Defendants' Litigation History

         Because the instant case is just the latest iteration in an ongoing saga concerning Defendants' business practices, it is helpful to first put this case in some broader context. Over the last few years, Defendants have become enmeshed in a spate of civil lawsuits and other proceedings across the country. At first, Defendants and related entities prevailed before various courts with many of the same arguments advanced in the instant motion. See Banks v. CashCall, Inc., No. 14-488, 2016 WL 3021749 (M.D. Fla. May 26, 2016); Yaroma v. Cashcall, Inc., 130 F.Supp.3d 1055 (E.D. Ky. 2015); Kemph v. Reddam, No. 13-6785, 2015 WL 1510797 (N.D. Ill. Mar. 27, 2015); Williams v. CashCall, Inc., 92 F.Supp.3d 847 (E.D. Wis. 2015); Chitoff v. CashCall, Inc., No. 14-60292, 2014 WL 6603987 (S.D. Fla. Nov. 17, 2014); Chitoff v. CashCall, Inc., No. 14-60292, 2014 WL 6603985 (S.D. Fla. Nov. 7, 2014); Narula v. Delbert Servs. Corp., No. 13-15065, 2014 WL 3752797 (E.D. Mich. July 30, 2014); Heldt v. Payday Fin., LLC, 12 F.Supp.3d 1170 (D.S.D. 2014).

         Yet the recent trend has tilted decidedly in favor of parties challenging Defendants' questionable business practices. Numerous courts, including two within this circuit and several Courts of Appeals, have rejected Defendants' arguments and refused to compel arbitration, tribal exhaustion, litigation in the CRST Court, or the application of tribal law. See Parnell v. W. Sky Fin., LLC, 664 F. App'x 841 (11th Cir. 2016); Parm v. Nat'l Bank of California, N.A., 835 F.3d 1331 (11th Cir. 2016); Hayes v. Delbert Servs. Corp., 811 F.3d 666 (4th Cir. 2016); Inetianbor v. CashCall, Inc., 768 F.3d 1346 (11th Cir. 2014); Jackson v. Payday Fin., LLC, 764 F.3d 765 (7th Cir. 2014); Ryan v. Delbert Servs. Corp., 15-05044, 2016 WL 4702352 (E.D. Pa. Sept. 8, 2016); Consumer Fin. Prot. Bureau v. CashCall, Inc., No. 15-7522, 2016 WL 4820635 (C.D. Cal. Aug. 31, 2016); Inetianbor v. Cashcall, Inc., No. 13-60066, 2016 WL 4702370 (S.D. Fla. Aug. 18, 2016); Inetianbor v. Cashcall, Inc., No. 13-60066, 2016 WL 4250644 (S.D. Fla. Apr. 5, 2016); Smith v. W. Sky Fin., LLC, 168 F.Supp.3d 778 (E.D. Pa. 2016), appeal dismissed (Apr. 19, 2016); Parnell v. CashCall, Inc., 181 F.Supp.3d 1025 (N.D.Ga.), aff'd sub nom., Parnell v. W. Sky Fin., LLC, 664 F. App'x 841 (11th Cir. 2016); Inetianbor v. CashCall, Inc., No. 13-60066, 2015 WL 11438192, at *3 (S.D. Fla. Dec. 8, 2015), reconsideration denied, No. 13-60066, 2016 WL 4249938 (S.D. Fla. Jan. 26, 2016); Parm v. Nat'l Bank of California, N.A., No. 14-0320, 2015 WL 11605748 (N.D.Ga. May 20, 2015), aff'd, 835 F.3d 1331 (11th Cir. 2016); Inetianbor v. CashCall, Inc., 962 F.Supp.2d 1303, 1309 (S.D. Fla. 2013), aff'd, 768 F.3d 1346 (11th Cir. 2014); W. Sky Fin., LLC v. State ex rel. Olens, 300 Ga. 340, 348 (2016); State ex rel. Cooper v. W. Sky Fin., LLC, No. 13-16487, 2015 WL 5091229, at *10 ( N.C. Super. Aug. 27, 2015).[4] The Court finds the latter line of cases persuasive, and their analysis undergirds the Court's holding here.

         II. Analysis

         A. Arbitration Clause

         1. Enforceability of the Delegation Provision

         Defendants first argue that the Court may not assess the enforceability of the arbitration clause because pursuant to the Agreement's delegation provision, issues concerning the validity, enforceability, and scope of the arbitration clause must be determined by an arbitrator. The Court disagrees.

         The Loan Agreement provides, in relevant part, that issues “concerning the validity, enforceability, or scope of this loan or the Arbitration agreement” must be submitted to arbitration. Loan Agreement at 9, Compl. Ex. 3, Dkt. No. 1-3. Under this so-called delegation provision, parties must submit even threshold disputes concerning the validity or scope of an arbitration clause to the arbitrator. See Rent-A-Ctr., W., Inc. v. Jackson, 561 U.S. 63, 68-69 (2010) (holding that “parties can agree to arbitrate ‘gateway' questions of ‘arbitrability, ' such as whether the parties have agreed to arbitrate or whether their agreement covers a particular controversy”) (quotations omitted). Such delegation clauses are simply “an additional, antecedent agreement the party seeking arbitration asks the federal court to enforce.” Id. at 70. For this reason, if a plaintiff wishes to challenge a delegation provision, he must do so specifically. Id. at 72; see also Ryan, 2016 WL 4702352, at *4. If the plaintiff fails to challenge the delegation provision itself, “the federal courts must treat the delegation provision” as valid, and “leav[e] any challenge to the validity of the Agreement as a whole for the arbitrator.” Parnell v. CashCall, Inc., 804 F.3d 1142, 1146-47 (11th Cir. 2015) (quotation omitted).

         Defendants maintain that Plaintiff has not asserted a challenge to the delegation clause itself. But the Complaint specifically states that “[b]ecause the arbitration procedure described in the agreement is fabricated and illusory, any provision requiring that the enforceability of the arbitration procedure must be decided through arbitration is also illusory and unenforceable.” Compl. ¶ 32. In addition, Plaintiff dedicated a section of his opposition brief to an argument against enforcement of the delegation clause. Opp'n at 14-15. This is more than sufficient to challenge the delegation provision. See Parm, 835 F.3d at 1335 n.1 (holding that a challenge to the delegation clause raised in an opposition brief is sufficient); Smith, 168 F.Supp.3d at 785-86 (same); Ryan, 2016 WL 4702352, at *5 n.8 (holding that by urging the Court in a notice of supplemental authority to follow Smith, which had refused to enforce the delegation provision, the plaintiff had sufficiently challenged the delegation clause).

         The delegation clause is unenforceable for virtually the same reason as the underlying arbitration agreement-the Loan Agreement's wholesale waiver of the application of federal and state law makes it invalid. As further explained below, even if the question of the enforceability of the arbitration clause were sent to an arbitrator, he or she would be categorically prohibited from applying any federal or state law to arrive at an answer. In other words, “enforcing the delegation provision would place an arbitrator in the impossible position of deciding the enforceability of the agreement without authority to apply any applicable federal or state law.” Smith, 168 F.Supp.3d at 786. This prohibition renders the clause invalid. See id. (holding that because there would be “no benchmark for JAMS or any other arbitrator to follow, ” the delegation clause was “illusory” and unenforceable); Ryan, 2016 WL 4702352, at *4-6 (holding that the delegation provision was unenforceable due to the agreement's “wholesale waiver of federal and state law, ” which would prohibit the arbitrator from determining whether the arbitration clause violated federal or state law, and effectively allow Defendants “to insulate an unenforceable arbitration clause from attack”); cf. Parm, 835 F.3d at 1335 (affirming the district court's conclusion that “the delegation clause is unenforceable because the arbitration agreement provides no available forum for an arbitrator to decide threshold issues of arbitrability”). Therefore, the Court will deny Defendants' motion to compel on this basis, and will proceed to address the enforceability of the arbitration provision.[5]

         2. Enforceability of the Arbitration Clause

         Next, Defendants contend that the Loan Agreement mandates arbitration of all of Plaintiff's claims. The Court disagrees, and holds that the arbitration agreement is unenforceable.

         The Federal Arbitration Act, 9 U.S.C. §§ 1, et seq. (“FAA”), provides that “[a] written provision . . . to settle by arbitration a controversy . . . shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.” 9 U.S.C. § 2. This provision reflects “a strong federal policy in favor of resolving disputes through arbitration.” Century Indem. Co. v. Certain Underwriters at Lloyd's, London, 584 F.3d 513, 522 (3d Cir. 2009). Thus, “any 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 any allegation of waiver, delay, or a like defense to arbitrability.” Moses H. Cone Mem'l Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 24-25 (1983).

         Initially, Defendants' loan agreements stated that any dispute would be resolved by arbitration, which “shall be conducted by the Cheyenne River Sioux Tribal Nation by an authorized representative in accordance with its consumer dispute rules and the terms of this Agreement.” Loan Agreement at 8. Several courts interpreting this provision held that it was unenforceable because it was illusory, in that the CRST did not actually conduct arbitrations and had no rules for the conduct of the arbitration. See Jackson, 764 F.3d at 779; Inetianbor, 962 F.Supp.2d at 1307; Inetianbor, 768 F.3d at 1354.

         Seemingly aware of this shortcoming, Defendants added an additional provision to their loan agreements, which purports to allow the borrower to select AAA, JAMS, or any other organization agreed to by all parties to administer the arbitration. Loan Agreement at 9; see Hayes, 811 F.3d at 672-73; Smith, 168 F.Supp.3d at 785. Based on this clause, Defendants argue that an arbitral forum is available for Plaintiff, and that the agreement is therefore enforceable. This clause, however, does not save it.

         Critically, the Loan Agreement categorically prohibits the arbitrator from applying any federal or state law to Plaintiff's claims. It states that: “no other state or federal law or regulation shall apply”; “[n]either this Agreement nor Lender is subject to the laws of any state of the United States of America”; “this Agreement shall be subject to and construed in accordance only with the provisions of the laws of the Cheyenne River Sioux Tribe and . . . no United States state or federal law applies to this Agreement”; the arbitration may be governed by the arbitral organization's rules only “to the extent that those rules and procedures do not contradict either the law of the Cheyenne River Sioux Tribe”; and “[t]he arbitrator will apply the laws of the Cheyenne River Sioux Tribal Nation and the terms of this Agreement.” Loan Agreement at 2, 7, 9, 10. The Loan Agreement also provides that while the arbitration may be conducted within thirty miles of the plaintiff's residence, such an accommodation should “not be construed in any way . . . to allow for the application of any law other than the law of the Cheyenne River Sioux Tribe of Indians to this Agreement.” Id. at 9-10. In other words, the Loan Agreement ensures that no matter who the arbitrator is or where the arbitration occurs (including if a plaintiff selects AAA or JAMS), federal and state law may not be applied.

         It is difficult to imagine a more transparent attempt to hijack the FAA to deprive aggrieved parties of an opportunity to meaningfully adjudicate their claims. Although the FAA has a broad reach, “courts will not enforce a prospective waiver” of statutory rights, “whether in an arbitration agreement or any other contract.” Am. Exp. Co. v. Italian Colors Rest., 133 S.Ct. 2304, 2313-14 (2013); see also Vimar Seguros y Reaseguros, S.A. v. M/V Sky Reefer, 515 U.S. 528, 540 (1995) (noting that if an arbitration provision operated as a “prospective waiver of a party's right to pursue statutory remedies, ” the Court would have “little hesitation in condemning the agreement as against public policy”) (quoting Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614, 637 n.19 (1985)). Accordingly, numerous courts have held that the Loan Agreement's wholesale renunciation of federal and state law renders the arbitration agreement unenforceable. See Hayes, 811 F.3d at 673 (holding that the arbitration agreement is unenforceable “for the fundamental reason that it purports to renounce wholesale the application of any federal law to the plaintiffs' federal claims”); Smith, 168 F.Supp.3d at 785 (“The purpose of the arbitration agreement at issue here is not to create a fair and efficient means of adjudicating Plaintiff's claims, but to manufacture a parallel universe in which state and federal law claims are avoided entirely.”); Ryan, 2016 WL 4702352, at *5 (holding that “[t]he wholesale waiver of federal and state law . . . dooms both the delegation provision and the arbitration clause”); Parnell, 181 F.Supp.3d at 1044 (agreeing with the Fourth Circuit that the “Loan Agreement has attempted to ‘convert a choice of law clause into a choice of no law clause'”) (quoting Hayes, 811 F.3d at 675). As the Fourth Circuit recently remarked:

With one hand, the arbitration agreement offers an alternative dispute resolution procedure in which aggrieved persons may bring their claims, and with the other, it proceeds to take those very claims away. The just and efficient system of arbitration intended by Congress when it passed the FAA may not play host to this sort of farce.

Hayes, 811 F.3d at 673-74. The Court agrees, and likewise declines to endorse the Loan Agreement's sham dispute resolution procedures.[6] Defendants' motion to compel arbitration is denied.[7]

         B. Forum Selection Clause and Tribal Exhaustion

         The Loan Agreement provides that it “is subject solely to the exclusive laws and jurisdiction of the Cheyenne River Sioux Tribe, Cheyenne River Indian Reservation, ” and that the borrower consents to “the sole subject matter and personal jurisdiction of the Cheyenne River Sioux Tribal Court.” Loan Agreement at 2. Defendants argue that, pursuant to this forum selection clause, Plaintiff should be required to proceed in the CRST Court. The Court disagrees.

         Native American “tribes do not, as a general matter, possess authority over non-Indians who come within their borders: ‘[T]he inherent sovereign powers of an Indian tribe do not extend to the activities of nonmembers of the tribe.'” Plains Commerce Bank v. Long Family Land & Cattle Co., 554 U.S. 316, 328 (2008) (quoting Montana v. United States, 450 U.S. 544, 565 (1981)). Pursuant to two limited exceptions under Montana, tribes may exercise subject matter jurisdiction over non-Indians on their reservations: (1) “A tribe may regulate, through taxation, licensing, or other means, the activities of nonmembers who enter consensual relationships with the tribe or its members, through commercial dealing, contracts, leases, or other arrangements”; and (2) “[a] tribe may also retain inherent power to exercise civil authority over the ...


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