I am currently reading Chernow’s Hamilton and just finished Ricks’ First Principles.  I am having a hard time getting my head and soul around the contrast between the deliberative legislature which the Founders contemplated and the invasion of the Capitol. America has to step back and find some shared principles and truths or our most essential democratic institutions may be shattered like the doors to the House Chamber – and they will be much harder to repair. 

Now on to this week’s cases.

Dodd-Frank prohibition against arbitration

As the pandemic-related moratorium on foreclosures ends, the topics presented in Lyons v. PNC Bank, N.A., 2021 U.S. Dist. LEXIS 1930 (D. Md. Jan. 6, 2021) will, unfortunately, become more relevant. The Dodd-Frank Act provides:

No residential mortgage loan and no extension of credit under an open end [sic] consumer credit plan secured by the principal dwelling of the consumer may include terms which require arbitration or any other nonjudicial procedure as the method for resolving any controversy or settling any claims arising out of the transaction.

The provision barring arbitration has an effective date of June 1, 2013.   Lyons addresses both the scope of the prohibition and its retroactivity.

Plaintiff obtained a Home Equity loan from the defendant February 4, 2005.  The mortgage did not contain an arbitration provision.  Separately, he opened two deposit accounts with PNC – one on May 3, 2010 and one on July 6, 2016 (“Account Agreements”).  The documentation he signed when opening those accounts provided the bank the right to set off the account to cover any obligations Lyons owed PNC and gave the bank a security interest in the accounts.  Under the terms of the contract or through subsequent amendment, any disputes “aris[ing] under or relat[ing] to” the Account Agreements would be arbitrable.  On two occasions, PNC set off the deposit accounts to make payments on the Home Equity Loan. Lyons sued PNC related to those set offs; PNC moved to compel arbitration under the terms of the Account Agreements.

Since the arbitration mandates are not in the “residential mortgage” itself, but rather in the separate Account Agreements, Judge Gallagher first addresses whether the Dodd-Frank arbitration prohibition applies to the transaction. Rather than focusing solely on the language of the mortgage, she looks to the “whole transaction.”  Taking that view, she opines that “it would be an extraordinary loophole in the statute to suggest that it does not apply to this term providing Defendant with significant power to secure its HELCO [Home Equity] loan simply because it is contained in a later-drafted document.” Accordingly, she holds that the arbitration ban includes proceedings under clauses imposed by any documents that relate to the mortgage transaction.

She next addresses the retroactivity of the ban and its applicability to the subject transaction.  The ban has an effective date of June 1, 2013.  One of the deposit accounts was opened before that date; one, after.  Judge Gallagher starts her analysis from the widely acknowledged principle that the obligation to arbitrate is contractual.  She then holds that “Supreme Court precedent makes clear that preserving established contractual obligations – like the expectation that a claim will be arbitrated – is of the utmost importance when determining retroactivity.”  Since the statute includes no specific direction that it is to be applied to obligations already in place on its effective date, the court holds that the arbitration clause contained in the May 2010 account, which was opened before the arbitration ban under Dodd-Frank became effective, is still viable and she compels arbitration as to claims related to that account.  However, because of the ban, she denies the motion to compel as to claims related to set offs from the account opened in July 2016.

Practitioners dealing with upcoming flood of home mortgage foreclosures will be faced with this issue in numerous state court and federal venues.  It will be interesting to see whether the analysis in Lyons and the numerous federal cases which she cites will gain wide acceptance.  Ultimately, this important issue may reach SCOTUS.

Private Attorney General Act

Rivas v. Coverall N.A., Inc., 2021 U.S. App. LEXIS 364 (9^th Cir. Jan. 7, 2021) is interesting for two reasons.  To California practitioners, it is important because it reaffirms the viability of Sakkab v. Luxottica Retail N.A., Inc. 803 (9^th Cir. 2015), which holds that the state’s Private Attorney General Act renders arbitration clauses unenforceable to the extent that they prohibit a claimant from arbitrating claims on behalf of similarly aggrieved employees.  The Court’s opinion from a panel of Circuit Judges Callahan and Bumatay, with District Judge Presnell sitting by designation, rejects Coverall’s argument that the Supreme Court’s holdings in Epic Systems Corp. v. Lewis, 138 S. Ct. 1612 (2018) and Lamps Plus, Inc. v. Varela, 139 S. Ct. 1407 (2019) no longer permit a court to compel class arbitration in the face of the parties’ contractual waiver thereof.

The binding nature of holdings by one panel of a Circuit on those coming later provides the interesting part of the decision for those practicing outside California.  In a concurrence, Circuit Judge Bumatay opines that Sakkab is no longer good law after Epic. However, rather than dissenting, he argues that, as a matter of precedent, the panel is still bound by Sakkab.  He asks, therefore, that the Circuit rehear the case en banc, in order to overrule that holding.  “Unfortunately, our saving-clause precedent is in disharmony with the Supreme Court’s.  Both Epic Systems and Lamps Plus required the Supreme Court to step in and correct our saving-clause decisions two times in the course of two terms.  We should listen to what the Court is telling us and revisit our precedent before again being forced to do so.”

A troublesome aspect of the case, in light of its importance to California arbitration and employment law, is that the panel designates the opinion as “not appropriate for publication and . . . not precedent except as provided in Ninth Circuit Rule 36-3,” which limits citation to its use for law of the case, res judicata, and collateral estoppel. If the panel thinks its holding is right, it should be willing to have its work cited.

Quick hits

The eyes have it

In finding that there is no agreement to arbitrate, Sosa v. Onfido, Inc., 2021 U.S. Dist. LEXIS 658 (N.D. Ill. Jan. 5, 2021) lays out the standard analysis under Illinois law of claims of whether a non-signatory is bound to arbitrate under doctrines of equitable estoppel, third-party beneficiary, and agency.  The interesting aspect of the case is that it arises out of the alleged misuse of facial recognition technology and biometric identifiers derived from a driver’s license photograph which plaintiff uploaded to establish his identity on a website. It is a reminder that, if something on the internet is free, you have become the product.

Interlocutory appeal

Monday’s “Highlights” discussed Langere v. Verizon Wireless Services, LLC., 2020 U.S. App. LEXIS 40566 (9^th Cir. Dec. 29, 2020), which foreclosed a method of appealing the granting of a motion to compel.  I said, “good luck” in getting a court to grant an interim appeal under 28 U.S. C. §1292(b).”  Johnson v. Maker Ecosystem Growth Holdings, Inc. 2021 U.S. Dist. LEXIS 508 (N.D. Cal. Jan. 4, 2021) vindicates my pessimism as the court declines to grant such certification.

Stay of discovery

Al Thani v. Hanke, 2021 U.S. Dist. LEXIS 395 (S.D.N.Y. Jan. 4, 2021) addresses an application to stay discovery in a pending investment action while awaiting the court’s resolution of a motion to compel arbitration thereof. Finding that it is probable that arbitration will be mandated imminently, the court adopts what it calls “the general practice of district courts” and declines to allow general discovery since to do so would undercut arbitration’s “efficiency and cost-effectiveness.”  However, in light of the possibility that one of the defendants might transfer funds which a plaintiff invested with him, Judge Cronan allows discovery as to “the specific location” of where those funds might be deposited.

FINRA live hearing moratorium extended

FINRA has extended its administrative moratorium on live hearings from February 28, 2021 to April 2, 2021.  Parties are free by unanimous agreement among themselves and with consent of the arbitrator to hold such hearings virtually during the interim.

Have a good weekend.  May it remain quiet. See you Monday.

David A. Reif
Reif ADR
Dreif@reifadr.com
Reifadr.com