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Courts must fully resolve issues around the existence of an arbitration agreement, including conducting an evidentiary hearing if there are factual disputes, the Fourth Circuit ruled last Friday.
In a case involving online payday loans, a district court ruled that several banks had failed to meet their burden in showing the existence of an arbitration agreement. When the banks provided further evidence, the court refused to reconsider, finding the issue was already decided. That was wrong, according to the Fourth, who ruled that the court must determine whether arbitration was required.
James Dillon applied for four online payday loans from tribal and out-of-state lenders. Payday loans are notoriously exploitive, offering desperate borrowers quick cash in exchange for often inescapable debt. Tribal payday loans in particular are shielded from interest rate caps and can have interest rates of over 300 percent -- that's an interest rate even the worst Wall Street villains could only dream of. Since they are so often a gateway to bankruptcy, Payday loans are banned in 12 states and strictly regulated in five others.
Dillon's loans were allegedly prohibited in North Carolina, which bans payday lenders and caps the interest rate one can charge on a small loan. Dillon didn't sue the lenders, however -- he sued the banks who facilitated the collection of the loans by transferring money from his account to the lenders.
The banks sought to enforce arbitration procedures. They argued that, when Dillon took out the loans, he agreed to use arbitration to resolve all disputes. That includes his dispute with the banks, they argue, even though the banks were not a party to the loan agreement. The court rejected their argument on the basis that they had not met their burden to prove the existence of an arbitration agreement. When they banks submitted extra evidence to cure the deficiency, the court declined to reconsider its ruling, finding that it had already decided the arbitration issue.
Despite all the juicy legal tidbits around exploitative usury, tribal sovereignty, and the role of third parties in enforcing potentially unenforceable agreements, the case fundamentally comes down to whether the court had to rehear the banks motion regarding arbitration. Under the Federal Arbitration Act, the Fourth Circuit found, courts are required to hold an evidentiary hearing when there are factual disputes regarding the existence of an arbitration agreement.
Under the FAA, the court cannot decide a material disputed fact without a trial to resolve that dispute, the Fourth held. No authority limits a party to only one motion under the FAA; hence, the district court should not have treated the banks renewed motion as a motion to reconsider. Similarly, those renewed motions presented different issues, removing them from the law of the case doctrine.
The district court must decide whether Dillon was required to go into arbitration, keeping in mind the "emphatic federal policy" in favor of arbitration. If factual disputes remain, the court must resolve them by "an expeditious and summary hearing." The rest of the fun legal issues will have to wait.
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