Opinion
6:20-cv-01038-MC
11-04-2020
RICHARD BARRIE and ALBA FISHERIES, LLC, Plaintiffs, v. NFH OREGON, LLC, NFH FLORIDA, LLC, and FINOVA FINANCIAL, LLC, Defendants.
OPINION AND ORDER
Michael McShane United States District Judge
Plaintiffs Richard Barrie and Alba Fisheries, LLC (“Alba Fisheries”), bring claims for misrepresentation, conversion, and unjust enrichment against Defendants NFH Oregon, LLC, NFH Florida, LLC, and Finova Financial, LLC. Defendants move to stay this litigation and compel arbitration of Plaintiffs claims. Because all parties here are bound by the arbitration provision, Defendants Motion to Compel Arbitration and Stay this Action, ECF No. 6, is GRANTED.
BACKGROUND
Plaintiff Richard Barrie is a resident of Oregon. Defendant NFH Florida, LLC, is the sole member of Defendant NFH Oregon, LLC, and of Defendant Finova Financial, LLC. Defs.' Corp. Disclosure Statement 2, ECF No. 2. National Financial Holdings, LLC, is the sole member of NFH Florida and is not party to this action. National Financial Holdings is incorporated under the laws of Delaware with its principal place of business in Florida. Id. Alba Fisheries two members are residents of Oregon, and Mr. Barrie is one of its members. Pls.' Corp. Disclosure Statement 2, ECF No. 8.
Mr. Barrie applied for and received a loan from NFH Oregon. The two parties executed a contract that contained a written arbitration provision. The provision reads, in part:
NOTICE: READ THIS INDIVIDUAL ARBITRATOIN PROVISION CAREFULLY AS IT AFFECTS YOUR LEGAL RIGHTS. . . . IF YOU DO NOT REJECT THIS INDIVIDUAL ARBITRATION PROVISION IN THE MANNER SET FORTH BELOW, ANY CLAIMS RELATING TO OR ARISING FROM THE LOAN OR YOUR AGREEMENT WITH U.S. MUST, AT THE ELECTION OF EITHER YOU OR US, BE RESOLVED BY BINDING INDIVIDUAL ARBITRATION.Defs.' Mot. to Compel Arb. and Stay Action Ex. A 2, ECF No. 6 (emphasis in original). Under the provision, the parties to be bound are Mr. Barrie, and Finova, including any “subsidiary or affiliate of ours” and “any person or company that acquires interest in the Loan . . .” Id. “Claim” is defined as:
[A]any claim, dispute or controversy between you and us that in any way arises from or relates to [this contract or transaction] . . . . “Claim” has the broadest possible meaning and includes initial claims, counterclaims, cross-claims and third-party claims. It includes disputes based upon contract, tort, consumer rights, fraud and other intentional torts, constitution, statute, regulation, ordinance, common law and equity including any claim for injunctive or declaratory relief. This provision expressly delegates all decisions regarding the enforceability, validity, formation, or scope of the Agreement and this Individual Arbitration Provision (including, but not limited to, challenges based on unconscionability . . .) to the arbitrator.Id. The provision also allows that Finova, its affiliates, and subsidiaries would not force arbitration when claims are brought against it in small claims court and provides instructions for how to opt out of the provision. Id. at 2-3. Mr. Barrie's initials appear in the lower right-hand corner of the first and second pages of the provision, and his full signature appears on the third and final page of the document. Id. at 2-4. All are dated August 13, 2017. Id. Mr. Barrie did not opt out of the arbitration provision.
Mr. Barrie's personal vehicle served as collateral to secure the loan. After receiving the proceeds of the loan, Mr. Barrie made the first payment as scheduled. Later, in September 2017, he purportedly requested the payoff balance for the loan, but Defendants did not provide it. Communication broke down between the parties, and Mr. Barrie made no other payments. Mr. Barrie alleges that NFH Oregon fraudulently attached the vehicle to his loan. Later, during December 2017, Mr. Barrie conveyed the vehicle to his business, Alba Fisheries, to prevent repossession, to no avail. At the time of the repossession, the vehicle contained valuable personal property of Mr. Barrie's, which was also repossessed.
Mr. Barrie filed an action in Oregon state court to recover $82,500 in damages for misrepresentation, conversion, and unjust enrichment. Notice of Removal Ex. A 2-5. Defendants timely removed the action to federal court and moved to compel arbitration and stay this action.
STANDARDS
As the contract between the parties “involv[es] interstate commerce, ” discussed below, the Federal Arbitration Act (“FAA”) applies. 9 U.S.C. § 2. Therefore, the court makes the initial arbitrability decision applying federal law. Brennan v. Opus Bank, 796 F.3d 1125, 1129 (9th Cir. 2015). To determine whether arbitration must move forward or whether the case may continue in federal court, the court examines two threshold questions: (1) is there an agreement to arbitrate between the parties; and (2) whether that agreement covers this dispute. Id. If the answer to both questions is yes, then arbitration must proceed.
DISCUSSION
Typically, in federal court, when the parties in diversity are bringing state law claims, the Court applies federal procedural law and state substantive law. Prima Paint Corp. v. Flood & Conklin Mfg. Co. 388 U.S. 395, 404-05 (1967) (citing Guar. Trust Co. of New York v. York, 326 U.S. 99 (1945)). But with the FAA, Congress enacted a body of substantive law to apply when considering arbitration agreements between parties. Moses H. Cone Mem'l Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 24-25 (1983). As a result, when disputes arise over arbitration agreements, even when the underlying controversy is grounded in state law, federal law controls. Prima Paint, 388 U.S. at 405.
The FAA commands that:
A written provision in any maritime transaction or a contract evidencing a transaction involving commerce to settle by arbitration a controversy thereafter arising out of such contract or transaction . . . 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. The FAA defines “commerce” as “commerce among the several states.” 9 U.S.C. § 1. The FAA compels the Court to stay litigation where a controversy is “referable to arbitration” and grants the Court the power to compel arbitration when the Court would have had jurisdiction absent a written agreement to arbitrate. Id. at §§ 3, 4.
The FAA puts arbitration provisions “on equal footing with other contracts and requires courts to enforce them according to their terms.” Rent-a-Center, W., Inc. v. Jackson, 561 U.S. 63, 67 (2010) (citations omitted). Under the FAA, “contracts to arbitrate are not to be avoided by allowing one party to ignore the contract and resort to the courts” because such an allowance may lead to the very litigation that the parties explicitly sought to avoid by contracting for arbitration. Southland v. Keating, 465 U.S. 1, 8 (1984). The FAA also validates delegation clauses that bind parties “to arbitrate ‘gateway' questions of ‘arbitrability,' such as whether the parties have agreed to arbitrate or whether their agreement covers a particular controversy.” Rent-a-Center, 561 U.S. at 68-70.
In passing the FAA, Congress intended to exercise its power under the Commerce Clause to the greatest extent possible. Allied-Bruce Terminix Cos., Inc. v. Dobson, 513 U.S. 265, 277 (1995). Although it lacks an explicit preemption clause, the FAA imposes a federal policy strongly favoring arbitration. Volt, 489 U.S. at 477. Thus, the FAA preempts any state law that seeks to restrict arbitration or otherwise frustrate this policy. Doctor's Assoc.'s, Inc. v. Casarotto, 517 U.S. 681, 687-88 (1996). Put another way, the FAA gives arbitration agreements the same power as any other contract under generally applicable state-law contract principles and displaces any law that seeks to restrict that power.
I. The FAA Applies
The FAA grants a court the power to compel arbitration only where “the federal district court would have jurisdiction over the underlying dispute; hence, there must be diversity of citizenship or some other independent basis for federal jurisdiction . . . .” Moses H. Cone Mem'l Hosp., 460 U.S. at 25 n.32. Parties have diversity of citizenship when the parties are not domiciled in the same state, and the amount in controversy is over seventy-five thousand dollars. 28 U.S.C. § 1332. Diversity of citizenship requires complete diversity between plaintiffs and defendants. Owen Equip. Erection Co. v. Kroger, 437 U.S. 365, 373 (1978). For individuals, one's domicile is the state where one lives and intends to remain. Lew v. Moss, 797 F.2d 747, 749-50 (9th Cir. 1986). Corporations have two domiciles: the state in which they are incorporated and the state in which their principal place of business is located. Hertz Corp. v. Friend, 559 U.S. 77, 88 (2010). The principal place of business is its “corporate nerve center, ” understood as the “center of overall direction, control, and coordination, ” no matter where its business activities occur. Id. at 95-96. A limited liability corporation, however, “is a citizen of every state in which its owners/members are citizens.” Johnson v. Columbia Prop.'s Anchorage, LP, 437 F.3d 894, 899 (9th Cir. 2006). The amount of damages sought in the complaint is the amount in controversy. KVOS, Inc. v. Assoc. Press, 299 U.S. 269, 277 (1936).
Besides the Court having subject matter jurisdiction, the contract in question must involve interstate commerce. 9 U.S.C. § 2. “Involving” commerce is the same as “affecting” interstate commerce, which are “words of art that ordinarily signal the broadest permissible exercise of Congress'[s] Commerce Clause power.” Citizens Bank v. Alafabco, Inc., 539 U.S. 52, 56 (2003) (citing Allied-Bruce, 513 U.S. at 273-74). This extent of Congress's Commerce Clause power reaches more than those transactions that are “actually . . . ‘within the flow of interstate commerce.'” Id. at 56. It also reaches transactions that, when taken in the aggregate, have a substantial effect on interstate commerce and thereby “represent ‘a general practice . . . subject to federal control.'” Id. at 56-57. Thus, Congress's Commerce Clause power “may be exercised in individual cases without showing any specific effect upon interstate commerce.” Id.
Here, the parties have complete diversity of citizenship. Mr. Barrie is a resident of Oregon, and his company and co-plaintiff, Alba Fisheries, is a citizen of Oregon, as both of its members are residents thereof. Def. Mot. Ex. C at 2. On the other hand, NFH Oregon's and Finova's sole member is NFH Florida, whose sole member is National Financial Holdings, Inc., which is a Delaware corporation with its principal place of business in Florida. As a result, all three Defendants are citizens of Delaware and Florida for diversity purposes.
National Financial Holdings, Inc., is not a party to this action.
Because the parties assenting to this contract are of diverse citizenship, their contract necessarily “involve[es] interstate commerce.” 9 U.S.C. § 2. Even if this were not the case, there are other elements of this transaction that, in the aggregate, affect interstate commerce. For instance, the Alafabco Court found that the attachment of collateral that had moved through interstate commerce to secure a loan between two non-diverse parties could be grounds to find that their contract affected interstate commerce. Alafabco, 539 U.S. at 57. Here, Mr. Barrie's vehicle, which undoubtedly moved through interstate commerce, was the collateral that secured Mr. Barrie's loan from Defendants. The Alafabco Court also commented that “[n]o elaborate explanation is needed to make evident the broad impact of commercial lending on the national economy or Congress'[s] power to regulate that activity pursuant to the Commerce Clause.” Id. at 58. While the Court in Alafabco was specifically discussing commercial lending, consumer lending is also subject to federal regulation under the Commerce Clause. See, e.g., Truth in Lending Act, 15 U.S.C. § 1601. The loan here is no exception. Thus, this Court has subject matter jurisdiction over the underlying dispute and because the transaction involved interstate commerce, the FAA applies.
II. The Arbitration Agreement is Valid
The same defenses that can invalidate a contract can invalidate an arbitration agreement, such as “fraud, duress, or unconscionability.” Rent-a-Center, 561 U.S. at 68. But the FAA “operates on the specific written provision” to arbitrate and not the entire contract. Id. at 72. Thus, a provision to arbitrate is severable from the rest of the contract, and “a challenge to the contract as a whole does not prevent a court from enforcing a specific agreement to arbitrate.” Id. at 70. So, whether other terms of a contract are unconscionable is arbitrable under the FAA, unless the provision to arbitrate is specifically alleged to be unconscionable. State law controls what is unconscionable, but as noted, the FAA preempts any state law that operates to restrict the enforceability of an arbitration clause. Doctor's Assoc.'s, 517 U.S. at 686-87.
Parties may also agree to arbitrate statutory claims. Shearson/American Exp., Inc. 482 U.S. at 226. A legislative directive can override this mandate, but the burden is on the party opposing arbitration to show that a legislature intended their time of claim be excluded from arbitration. Id. at 226-27. Such intent can be shown from the text of the statute, legislative history, or “an inherent conflict between arbitration and the statute's underlying purpose.” Id. at 227. Without this showing, the provision to arbitrate is enforceable. Id. To show that an arbitration provision is unconscionable, as with any other contract, a plaintiff must show that it is substantively and procedurally unconscionable. Hinman v. Silverstar Group, LLC, 280 Or.App. 34, 41 (2016). “Substantive unconscionability concerns whether the terms of a contract are contrary to public policy. Procedural unconscionability . . . focuses on two factors: whether there was unequal bargaining power between the parties and whether the terms of the contract were hidden from a party.” Id. (emphasis supplied).
Plaintiffs claim that this arbitration provision is not enforceable for two reasons: (1) the entire contract is unconscionable; and (2) their claims implicate state laws and state constitutional rights. These arguments are unavailing. First, as noted, when a contract affects interstate commerce, the FAA governs. The FAA differs from Oregon law on unconscionability. Oregon law provides that a court may deny a motion to compel arbitration provision when the contract in which it is contained is unconscionable. Hinman, 280 Or.App. at 38-41 (discussing legislative history and intent behind Oregon's Uniform Arbitration Act). The FAA, however, provides that a court must enforce a valid arbitration provision, regardless of the conscionability of the surrounding contract, unless the provision itself is challenged as unconscionable. Rent-a-Center, 561 U.S. at 70. Because the Oregon law operates to limit the enforceability of arbitration provisions, the FAA preempts it. See Doctor's Assoc.'s, 517 U.S. at 687. The arbitrator thus properly decides whether the entire contract is unconscionable.
The parties in Hinman were subject to Oregon's Uniform Arbitration Act because both were citizens of Oregon, unlike the parties here, and agreed that their contract did not affect interstate commerce, also unlike the parties here. Hinman, 280 Or.App. at 34, 38.
Second, Plaintiffs' contend that their claims implicate state law and state constitutional claims, and so the arbitration provision should be considered unconscionable. Pls.' Mem. Opp'n to Defs.' Mot. Compel Arb. and Stay Action 3-4. Plaintiffs argue that Defendants' behavior was contrary to public policy, but they fail to allege that any terms of the arbitration agreement are contrary to public policy. The agreement appears fairly standard and even allows Plaintiff to opt out, which he did not do. Defs.' Mot. Ex. A 2-4. Situations may arise in which arbitration would be against the public interest. But this dispute is unremarkable in that it involves exactly the claims that one might imagine in a dispute between a secured lender and a debtor after a repossession.
Without a showing that the agreement's terms are unconscionable, the Court must enforce the provision according to its terms. Rent-a-Center, 561 U.S. at 67. The provision asserts that “any claims relating to, or arising from, the loan or your agreement . . . must . . . be resolved by binding individual arbitration.” Def. Mot., Ex. A. 2. The provision clarifies that covered claims include “disputes based upon contract, tort, consumer rights, fraud and other intentional torts, constitution, [and] statute . . . .” Id. Plaintiffs' claim of unjust enrichment is based upon contract; their claim of conversion, upon tort; and their claim of misrepresentation, upon fraud. As a result, each claim falls within the scope of those disputes that the parties mutually agreed to arbitrate.
In conclusion, the FAA controls because the parties have diversity of citizenship, and the contract affects interstate commerce. Because the FAA is the controlling law, questions about the enforceability of the contract or behavior of the parties are arbitrable. The final question is whether the agreement to arbitrate binds all the parties.
III. All Parties are Bound by the Arbitration Agreement
Unless the parties contract otherwise, whether a third party is bound by another's agreement to arbitrate is a question for the Court to decide. Carpenters 46 N. California Ctys. Conference Bd. v. Zcon Builders 96 F.3d 410, 414-15 (9th Cir. 1996). “‘[T]raditional principles' of state law allow a contract to be enforced by or against nonparties to the contract through ‘. . . piercing the corporate veil, [and] alter ego . . . .'” Arthur Anderson LLP v. Carlisle, 556 U.S. 624, 631 (2009) (quoting 21 R. Lord, Williston on Contracts § 57:19, p. 183 (4th ed. 2001)).
Under Oregon law, a party advancing an alter ego theory must make a prima facie showing that an entity is the alter ego of another. Joe Hand Promotions, Inc. v. Jacobsen, 874 F.Supp.2d 1010, 1014 (D. Or. 2012). The elements to make a prima facie case are: (1) the party controlled the entity; (2) the party used its control over the entity to engage in improper conduct; and (3) the improper conduct harmed the party urging the alter ego theory. State ex rel. Neidig v. Superior Nat. Ins., 343 Or. 434, 454 (2007) (en banc). The control element requires showing that the party had actual control over the specific conduct that led to the other party's harm. Id. at 456. “Improper conduct” includes instances “when a corporation was used for the perpetration of a fraud, to accomplish fraud or injustice, or in bad faith . . . [or] . . . misrepresentation that is short of fraud . . . .” Id. at 459 (cleaned up and citations omitted). Improper conduct is broader than legal culpability; it encompasses “oppressive or manipulative conduct that uses a corporate form to harm a creditor . . . .” Id. at 460. When all three elements are present, the Court may find that the arbiter has proper personal jurisdiction over the third party.
Mr. Barrie argues that the arbitration clause does not bind his business, Alba Fisheries, a nonparty to the contract between Mr. Barrie and Defendants. But Defendants plead all three elements necessary to make a prima facie showing of an alter ego theory. First, Defendants have shown that Mr. Barrie was in control of Alba Fisheries by presenting Alba Fisheries' business filings, which show that Mr. Barrie is one of the corporation's two governors. Def. Mot. Ex. B-E. Second, Defendants have alleged improper conduct, which Mr. Barrie does not contest; he conveyed the vehicle to Alba Fisheries, knowing that it was obligated as collateral on his loan. Therefore, Mr. Barrie used his corporate form to attempt to harm his creditors, meeting the third and final prong. In other words, Mr. Barrie had “actual control over the specific conduct” that Defendants allege caused their harm, which is the time and expense of litigation, precisely the types of harm that Defendants contracted to avoid by bargaining for an arbitration clause and by securing Mr. Barrie's obligation with collateral in the first place. Neidig, 343 Or. at 457.
As a result, the Court finds that Mr. Barrie controlled Alba Fisheries during the vehicle's conveyance now the subject of litigation. Alba Fisheries therefore is bound by Mr. Barrie's agreement to arbitrate disputes arising from Mr. Barrie's contract with Defendants.
CONCLUSION
For the reasons discussed, Defendants' Motion to Compel Arbitration and Stay this Action, ECF No. 6, is GRANTED. Plaintiffs' claims are STAYED, and the parties are also ORDERED to file a status report once arbitration concludes.
IT IS SO ORDERED.