The Eastern District of New York recently applied the doctrine of estoppel to allow non-signatory banks to rely on an arbitration agreement between other parties to compel arbitration in a putative class action. Moss v. BMO Harris Bank, N.A., No. 13-cv-5438, 2014 WL 2565824 (E.D.N.Y. June 9, 2014).
Plaintiffs, borrowers who obtained payday loans from online lenders, brought a RICO action against five banks that had performed the Automatic Clearing House (ACH) transactions by which funds were transmitted between the lenders and plaintiffs. The loans were made pursuant to written agreements between plaintiffs and lenders, all of which contained both an arbitration provision and a specific authorization for the lender to initiate ACH electronic funds transfers. The arbitration provisions provided that the borrowers must arbitrate with the lenders as well as the lenders’ agents and servicers.
The defendant banks moved to compel arbitration, arguing that they were within the agreements’ definition of “agents” and “servicers” of the lenders. Relying on principles of estoppel, the district court balanced the Second Circuit’s observation that “it is difficult to overstate the strong federal policy in favor of arbitration,” with the Supreme Court’s rule that “[a]rbitration . . . is a matter of consent, not coercion.” Id. at *3.
Under estoppel principles, “a nonsignatory to an arbitration agreement may compel a signatory to that agreement to arbitrate a dispute where a careful review of the relationship among the parties, the contracts they signed . . . and the issues that had arisen among them discloses that the issues the non-signatory is seeking to resolve in arbitration are intertwined with the agreement that the estopped party has signed.” Id.
The Second Circuit has a “‘a two-part intertwined-ness test, under which they examine whether: (1) the signatory’s claims arise under the subject matter of the underlying agreement and (2) whether there is a close relationship between the signatory and the non-signatory party.’” Id. at *4.
Because the plaintiffs claimed that the defendant banks participated in the collection of unlawful debts, aided and abetted the lenders’ violation of New York usury law, and charged illegal, usurious and unconscionable fees for payday loans, the district court concluded that for plaintiffs to prevail they had to establish that the loan agreements were invalid. Accordingly, their claims arose out of the subject matter of those agreements.
The court also found that the plaintiffs and banks had a sufficiently close relationship. Since it was foreseeable that the banks performing the ACH transactions to facilitate the loans would be included among the lenders’ agents and servicers, “all defendants are ‘linked textually’ to the arbitration provisions,” and the plaintiffs are estopped from avoiding arbitration with the non-signatory defendants. Id. at *7. Thus, the District Court granted the non-signatory banks’ motion to compel arbitration.