If It’s Good For Thee, It’s Good For Me

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.