Moses v. Cashcall, Inc.

UNITED STATES BANKRUPTCY COURT
EASTERN DISTRICT OF NORTH CAROLINA
WILSON DIVISION
IN RE:
OTERIA Q. MOSES,
DEBTOR
CHAPTER 13
CASE NUMBER: 12-05563-8-RDD
OTERIA Q. MOSES,
Plaintiff
v.
CASHCALL, INC.,
Defendant
ADVERSARY PROCEEDING
NUMBER: 12-00174-8-RDD
ORDER DENYING MOTION TO DISMISS
OR TO STAY AND COMPEL ARBITRATION
Pending before the Court is the Motion to Dismiss or to Stay and Compel Arbitration (the
“Motion”) and Memorandum in Support of Motion to Dismiss or to Stay and Compel Arbitration
filed by CashCall, Inc. (the “Defendant”) on November 13, 2012 and the Memorandum Opposing
Defendant’s Motion to Dismiss or to Stay and Compel Arbitration (the “Response”) filed by Oteria
Q. Moses (the “Plaintiff”) on December 5, 2012. The Court conducted a hearing on December 6,
2012 in Wilson, North Carolina to consider the Motion and Response.
SO ORDERED.
SIGNED this 03 day of January, 2013.
________________________________________
Randy D. Doub
United States Bankruptcy Judge
____________________________________________________________
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BACKGROUND
The Plaintiff filed a voluntary petition under Chapter 13 of the United States Bankruptcy
Code on August 1, 2012. The Defendant filed proof of claim number three, in the amount of
$1,929.02 on August 8, 2012. In response to the Defendant’s proof of claim, the Plaintiff filed this
adversary proceeding objecting to the proof of claim on August 17, 2012. The Plaintiff seeks a
declaratory judgment that the debt owed to the Defendant is void based on the Defendant’s violation
of the North Carolina Consumer Finance Act, N.C. Gen. Stat. §§ 53-164 to -191 (2012). The
complaint also alleges the Defendant engaged in acts that qualify as Prohibited Acts by Debt
Collectors under N.C. Gen. Stat. § 75-50 to -56 (2012) in attempts to collect on the debt and seeks
actual and statutory damages.
The Plaintiff entered into a consumer loan agreement (the “Loan”) with Western Sky
Financial, LLC (“Western Sky”) in May 10, 2012 for the advancement of funds in the principal
amount of $1,500.00. Western Sky subsequently assigned the Loan to the Defendant. The terms1
of the Loan provide that the Loan is subject solely to the laws and jurisdiction of the Cheyenne River
Sioux Tribe, Cheyenne River Indian Reservation and that by executing the loan agreement, the
borrower consents to the Cheyenne River Sioux Tribal Court having sole subject matter and personal
jurisdiction over any disputes. Further, the loan agreement provides any dispute will be resolved by
arbitration conducted by the Cheyenne River Sioux Tribal Nation. A dispute is defined as any
controversy or claim between the borrower and Western Sky or the holder or servicer of the Loan.
In the Motion, the Defendant requests that the adversary proceeding be dismissed pursuant
Western Sky is a limited liability company registered in South Dakota that makes short1
term consumer loans.
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to Federal Rule of Civil Procedure 12(b)(1), (b)(6), made applicable to adversary proceedings
through Federal Rule of Bankruptcy Procedure 7012, or in the alternative, be stayed and sent to
arbitration. The Defendant asserts that the causes of action under North Carolina law are non-core
proceedings, which are subject to arbitration provisions, even when brought in relation to a
bankruptcy case. Therefore, the Court should dismiss the adversary proceeding for lack of subject
matter jurisdiction or stay the proceeding and compel arbitration.
The Plaintiff argues the bankruptcy court has subject-matter jurisdiction to hear the objection
to claim because it is a core proceeding and not subject to any arbitration provision. Further, the
Plaintiff asserts that the bankruptcy court may also hear and enter final determination on any non-
core proceedings because they exclusively depend on the determination of whether the underlying
loan agreement is legal.
DISCUSSION
The Defendant brings the Motion pursuant to Federal Rule of Civil Procedure 12(b)(1) and
12(b)(6), made applicable to adversary proceedings by Federal Rule of Bankruptcy Procedure 7012.
Rule 12(b) provides that a party may assert the defenses of lack of subject-matter jurisdiction and
failure to state a claim upon which relief can be granted. Fed. R. Civ. P. 12(b)(1), (b)(6). “Whether
the parties have agreed to arbitrate their disputes is a jurisdictional question.” Wake Cnty. Bd. of
Educ. v. Dow Roofing Sys., LLC, 792 F.Supp.2d 897, 900 (E.D.N.C. 2011) (citing Bhd. of Ry. & S.S.
Clerks v. Norfolk S. Ry. Co., 143 F.2d 1015, 1017 (4th Cir. 1944)).
Within the Fourth Circuit, arbitration provisions “generally are favored in federal courts. In
bankruptcy proceedings, however, whether a proceeding is a ‘core proceeding’ as defined by 28
U.S.C. § 157(b) generally determines whether an arbitration clause can be enforced.” TP, Inc. v.
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Bank of Am., N.A., 479 B.R. 373, 382 (Bankr. E.D.N.C. 2012) (quoting D & B Swine Farms, Inc.
v. Murphy Brown, L.L.C., 430 B.R. 737, 741 (Bankr. E.D.N.C. 2010) (citation omitted)). Fourth
Circuit precedent indicates “[a]rbitration is inconsistent with centralized decision-making because
permitting an arbitrator to decide a core issue would make debtor-creditor rights ‘contingent upon
an arbitrator’s ruling’ rather than the ruling of the bankruptcy judge assigned to hear the debtor’s
case.” Id. (quoting White Mountain Mining Co., L.L.C. v. Congelton, L.L.C., 403 F.3d 164, 169 (4th
Cir. 2005)). Based on the test established in Shearson/Am. Express, Inc. v. McMahon, 482 U.S. 220,
226 (1987), “the burden is on the party opposing arbitration to show that Congress intended to ‘limit
or prohibit waiver of a judicial forum for a particular claim’ under the Federal Arbitration Act.” D
& B Swine, 430 B.R. at 741 (quoting In re Blanchard Transp. Serv., Inc., No. 07-01830-8-JRL, 2008
WL 619379 (Bankr. E.D.N.C. Feb. 29, 2008)). Thus, generally non-core matters are “referred to
arbitration consistent with the policy in favor of arbitration; however if a core proceeding is at issue,
the policy in favor of centralized determination in the bankruptcy court generally prevails.” TP, Inc.,
479 B.R. at 382.
As explained in TP, Inc. v. Bank of America, “the court must evaluate each cause of action
in the present adversary proceeding to determine whether it is a core proceeding.” Id. The
bankruptcy court may hear “all cases under title 11 and all core proceedings arising under title 11,
or arising in a case under title 11 . . . and may enter appropriate orders and judgments.” 28 U.S.C.
§ 157(b)(1); TP, Inc., 479 B.R. at 382; Stern v. Marshall, – U.S. –, 131 S.Ct. 2594, 2604, 180
L.Ed.2d 475 (2011). Section 157(b)(2) provides a non-exclusive list of example core proceedings,
including, “the allowance or disallowance of claims against the estate” as well as “counterclaims by
the estate against persons filing claims against the estate.” 28 U.S.C . § 157(b)(2); TP, Inc., 479
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B.R. at 382; Stern, 131 S.Ct. at 2604. In TP, Inc. v. Bank of America, the bankruptcy court
determined that “although an action was initiated by a complaint rather than a traditional
counterclaim, ‘such actions are in the nature of a counterclaim when asserted against parties who
have filed proofs of claim in the bankruptcy case.’” TP, Inc., 479 B.R. at 383 (explaining state law
claims were core proceedings because the claims were essentially counterclaims brought against
creditors who filed proofs of claim in the bankruptcy case) (citation omitted). The Court agrees with
the findings in TP, Inc. v. Bank of America, and finds that the Plaintiff’s claims against the
Defendant are statutorily core, as they “function as counterclaims to the claims filed [] against the
estate.” Id.
TP, Inc. v. Bank of America further instructs that once a proceeding is determined to be
statutorily core, it must also be determined to be constitutionally core in light of the Supreme Court
decision in Stern v. Marshall. In Stern v. Marshall, the Court found that although bankruptcy courts
may enter final judgments on a debtor’s counterclaims against persons filing claims against the estate
under § 157(b)(2)(C), bankruptcy courts may not enter final orders in non-bankruptcy matters based
in common law or state law, which would not necessarily be resolved in the claims allowance
process. TP, Inc., 479 B.R. at 383-84. In order to determine whether a matter is constitutionally
core, the action must (i) stem from the bankruptcy itself, or (ii) “necessarily be resolved in” the
claims allowance process. Id. (citing Stern, 131 S.Ct. at 2618). “If either of the prongs in the Stern
test are met, the matter is constitutionally core.” TP, Inc., 479 B.R. at 384 (citation omitted). Should
neither prong be met, the bankruptcy court then “lacks constitutional authority to enter final
judgment and may only submit proposed findings of fact and conclusions of law to the district
court.” Burns v. Dennis (In re Se. Materials, Inc.), 467 B.R. 337, 348 (Bankr. M.D.N.C. 2012).
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In the present case, the Plaintiff seeks a declaratory judgment finding the debt to and claim
of the Defendant is void based on the Defendant’s violation of the North Carolina Consumer Finance
Act, N.C. Gen. Stat. §§ 53-164 to -191 (2012) and alleges the Defendant engaged in acts that qualify
as Prohibited Acts by Debt Collectors under N.C. Gen. Stat. §§ 75-50 to -56 (2012). These causes
of action will “be treated as counterclaims asserted by the debtor to the claim filed by the creditor,”
and are statutorily core. TP, Inc., 479 B.R. at 383.
The first cause of action for a declaratory judgment, requests that the Court determine that
the Loan is void and unenforceable as the activities of the Defendant and its predecessors in
originating, acquiring, and servicing the Loan failed to comply with the requirements of the North
Carolina Consumer Finance Act. The Debtor asserts the Defendant or its predecessors failed to
obtain a license with the North Carolina Commissioner of Banks and failed to adhere to the
requirements of N.C. Gen. Stat. § 53-176(a) (2012). Compl. 5-7. Based on these violations, the
Plaintiff objects to the allowance of the proof of claim as provided by 11 U.S.C. § 506(a) because
the underlying loan is void and of no legal validity. Compl. 7. This cause of action is statutorily core
in that it involves the “allowance or disallowance of claims against the estate.” 28 U.S.C. §
157(b)(2)(B). Undertaking the analysis of whether the cause of action is constitutionally core, the
Court finds the cause of action does not stem from the bankruptcy itself, as it arose “in state court
and is based on state law.” TP, Inc., 479 B.R. at 384. However, a determination of whether the
violations of the North Carolina consumer protection statutes render the loan agreement void or
legally ineffective is necessarily intertwined in the claims allowance process. “For a counterclaim
to be necessarily resolved in ruling on the proof of claim, the relationship must be such that
resolution of the counterclaim would alter the amount sought by the claimant.” TP, Inc., 479 B.R.
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at 384 (citing In re Olde Prairie Block Owner, 457 B.R. 692, 698-99 (Bankr. N.D.Ill. 2011)).
Should the Court determine the underlying loan agreement is void, such resolution would
undoubtedly alter the claim amount. Therefore, the Court finds the first cause of action to be
constitutionally core. Accordingly the Court shall hear and enter final determination on the first
cause of action.
In the second cause of action, the Plaintiff alleges the Defendant committed several violations
of N.C. Gen. Stat. §§ 75-50 to -56 by attempting to collect on a debt rendered unenforceable by
North Carolina’s consumer protection statutes and seeks alternative relief in the way of damages.
The second claim is statutorily core as it qualifies as a “counterclaim[] by the estate against persons
filing claims against the estate.” 28 U.S.C. § 157(b)(2)(C). However, in light of Stern, the Court
must undertake a constitutionally core analysis. The cause of action does not stem from the
bankruptcy itself because the cause of action is based in state statutory law. See TP, Inc., 479 B.R.
at 384. Whether the second cause of action is necessarily resolved in the claims allowance process
is a more difficult question. The cause of action relates to actions that occurred after the origination
of the Loan and does not attack the validity of the Defendant’s claim or assert the Defendant should
recover a lesser amount. Instead, the second cause of action seeks actual damages for emotional
distress and anxiety caused by the Defendant’s actions as well as statutory damages provided by N.C.
Gen. Stat. § 75-56(b) (2012). These damages are unrelated to the Defendant’s proof of claim and are
only related to the bankruptcy case in that if successful, the bankruptcy estate will recover any non-
exempt funds and disburse them to claims in accordance with the bankruptcy code.
In TP, Inc. v. Bank of America, as in this case, the debtor filed a complaint alleging causes
of action based in North Carolina law that were viewed as counterclaims to a creditor’s proof of
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claim. One of the causes of actions considered was for unfair and deceptive trade practices under2
North Carolina state law. The bankruptcy court found the unfair and deceptive trade practice claims
would not “affect the calculation of the amount of [the creditor’s] proof of claim, such that each
[claim] fail[ed] to satisfy the second prong of Stern.” TP, Inc., 479 B.R. at 387. Therefore, the
Court cannot find the Plaintiff’s cause of action for violation of N.C. Gen. Stat. §§ 75-50 to -56 is
a constitutionally core counterclaim. TP, Inc., 479 B.R. 373; see also Burns v. Dennis 467 B.R. at
359-60 (debtor’s claims under chapter 75 of the North Carolina General Statutes were not
constitutionally core proceedings as they did not stem from the Bankruptcy Code and adjudication
was not necessary “in order to allow or disallow [a] proof of claim”); Tolliver v. Bank of Am. (In re
Tolliver), 464 B.R. 720, 740 (Bankr. E.D. Ky. 2012) (“claims for violation of the Kentucky
Consumer Protection Act will not be ‘necessarily resolved’ in the claims resolution process”). The
Court also finds that the claims brought under N.C. Gen. Stat. §§ 75-50 to -56 will not affect the
calculation of the amount of the Defendant’s claim in the bankruptcy case in accordance with the
guidance provided by Stern. Therefore, because the Court lacks constitutional authority to enter final
judgment on the second cause of action, findings of fact and conclusions of law on the cause of
action will be submitted to the district court. See Burns v. Dennis, 467 B.R. at 348; 28 U.S.C. §
157(c)(1).
Therefore, the Motion is DENIED as to the first cause of action. As to the second cause of
action, the Motion is also DENIED, and the Court shall submit findings of fact and conclusions of
The causes of action included constructive fraud, fraud, fraud in the inducement,2
recission, breach of fiduciary duty, negligence and negligent misrepresentation, tortious
interference, breach of contract, unfair and deceptive trade practices, and equitable subordination.
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law to the district court for entry of a final order or judgment. The Defendant shall have twenty (20)
days from the entry of this order to file an answer or otherwise respond to the Plaintiff’s complaint.
SO ORDERED.
END OF DOCUMENT
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