Petition for Writ of Certiorari — Portfolio Recovery Associates, LLC, Petitioner v. Iris Pounds, et al.
Supreme Court briefFeb 24, 2022
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IN THE
PORTFOLIO RECOVERY ASSOCIATES, LLC,
Petitioner,
v.
IRIS POUNDS, CARLTON MILLER, VILAYUAN SAYAPHETTYLER, and RHONDA HALL, on behalf of themselves
and all others similarly situated,
Respondents.
_______________
On Petition for a Writ of Certiorari to
the Court of Appeals of North Carolina
_______________
PETITION FOR A WRIT OF CERTIORARI
_______________
Jon Berkelhammer
Joseph D. Hammond
ELLIS & WINTERS LLP
Post Office Box 2752
Greensboro, NC 27402
Michelle A. Liguori
D. Scott Hazelgrove, II
ELLIS & WINTERS LLP
Post Office Box 33550
Raleigh, NC 27636
Brian D. Schmalzbach
Counsel of Record
MCGUIREWOODS LLP
800 East Canal Street
Richmond, VA 23219
(804) 775-4746
bschmalzbach@mcguirewoods.com
Counsel for Petitioner
i
QUESTION PRESENTED
The Federal Arbitration Act prohibits contract-law
rules that discriminate against arbitration, as this
Court has held again and again. See, e.g., Epic Sys.
Corp. v. Lewis, 138 S. Ct. 1612, 1622 (2018); Arthur
Andersen LLP v. Carlisle, 556 U.S. 624, 631 (2009).
Yet the guerrilla war on arbitration wages on. Here,
the state courts created a novel rule of contract law
that discriminates against arbitration rights
exercised by assignees. Those courts held that an
undisputed assignee could not enforce undisputedly
valid arbitration agreements without presenting
evidence of “additional intent by the original creditors
to assign” the right to arbitrate to the assignee.
Pounds v. Portfolio Recovery Assocs., LLC, 851 S.E.2d
423, 431 (N.C. Ct. App. 2020).
The question presented is:
Whether the FAA preempts a state rule of contract
law that requires assignees seeking to enforce
arbitration rights to meet a higher evidentiary burden
than is needed to enforce other contractual rights.
ii
RULE 29.6 DISCLOSURE STATEMENT
Petitioner Portfolio Recovery Associates, LLC is a
Delaware limited liability company that has one
member, PRA Group, Inc., which is a publicly held
corporation. As the sole member, PRA Group, Inc.
holds more than 10% of Portfolio Recovery Associates,
LLC’s stock.
RELATED PROCEEDINGS
Iris Pounds v. Portfolio Recovery Assocs., LLC, No.
1:16-cv-1395 (M.D.N.C. Mar. 28, 2018) (remand
order)
Portfolio Recovery Assocs., LLC v. Iris Pounds, No. 18174 (4th Cir. May 17, 2018) (denying petition for
permission to appeal under 28 U.S.C. 1453(c))
Portfolio Recovery Assocs., LLC v. Iris Pounds, No. 18204 (S. Ct. Nov. 19, 2018) (denying petition for a
writ of certiorari)
iii
TABLE OF CONTENTS
QUESTION PRESENTED ......................................... i
RULE 29.6 DISCLOSURE STATEMENT................ ii
STATEMENT OF RELATED
PROCEEDINGS.............................................. ii
APPENDIX ................................................................ v
TABLE OF AUTHORITIES ..................................... vi
PETITION FOR A WRIT OF CERTIORARI ............. 1
OPINIONS BELOW .................................................. 1
JURISDICTION ........................................................ 1
RELEVANT CONSTITUTIONAL AND
STATUTORY PROVISIONS ............................... 1
INTRODUCTION ...................................................... 2
STATEMENT OF THE CASE .................................. 5
A.
Respondents entered valid arbitration
agreements. ..................................................... 5
B.
The North Carolina courts disregarded
the FAA to deny PRA’s motion to
compel arbitration as a third-party
beneficiary and assignee of the credit
issuers.............................................................. 6
REASONS FOR GRANTING THE
PETITION ............................................................ 8
A.
The court of appeals’ decision violates
this Court’s precedent by discriminating
against arbitration. ......................................... 9
1.
A third-party beneficiary may
enforce a contract. .............................. 10
iv
2.
An assignee may enforce the
assignor’s rights and remedies—
absent manifest intent to the
contrary. ............................................. 11
3.
The court of appeals adopted a
new contract-law rule that
discriminates against arbitration
by requiring additional intent to
transfer the right to arbitrate............ 12
B.
The absence of precedent from this
Court on the application of the FAA to
motions to compel arbitration by
assignees is leading to confusion. ................. 14
C.
The Court’s review is warranted
without waiting for the North Carolina
Supreme Court to grant discretionary
review of this important federal issue. ........ 16
D.
The importance of this issue transcends
the parties before the Court. ........................ 18
CONCLUSION ........................................................ 19
v
APPENDIX
APPENDIX A: Order in the Supreme Court of
North Carolina
(October 27, 2021) ........................ App. 1
APPENDIX B: Opinion in the Court of Appeals of
North Carolina
(November 3, 2020) ...................... App. 5
APPENDIX C: Order Denying Defendant’s Motion
to Compel Arbitration in the
General Court of Justice Superior
Court Division North Carolina
County of Durham
(March 21, 2019) ........................ App. 26
APPENDIX D: Excerpts of Attachments to
Motion to Compel Arbitration
Account Agreements .................. App. 64
vi
TABLE OF AUTHORITIES
Cases
Arthur Andersen LLP v. Carlisle,
556 U.S. 624 (2009) ............................................. 10
AT&T Mobility LLC v. Concepcion,
563 U.S. 333 (2011) ........................................... 2, 9
Barbosa v. Midland Credit Mgmt., Inc.,
981 F.3d 82 (1st Cir. 2020).................................. 14
Cox v. CA Holding Inc.,
No. 1:13-CV-01754-JMS, 2015 WL 631393
(S.D. Ind. Feb. 13, 2015) ................................15, 18
DIRECTV, Inc. v. Imburgia,
136 S. Ct. 463 (2015) ........................................... 17
Epic Sys. Corp. v. Lewis,
138 S. Ct. 1612 (2018) ......................................9, 13
Funderburke v. Midland Funding, LLC,
No. 12-2221-JAR/DJW,
2013 WL 394198 (D. Kan. Feb. 1, 2013)........15, 18
Gilbert v. United Nat’l Bank,
436 N.W.2d 23 (S.D. 1989) .................................. 11
Henry Schein, Inc. v. Archer & White Sales, Inc.,
139 S. Ct. 524 (2019) ........................................9, 13
Jennings v. Rapid City Reg’l Hosp., Inc.,
802 N.W.2d 918 (S.D. 2011) ................................ 10
Kindred Nursing Centers Ltd. P’ship v. Clark,
137 S. Ct. 1421 (2017) ............................ 2-4, 10, 13
vii
Koch v. Compucredit Corp.,
543 F.3d 460 (8th Cir. 2008) ............................... 18
KPMG LLP v. Cocchi,
132 S. Ct. 23 (2011) ............................................. 17
Lester v. Portfolio Recovery Assocs., LLC,
No. 1:18-CV-0267, 2018 WL 3374107
(N.D. Ala. July 11, 2018) ................................15, 18
Marmet Health Care Center, Inc. v. Brown,
132 S. Ct. 1201 (2012) ......................................... 17
Mey v. DIRECTV, LLC,
971 F.3d 284 (4th Cir. 2020) ..........................15, 16
Nitro-Lift Technologies, L.L.C. v. Howard,
133 S. Ct. 500 (2012) ......................................16, 17
Pine Top Receivables of Ill., LLC v.
Banco de Seguros del Estado,
771 F.3d 980 (7th Cir. 2014) ............................... 15
Pounds v. Portfolio Recovery Assocs., LLC,
851 S.E.2d 423 (N.C. Ct. App. 2020) .................... 1
Pounds v. Portfolio Recovery Assocs., LLC,
863 S.E.2d 610 (N.C. 2021) ................................... 1
Rivers v. Roadway Express, Inc.,
511 U.S. 298 (1994) ............................................. 18
Rodriguez-Ocasio v. Midland Credit
Mgmt., Inc.,
No. CV 17-3630 (ES) (MAH),
2021 WL 3758077 (D. N.J. Aug. 25, 2021) ....15, 18
viii
Ron Case Roofing & Asphalt Paving v.
Blomquist, Inc.,
773 P.2d 1382 (Utah 1989) ................................. 10
Sunridge Dev. Corp. v. RB & G Eng’g, Inc.,
230 P.3d 1000 (Utah 2010) ................................. 11
Constitutional Provisions
U.S. Const. art. VI, cl. 2.............................................. 2
Federal Statutes
9 U.S.C. § 2 ........................................................ passim
28 U.S.C. § 1257(a) ..................................................... 1
State Statutes
S.D. Codified Laws § 57A-9-404 ............................... 12
Utah Code § 70A-9a-404........................................... 12
Other Authorities
6A C.J.S. Assignments §§ 93, 111 ............................ 11
21 Williston on Contracts (4th ed. 2001) ................. 10
Debt Collection Bureau of America,
Debt Collection Industry Statistics,
Trends, and Rates, available at
https://www.collectionbureauofameri
ca.com/index.php/2021/10/29/debtcollection-industry-statistics/.............................. 18
UCC § 9-404(a).......................................................... 11
1
PETITION FOR A WRIT OF CERTIORARI
Petitioner Portfolio Recovery Associates, LLC
(“PRA”) respectfully petitions for a writ of certiorari to
review the judgment of the Court of Appeals of North
Carolina.
OPINIONS BELOW
The opinion of the Court of Appeals of North
Carolina (App. 5-25) is reported at 851 S.E.2d 423
(N.C. Ct. App. 2020). The order of the North Carolina
Supreme Court denying discretionary review of the
court of appeals’ decision (App. 1-4) is reported at 863
S.E.2d 610 (N.C. 2021). The trial court’s opinion
denying petitioner’s motion to compel arbitration
(App. 26-63) is unreported.
JURISDICTION
The court of appeals issued its decision on
November 3, 2020. Petitioner timely petitioned for
review, which the North Carolina Supreme Court
denied on November 2, 2021. App. 1-4. The Chief
Justice granted an application to extend the time to
file a petition for a writ of certiorari to February 24,
2022. No. 21A344. This Court has jurisdiction
pursuant to 28 U.S.C. § 1257(a).
RELEVANT CONSTITUTIONAL AND
STATUTORY PROVISIONS
The Supremacy Clause of the U.S. Constitution
provides in relevant part:
This Constitution, and the Laws of the
United States which shall be made in
Pursuance thereof; . . . shall be the
2
supreme Law of the Land; and the
Judges in every State shall be bound
thereby, any Thing in the Constitution or
Laws of any State to the Contrary
notwithstanding.
U.S. Const. art. VI, cl. 2.
Section 2 of the FAA provides in relevant part:
A written provision in . . . 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.
INTRODUCTION
The bedrock of the FAA is the “equal-treatment
principle”: “A court may invalidate an arbitration
agreement based on ‘generally applicable contract
defenses’ like fraud or unconscionability, but not on
legal rules that ‘apply only to arbitration or that
derive their meaning from the fact that an agreement
to arbitrate is at issue.’” Kindred Nursing Centers
Ltd. P’ship v. Clark, 137 S. Ct. 1421, 1426 (2017)
(quoting AT&T Mobility LLC v. Concepcion, 563 U.S.
333, 339 (2011)).
The equal-treatment principle applies both to the
enforcement and validity of arbitration agreements.
The FAA “cares not only about the ‘enforce[ment]’ of
arbitration agreements, but also about their initial
‘valid[ity]’—that is, about what it takes to enter into
3
them. . . A rule selectively finding arbitration
contracts invalid because improperly formed fares no
better under the Act than a rule selectively refusing
to enforce those agreements once properly made.”
Kindred Nursing, 137 S. Ct. at 1428.
PRA’s motion to compel arbitration was based on
the straightforward application of contract-law
principles.
When an agreement—whether an
arbitration agreement or otherwise—expressly names
a party as one who can enforce the agreement, such as
an assignee, that party may enforce the agreement as
a third-party beneficiary. Moreover, when a contract
right is assigned, the assignee steps into the shoes of
the assignor and can enforce the assignor’s rights
under the contract, including arbitration rights—
absent manifest intent to the contrary.
PRA argued that it, as an assignee, could enforce
respondents’
arbitration
agreements
under
traditional third-party beneficiary and assignment
principles of contract enforcement. Ignoring the
FAA’s equal-treatment principle, the court of appeals
improperly framed the question as one of contract
formation rather than enforcement. The court asked
whether PRA formed arbitration agreements with the
respondents instead of whether PRA could enforce the
arbitration agreements that already existed between
the respondents and the creditors that assigned the
respondents’ debts to PRA. The court then adopted a
new contract-law rule under which assignees cannot
compel arbitration without evidence of “additional
intent by the” assignor to assign the right to arbitrate
to the assignee. App. 24 (emphasis added).
By reframing the issue in this fashion, the court of
appeals circumvented the FAA. In fact, the court did
4
not even address the FAA despite the FAA being the
primary basis for the appeal. This move runs
headlong into this Court’s decision in Kindred
Nursing, which instructs that courts may not reframe
enforcement issues as ones of validity to avoid
applying the FAA. 137 S. Ct. at 1428. Moreover, the
denial of PRA’s motion to compel arbitration based on
a new-found and arbitration-targeting contract-law
principle violates this Court’s well-established
precedent. This Court should grant certiorari here to
prevent state courts from surreptitiously navigating
around the FAA, as the court of appeals did here.
This Court’s review is also needed for several other
reasons—first among them, to fill a void in this
Court’s FAA jurisprudence, namely the ability of an
assignee to enforce the arbitration rights of its
assignor. The absence of guidance from this Court is
leading to inconsistency and confusion. In addition,
the court of appeals’ holding on the inability of named
third-party beneficiaries to enforce arbitration clauses
conflicts with a decision of the Fourth Circuit on the
same issue. This divergence risks different outcomes
between the federal and state courts in North
Carolina and exacerbates the pervasive confusion in
this area of the law. This Court has not hesitated to
step in to correct such confusion and to resolve
conflicting interpretations of federal law between a
state court and its corresponding federal circuit.
Moreover, the North Carolina courts’ actions
reflect a pattern of state courts circumventing the
FAA’s equal-treatment principle, which requires this
Court’s protection. PRA sought discretionary review
from the North Carolina Supreme Court based on the
court of appeals’ failure to follow the FAA. But that
5
court denied review, letting stand this circumvention
of federal law.
Finally, in today’s credit and consumer economy,
with its prevalence of assignments, this is a vital issue
beyond these parties. This case involves a putative
class action with more than 20,000 potential class
members and potentially tens of millions of dollars in
statutory penalties. While the motion under review
involves the four named plaintiffs, the court of
appeals’ holding would apply to the tens of thousands
of other class members, each of whom entered credit
agreements that all or almost all contain arbitration
clauses. Allowing the court of appeals’ holding to
stand could impact the petitioner’s right to arbitrate
disputes with tens of thousands of potential plaintiffs
and risks erroneous denials of motions to compel
arbitration in similar class actions.
For each of these reasons, certiorari should be
granted.
STATEMENT OF THE CASE
A.
Respondents entered valid arbitration
agreements.
Respondents opened credit-card accounts and
entered agreements with the credit issuers governing
the accounts. All the agreements contain mandatory
arbitration clauses. App. 85-89, 119-121, 144-48, 179182, 196-97, 219-222, 234-39. Most of the agreements
expressly let the credit issuer assign its rights under
the agreements. App. 85, 92, 149, 183, 196-97, 218.
The arbitration clauses of two respondents include
future assigns in the definition of parties entitled to
enforce the arbitration agreements or expressly state
6
that assigns may enforce the arbitration clause. App.
33-34.
Respondents accumulated credit-card debts that
they failed to pay. The credit issuers charged off their
debts and sold the debts to PRA. App. 6.
PRA later sued respondents and obtained default
judgments. App. 6. Several years later, respondents
filed this putative class action, alleging that PRA
violated a North Carolina statute in securing the
default judgments. App. 6-7. PRA moved to compel
arbitration pursuant to the FAA based on the
arbitration clauses in respondents’ credit-card
agreements. App. 8.
B.
The North Carolina courts disregarded
the FAA to deny PRA’s motion to compel
arbitration as a third-party beneficiary
and assignee of the credit issuers.
The trial court found that each respondent had a
valid arbitration agreement and that PRA was the
assignee of each of their credit-card debts. App. 4748, 57. Yet the trial court denied PRA’s motion to
compel arbitration that was based on the FAA and the
respondents’ arbitration agreements with the credit
issuers because there was no arbitration agreement
between respondents and PRA. App. 57-59.
PRA appealed to the Court of Appeals of North
Carolina, again invoking the FAA. App. 14. Despite
also finding the arbitration agreements to be valid
and that the debts were assigned to PRA, that court
affirmed. App. 12, 14-16, 24-25.
At no point did the court of appeals analyze or
apply the FAA. The court failed to mention the
traditional rule of contract law that a third-party
7
beneficiary named in the agreement may enforce the
agreement and rejected, without explanation, PRA’s
argument that it was entitled to enforce the two
arbitration clauses that expressly were enforceable by
assigns. App. 5-25.
Even worse, the court of appeals adopted a new
rule about the scope of assignment of a right. The
court initially noted the traditional contract-law rule
that, for an assignment to occur, there must be
identification of the right assigned and clear evidence
of intent to transfer that right. App. 18-19. The court
of appeals correctly concluded that the bills of sale
entered into by the credit issuers and PRA transferred
respondents’ debts to PRA. App. 21. But the court of
appeals then went astray, and violated the FAA, by
ignoring the traditional contract-law principle that,
when a right is assigned, all incidental rights and
remedies transfer with the right expressly assigned—
absent manifest intent to the contrary. App. 21-25.
Rather than apply this traditional contract-law
rule and ask whether there was manifest intent that
the right to arbitrate not transfer with assignment of
the debts, the court of appeals adopted a new rule of
contract law, under which the right to arbitrate does
not transfer without a showing of “additional intent”
to transfer the right to arbitrate. App. 24-25.
The court of appeals made no attempt to square its
“additional intent” rule with the FAA’s equaltreatment principle. The court compounded that error
by framing the issue as one of contract formation: the
court asked only whether PRA entered an agreement
to arbitrate with respondents, rather than whether
PRA could enforce respondents’ valid arbitration
agreement with each credit issuer. Thus, not only did
8
the court of appeals violate the anti-discrimination
requirement of the FAA, but it also ignored this
Court’s precedent that the FAA applies as equally to
contract formation as it does to contract enforcement.
App. 21-25.
PRA petitioned for discretionary review with the
North Carolina Supreme Court, which denied PRA’s
petition. App. 1-4.
REASONS FOR GRANTING THE PETITION
This Court should grant this petition for four main
reasons.
First, the court of appeals violated the FAA by
discriminating against arbitration. The court failed to
apply traditional contract-law rules evenhandedly to
arbitration agreements. Instead, it ignored the FAA
by framing the issue as one of contract formation
rather than enforcement. That procedure flouted this
Court’s decisions in Concepcion and Kindred Nursing.
This reason alone warrants certiorari and reversal.
Second, this Court has not addressed the
application of the FAA to motions to compel
arbitration by assignees. An emerging number of
courts across the country have stepped into this void,
confusing the enforcement of arbitration agreements
in the context of assignment. Moreover, the court of
appeals’ refusal to allow PRA to enforce arbitration
clauses expressly enforceable by assigns conflicts with
a decision by the Fourth Circuit. That conflict creates
an untenable situation where the outcome of a motion
to compel arbitration in North Carolina depends on
whether it is filed in federal or state court.
Third, this Court need not wait for the North
Carolina Supreme Court to grant discretionary review
9
of a case implicating this important federal issue. The
North Carolina Supreme Court’s refusal to grant
discretionary review is tantamount to affirming a
published court of appeals decision that willfully
ignores the FAA. If left uncorrected, other state
supreme courts and intermediate courts of appeal are
invited to do the same, thus undermining the FAA and
violating this Court’s cases addressing it.
Finally, the error here is not limited to the dispute
between PRA and the respondents. If not corrected,
the error would be the law of this case and deny PRA
the right to arbitrate with a potential class of about
20,000 plaintiffs. Such an error threatens to impact
the growing debt-buyer industry at large and also
could be applied in similar class actions to deny
assignees the right to arbitrate with large classes of
consumers. A clear statement from this Court about
the enforceability of arbitration clauses by assignees
would give certainty to debt buyers and other
assignees and strengthen the federal policy in favor of
arbitration.
A.
The court of appeals’ decision violates this
Court’s precedent by discriminating
against arbitration.
This Court has forbidden state courts to adopt
contract-law rules that discriminate, directly or
indirectly, against arbitration. See Henry Schein, Inc.
v. Archer & White Sales, Inc., 139 S. Ct. 524, 527-28
(2019) (courts cannot “short-circuit” contract
principles by creating exceptions that apply only to
arbitration agreements); Epic Sys. Corp., 138 S. Ct. at
1622 (the FAA establishes an “equal-treatment rule
for arbitration contracts,” under which there is “no
refuge for defenses that apply only to arbitration or
10
that derive their meaning from the fact that an
agreement to arbitrate is at issue”); Concepcion, 563
U.S. at 343 (“Although § 2’s saving clause preserves
generally applicable contract defenses, nothing in it
suggests an intent to preserve state-law rules that
stand as an obstacle to the accomplishment of the
FAA’s objectives.”); Kindred Nursing, 137 S. Ct. at
1427 (courts cannot “adopt a legal rule hinging on the
primary characteristic of an arbitration agreement”).
Here, the court of appeals violated these principles
by engrafting an “additional intent” requirement onto
two longstanding pillars of contract law: third-party
beneficiary enforcement and the concept that an
assignee stands in the shoes of the assignor. The court
did so to avoid enforcement of valid agreements to
arbitrate. This error alone merits granting the
petition and reversing the judgment.
1.
A third-party beneficiary
enforce a contract.
may
A party expressly named in an agreement may
enforce that agreement. See Arthur Andersen, 556
U.S. at 631 (citing 21 Williston on Contracts § 57:19
(4th ed. 2001)). Utah and South Dakota, the states
identified in the choice of law clause under the
agreements, apply this traditional rule. See, e.g., Ron
Case Roofing & Asphalt Paving, Inc. v. Blomquist, 773
P.2d 1382, 1386 (Utah 1989); Jennings v. Rapid City
Reg’l Hosp., Inc., 802 N.W.2d 918, 921 (S.D. 2011).
Two of the arbitration agreements at issue are
expressly enforceable by assigns. One states that any
claim that “relates in any way to your account, card or
your relationship with us . . . will be resolved by
binding arbitration if either you or we elect to
11
arbitrate.” App. 34, 40. The arbitration provision
defined “us” and “we” to include “assigns” among other
entities. Id. at 34. The second agreement similarly,
and even more directly, states that “[a]ll Claims
relating to your account . . . are subject to arbitration,
including . . . Claims made by or against anyone
connected with us or you, such as . . . an assignee . . .”
App. 45. So PRA as an assignee was expressly allowed
to enforce the respondents’ arbitration agreements.
2.
An assignee may enforce the
assignor’s rights and remedies—
absent manifest intent to the
contrary.
When a contract right is assigned, the assignee
steps into the assignor’s shoes and can enforce any
rights and remedies the assignor had over the
assigned rights. See 6A C.J.S. Assignments §§ 93,
111. Thus, when a receivable is assigned, the assignee
can enforce all rights and remedies related to the
receivable, unless the assignment manifests an intent
to the contrary. Utah and South Dakota law embrace
this traditional rule. See, e.g., Sunridge Dev. Corp. v.
RB & G Eng’g, Inc., 230 P.3d 1000, 1004 (Utah 2010)
(“an assignee has rights and liabilities identical to
those of its assignor”); Gilbert v. United Nat’l Bank,
436 N.W.2d 23, 25 (S.D. 1989) (“an assignee takes the
subject of the assignment with all the rights and
remedies possessed by or available to the assignor”
(quotation omitted, alterations adopted)).
The Uniform Commercial Code requires the same
treatment. Under UCC section 9-404(a), when a debt
incurred under a contract is assigned, the assignee
may enforce the terms of the contract under which the
debt was incurred, absent manifest intent that those
12
terms not apply. See Utah Code § 70A-9a-404; S.D.
Codified Laws § 57A-9-404.
As noted above, the bills of sale assigned
respondents’ debts to PRA. Indeed, the bills of sale
governing all but one of the assignments at issue
transferred the respondents’ receivables to PRA “to
the extent of [the seller’s] ownership[.]” App. 16
(emphasis added).
Further, the bills of sale
manifested no intent that any rights not be included
with the assignment of respondents’ debts. So the
assignments under the bills of sale gave PRA the right
to enforce the arbitration clauses in each respondent’s
credit-card agreement.
3.
The court of appeals adopted a new
contract-law rule that discriminates
against arbitration by requiring
additional intent to transfer the
right to arbitrate.
Rather than compel arbitration under the FAA by
applying these straightforward contract-law rules,
the court of appeals adopted a new rule forbidding
PRA to arbitrate unless it showed additional intent by
the assignors to transfer their right to arbitrate to
PRA. The court thus singled out arbitration for
discriminatory treatment.
Despite the unambiguous language in two
agreements that assignees may arbitrate, as well as
the traditional rule that assignors’ rights and
remedies transfer by default to the assignee, the court
of appeals refused to compel arbitration because PRA
had not shown the newly required additional evidence
that the credit issuer specifically intended to transfer
that right. App. 17-18, 24-25. This rule violates the
13
basic principle that courts may not impose
arbitration-specific obstacles to the enforcement of
arbitration rights.
The barrier to arbitration created by the court is
evident from the opinion itself. The court did not
require additional intent for other provisions of the
agreements to transfer, such as the choice-of-law
provisions requiring application of Utah and South
Dakota law—which the Court did not hesitate to
apply to PRA. App. 15-16. This “cherry-picking”
reflects discriminatory treatment against arbitration,
which violates the FAA and this Court’s consistent
precedent. See Henry Schein, 139 S. Ct. at 527-28
(courts cannot “short-circuit” contract principles by
creating exceptions that apply only to arbitration
agreements); Epic Sys. Corp., 138 S. Ct. at 1622 (the
FAA establishes an “equal-treatment rule for
arbitration contracts,” under which there is “no refuge
for defenses that apply only to arbitration or that
derive their meaning from the fact that an agreement
to arbitrate is at issue”).
The court’s reframing of the issue to avoid the FAA
is directly contrary to the teachings of Kindred
Nursing. This Court explained in Kindred Nursing
that the FAA “cares not only about the ‘enforce[ment]’
of arbitration agreements, but also about their initial
‘valid[ity]’—that is, about what it takes to enter into
them.” 137 S. Ct. at 1428. Said differently, “[a] rule
selectively finding arbitration contracts invalid
because improperly formed fares no better under the
Act than a rule selectively refusing to enforce those
agreements once properly made.” Id.
The court of appeals violated that principle by
requiring additional evidence of intent to transfer the
14
right to arbitrate to PRA. Without this additional
evidence, according to the court, no valid arbitration
agreement had been formed as between Plaintiffs and
PRA. App. 24-25 (holding that “without any showing
of the additional intent by the original creditors to
assign to PRA, at the very least, ‘all of the rights and
obligations of the original agreements,’ . . . PRA has
not met its burden of showing a valid arbitration
agreement between each Plaintiff and PRA”).
That conclusion avoids the requirement that valid
arbitration agreements are to be enforced according to
their terms:
by concluding that an arbitration
agreement had not been formed between PRA and the
respondents, the court managed to conclude that PRA
had no arbitration right to enforce. Yet the court of
appeals violated the FAA and ignored this Court’s
precedent, especially Kindred Nursing, overturning
cases like this one that discriminate against
arbitration rights.
That violation alone merits
granting the petition.
B.
The lack of precedent from this Court on
the application of the FAA to motions to
compel arbitration by assignees is leading
to confusion.
This Court has not spoken to the application of the
FAA to motions to compel arbitration by assignees.
Review by this Court would add much-needed
certainty to courts throughout the country.
Courts have reached different results on this issue.
Compare Barbosa v. Midland Credit Mgmt., Inc., 981
F.3d 82, 90 (1st Cir. 2020) (holding debt buyer could
enforce arbitration clause because arbitration clause
expressly was enforceable by assigns and because it
15
stood in creditor’s shoes for arbitration clause); Cox v.
CA Holding Inc., No. 1:13-CV-01754-JMS, 2015 WL
631393, at *13 (S.D. Ind. Feb. 13, 2015) (holding debt
buyer could enforce arbitration agreement that
expressly was enforceable by assigns); and
Funderburke v. Midland Funding, LLC, No. 12-2221JAR/DJW, 2013 WL 394198, at *3 (D. Kan. Feb. 1,
2013) (holding debt buyer stepped into shoes of credit
issuer and could enforce credit issuer’s arbitration
rights), with Pine Top Receivables of Ill., LLC v. Banco
de Seguros del Estado, 771 F.3d 980, 991-92 (7th Cir.
2014) (concluding debt assignment was limited and
did not transfer arbitration rights); Lester v. Portfolio
Recovery Assocs., LLC, No. 1:18-CV-0267, 2018 WL
3374107, at *3 (N.D. Ala. July 11, 2018) (holding debt
buyer could not enforce credit issuer’s arbitration
rights because bill of sale did not manifest intent to
transfer arbitration rights); and Rodriguez-Ocasio v.
Midland Credit Mgmt., Inc., No. CV 17-3630 (ES)
(MAH), 2021 WL 3758077, at *5-7 (D. N.J. Aug. 25,
2021) (same).
Further, the court of appeals’ decision conflicts
with a recent opinion by the U.S. Court of Appeals for
the Fourth Circuit. In Mey v. DIRECTV, LLC, 971
F.3d 284 (4th Cir. 2020), which also involved a
putative class and was decided before the North
Carolina court of appeals issued the decision below,
the Fourth Circuit held that, because the plaintiff had
expressly agreed in her contract with AT&T to
arbitrate disputes with non-signatories (such as
affiliates, agents, or assigns), DIRECTV, as an
affiliate of AT&T, could enforce the arbitration
agreement without also showing that it had been
assigned the right to arbitrate. 971 F.3d at 289-92.
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In a correct application of the law, the Fourth
Circuit in Mey looked to the plain language of the
arbitration agreement, considered whether there was
any language showing an intent to limit the nonsignatories that could arbitrate, and then considered
whether DIRECTV was an “affiliate” as that term is
“commonly understood.” Id. at 289. The court of
appeals here, by contrast, ignored the plain language
of two of the arbitration agreements, which gave the
right to arbitrate to assignees, such as PRA, and
reached a contrary result to that of the Fourth Circuit
in Mey.
As a result, an assignee that seeks to enforce an
arbitration clause on a third-party beneficiary theory
likely faces a different outcome depending on whether
its case is litigated in state or federal court. The Court
should correct this inconsistency.
C.
The Court’s review is warranted without
waiting for the North Carolina Supreme
Court to grant discretionary review of
this important federal issue.
This Court need not wait for further action by the
North Carolina Supreme Court. “It is a matter of
great importance,” this Court has explained, that
state courts “adhere to a correct interpretation of the
[FAA] legislation.” Nitro-Lift Technologies, L.L.C. v.
Howard, 133 S. Ct. 500, 501 (2012). This Court thus
routinely grants review to address chronic
underenforcement of the FAA by state courts,
including state intermediate courts of appeals, and
should do so here.
State courts in California (Concepcion and
DIRECTV, Inc. v. Imburgia, 136 S. Ct. 463 (2015)),
17
Kentucky (Kindred Nursing), Florida (KPMG LLP v.
Cocchi, 132 S. Ct. 23, 26 (2011)), West Virginia
(Marmet Health Care Center, Inc. v. Brown, 132 S. Ct.
1201 (2012)), and Oklahoma (Nitro-Lift) have all been
reversed by this Court for failing to enforce the FAA,
including by summary reversal.
In Cocchi, for example, this Court summarily
vacated the Florida District Court of Appeal’s refusal
to compel arbitration because the court “failed to give
effect to the plain meaning of the [Federal
Arbitration] Act and to the holding of Dean Witter.”
132 S. Ct. at 26.
In Imburgia, this Court reversed a decision by the
California Court of Appeal that adopted an incorrect
interpretation of a reference to invalidated state law
in an arbitration agreement in finding the agreement
unenforceable. Imburgia, 136 S. Ct. at 468-71. This
Court instructed that “the judges of every State must
follow” its precedents. Id. at 468.
In Marmet, this Court summarily vacated and
remanded a decision by the Supreme Court of Appeals
of West Virginia, which, “by misreading and
disregarding the precedents of this Court interpreting
the FAA, did not follow controlling federal law
implementing th[e] basic principle” that both “[s]tate
and federal courts must enforce the Federal
Arbitration Act.” 132 S. Ct. at 1202.
And in Nitro-Lift, this Court summarily vacated
the Oklahoma Supreme Court’s decision that
“disregard[ed] this Court’s precedents on the FAA.”
133 S. Ct. at 503. “It is this Court’s responsibility,”
the Court continued, “to say what a statute means,
and once the Court has spoken, it is the duty of other
courts to respect that understanding of the governing
18
rule of law.” Id. (quoting Rivers v. Roadway Express,
Inc., 511 U.S. 298, 312 (1994)). This case warrants
review for the same reasons.
D.
The importance of this issue transcends
the parties before the Court.
Finally, this case is a potential class action of more
than 20,000 plaintiffs. If unchecked, the North
Carolina courts’ FAA-avoiding rulings could prevent
arbitration not only with the respondents, but also
with potentially tens of thousands of other plaintiffs if
a class is certified.
The debt collection industry at issue is a
significant part of the economy.
The industry
generated over $18.5 billion in 2021 and has reported
annual growth rates of over 3% per year since 2016. 1
Unsurprisingly, debt buyers must frequently
litigate their arbitration rights, making this an issue
of immense importance. See, e.g., Cox, 2015 WL
631393, at *13; Funderburke, 2013 WL 394198, at *3;
Lester, 2018 WL 3374107, at *3; Rodriguez-Ocasio,
2021 WL 3758077, at *5-7.
Moreover, motions to compel arbitration under
assignment principles often arise in class actions.
See, e.g., Koch v. Compucredit Corp., 543 F.3d 460,
462, 464-66 (8th Cir. 2008); Cox, 2015 WL 631393, at
*13. Granting certiorari and reversing here would
prevent similar erroneous denials of arbitration with
1 Debt Collection Bureau of America, Debt Collection Industry
Statistics, Trends, and Rates, available at
https://www.collectionbureauofamerica.com/index.php/2021/10/
29/debt-collection-industry-statistics/.
19
the potential to affect exponentially large classes of
plaintiffs.
*
*
*
*
The decision of the North Carolina Court of
Appeals violates this Court’s precedent in multiple
ways, and the state’s highest court allowed those
errors to stand. If this Court does not step in, state
courts will continue to flout the FAA, and assignees—
in this putative class action of potentially more than
20,000 members and others like it—will be denied the
right to arbitrate under valid arbitration agreements.
The adjudication of motions to compel arbitration in
North Carolina also will depend on whether they are
filed in state or federal court.
CONCLUSION
Because the court of appeals’ holding violates the
FAA’s equal-treatment principle, the Court should
grant this petition for writ of certiorari and may wish
to consider summary reversal.
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Respectfully submitted,
Brian D. Schmalzbach
Counsel of Record
MCGUIREWOODS LLP
800 East Canal Street
Richmond, VA 23219
(804) 775-4746
bschmalzbach
@mcguirewoods.com
Jon Berkelhammer
Joseph D. Hammond
ELLIS & WINTERS LLP
Post Office Box 2752
Greensboro, NC 27402
Michelle A. Liguori
D. Scott Hazelgrove, II
ELLIS & WINTERS LLP
Post Office Box 33550
Raleigh, NC 27636
Counsel for Petitioner
February 24, 2022
This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.