Kemph v. Reddam

JENNAFER KEMPH, DAN DEHMLOW, and GLENN ALLHOFF,for themselves and others similarly situated, Plaintiffs, v. JOHN PAUL REDDAM, et al., Defendants.

No. 13 CV 6785

UNITED STATES DISTRICT COURT NORTHERN DISTRICT OF ILLINOIS EASTERN DIVISION

March 27, 2015

Hon. Marvin E. Aspen

MEMORANDUM OPINION AND ORDER

MARVIN E. ASPEN, District Judge:

This action arises out of three allegedly usurious loans issued to Plaintiffs by non-party lender Western Sky Financial, Inc. ("Western Sky"). Currently before us is Defendants' motion to compel arbitration, or in the alternative, to dismiss the complaint. In addition to the opening memorandum, response, and reply, Plaintiffs filed a sur-reply and both parties filed additional supporting authority. After reviewing all the submitted materials and relevant precedent, we grant Defendants' motion to compel arbitration and deny Defendants' motion to dismiss as moot.

BACKGROUND

Illinois residents Jennafer Kemph, Dan Dehmlow and Glenn Allhoff (collectively "Plaintiffs"), brought this action on behalf of themselves and others similarly situated,¹ against Cashcall, Inc. ("Cashcall"), its subsidiaries WS Financial, LLC ("Financial") and WS Funding, LLC ("Funding"), and its president and CEO John Paul Reddam ("Reddam"), as well as DelbertServices Corporation ("Delbert") and four of its directors and officers, Cesar Guzman, Sunshine Thayer, Greg Dalton, and Melissa Dalton, (collectively "Defendants"). None of the Defendants are residents of Illinois.

Between 2012 and 2013, Plaintiffs each borrowed between $1,000 and $5,075 from Western Sky through internet loans carrying interest rates ranging from 116% to 232%. (Compl. ¶¶ 48, 52, 56.) Western Sky is charted under South Dakota law, located on the Cheyenne River Sioux Tribe ("CRST") Reservation, and controlled by a CRST member, Martin A. Webb. (Resp. at 4.) The loan agreements describe Western Sky as a "lender authorized by the laws of the Cheyenne River Sioux Tribal Nation and the Indian Commerce Clause of the Constitution of the United States of America." (Mem., Ex. B, Western Sky Consumer Loan Agreement ("Agreement") at 1.)²

The agreements, which are form contracts, also purport to be "subject solely to the exclusive laws and jurisdiction of the Cheyenne River Sioux Tribe," and provide that the Cheyenne River Sioux Tribal Court has "sole subject matter and personal jurisdiction" over the borrowers. (Id.) At the same time, the contracts state that any "Dispute" under the contract must be resolved through arbitration. (Id. at 4.) Disputes are defined to include "any issue concerning the validity, enforceability, or scope of th[e] loan or the Arbitration agreement." (Id.) Although the agreements state that arbitration shall be "conducted by the Cheyenne River Sioux Tribal Nation," the borrower has the right to select an independent arbitration organization to "administer the arbitration" under that "organization's rules and procedures applicable toconsumer disputes, to the extent that those rules and procedures do not contradict either the law of the Cheyenne River Sioux Tribe or the express terms of this Agreement to Arbitrate." (Id.) The contracts specifically identify two arbitration organizations as potential options: Judicial Arbitration and Mediation Services ("JAMS") and the American Arbitration Association ("AAA"). (Id.) The agreements also contain a class action and class arbitration waiver. (Id. at 2-3.)

The loans were executed between Plaintiffs and Western Sky, but according to the complaint they were entirely funded, controlled, and serviced by Defendants, who merely used Western Sky as a front to evade state law. (Compl. ¶¶ 26, 32, 38-39, 41.) Plaintiffs allege that Defendants' scheme worked as follows: Western Sky marketed and sold high-interest loans to Illinois residents, including Plaintiffs, through their website, and television and radio advertising. (Id. ¶¶ 25, 48, 52, 56.) Cashcall, Funding, and Financial funded the loans entirely, and, immediately after origination, Western Sky transferred them to Financial or Funding. (Id. ¶¶ 32, 49, 53, 57.) Cashcall and/or Delbert then serviced the loans and collected payments. (Id. ¶¶ 32, 49, 51, 54-55, 58.)

In their complaint, Plaintiffs allege that the loans are illegal under Illinois' criminal and civil laws, and that the agreements are unenforceable. (Compl. ¶¶ 29, 70.) Specifically, Plaintiffs explain that in Illinois unlicensed lenders cannot issue loans with annual interest rates higher than 9% under the Illinois Interest Act, 815 ILCS 205/4(1), and higher than 20% under the Illinois Criminal Code, 720 ILCS 5/17-59. (See Resp. at 10-11.) Since Western Sky and Defendants are not licensed lenders under the Illinois Consumer Installment Loan Act ("CILA") and Plaintiffs' loans well exceed 20% annual interest, Plaintiffs contend that the loans violate these state laws (Count I) and the Federal Racketeer Influenced and Corrupt Organizations Act("RICO") (Count IV). Further, they allege that because the loan agreements violate Illinois law, they are null and void under CILA (Count II). Finally, they claim that Defendants' lending scheme constitutes unfair and deceptive acts and practices under the Illinois Consumer Fraud and Deceptive Business Practices Act ("CFA") (Count III). In part because the agreements purport to be fully performed within the exterior boundaries of the CRST Reservation and subject solely to tribal law, Defendants dispute these allegations and contend that they are not subject to any state law. (Mem. at 16-18, 21.) Neither Plaintiffs nor Defendants, however, have any tribal affiliation themselves. (Resp. at 1, 5.)

Defendants seek to compel arbitration under both the Federal Arbitration Act ("FAA") and the terms of the Plaintiffs' loan agreements. In the alternative, they move to dismiss the case for: (1) improper venue; (2) lack of personal jurisdiction; and (3) failure to state a claim.

ANALYSIS

The FAA applies broadly to questions of arbitrability in both federal and state courts. Jain v. de Mere, 51 F.3d 686, 688 (7th Cir. 1995); Wal-Mart Stores, Inc. v. Helferich Patent Licensing, LLC, No. 13 C 06485, 2014 WL 2795827, at *2 (N.D. Ill. June 17, 2014). Since Plaintiffs' loan agreements involve interstate commerce, they fall within the scope of the FAA.³9 U.S.C. § 2; Citizens Bank v. Alafabco, Inc., 539 U.S. 52, 56, 123 S. Ct. 2037, 2040 (2003). Consistent with the "liberal federal policy favoring arbitration," Sections 3 and 4 of the FAA mandate courts to stay judicial proceedings and compel arbitration when issues in the complaint fall within the scope of the parties' arbitration agreement. 9 U.S.C. §§ 3-4; AT&T Mobility LLC v. Concepcion, 131 S. Ct. 1740, 1745 (2011). Where one party seeks to compel arbitration, the court should resolve substantive issues only after determining that the arbitration agreement is unenforceable or inapplicable. See Wal-Mart Stores, 2014 WL 2795827 at *2 (citing Howsam v. Dean Witter Reynolds, Inc., 537 U.S. 79, 83, 123 S. Ct. 588, 591 (2002)). We address Defendants' motion to compel first and find that the parties' arbitration agreement is enforceable. Since Plaintiffs' claims must be resolved through binding arbitration, Defendants' motion to dismiss is denied as moot.

I. Motion to Compel Arbitration

Defendants move to compel arbitration, arguing that the issues in Plaintiffs' complaint fall under the mandatory arbitration provisions in the loan agreements between Plaintiffs and Western Sky. (Mem. at 5-6.) Plaintiffs do not contend that their claims fall outside the scope of arbitration, but instead claim that the disputes are properly before this Court because the entire forum selection clause (i.e., arbitration clause) is unenforceable. (Resp. at 8.) They explain that the choice-of-law provision, which requires application of tribal law, is unenforceable because it violates Illinois public policy by depriving borrowers of their rights under Illinois law. (Id. at 10-12.) Moreover, Plaintiffs contend that the agreements require the arbitrator to apply the contracts' illegal choice-of-law clause, and therefore all legitimate arbitral organizations likeAAA and JAMS would refuse the dispute. (Id. at 13-14.) Since no fair and unbiased organization would handle the dispute, the parties would be forced to arbitrate through CRST, which the Seventh Circuit has determined is an illusory forum. (Id. at 13.) This result is procedurally and substantively unconscionable, Plaintiffs argue, for two main reasons: CRST would enforce an illegal choice-of-law provision that violates Illinois public policy, and CRST is a non-existent forum that does not have any mechanisms or rules for conducting a fair and unbiased arbitration. (Id. at 13-14.) They also argue that the class arbitration waiver is unenforceable and inseparable from the rest of the arbitration agreement. (Id. at 15-16.)

Defendants reply that AAA and JAMS are available forums, and that, in any event, the parties' agreement delegates threshold issues of enforceability to the arbitrator. (Reply at 1-2.) As to the class action waiver, they argue that the Supreme Court has consistently enforced similar class arbitration waivers. (Id. at 5-6.)

The party opposing arbitration, in this case Plaintiffs, bears the burden to demonstrate that the arbitration agreement is unenforceable. Green Tree Fin. Corp.-Alabama v. Randolph, 531 U.S. 79, 91, 121 S. Ct. 513, 522 (2000); Johnson v. Orkin, LLC, 928 F. Supp. 2d 989, 1000 (N.D. Ill. 2013).

A. Delegation of Arbitrability

As a threshold matter, Defendants argue that the loan agreements give authority to the arbitrator, not the court, to decide any gateway challenges to the validity or enforceability of the arbitration agreement. (Mem. at 7; Reply at 2.) Notably, Plaintiffs have not made any attempt to respond to this argument, which in this case is sufficient ground for us to grant Defendants' motion. Bonte v. U.S. Bank, N.A., 624 F.3d 461, 467 (7th...