Opinion
No. N18A-08-001-DCS
09-20-2019
AUTO EQUITY LOANS OF DELAWARE, LLC, and DAVID LEVI, Appellants, v. JOSEPH BAIRD, Appellee ALTON GRIFFIN and JEANNINE MEDORA, Cross Appellants.
Vivian A. Houghton, Esquire, Attorney for Appellee and Cross-Appellants. Ellis E. Herrington, Esquire, and Douglass D. Herrmann, Esquire, Attorneys for Appellants.
Upon Appeal from the Court of Common Pleas-REVERSED and REMANDED, in part; AFFIRMED, in part.
OPINION
Vivian A. Houghton, Esquire, Attorney for Appellee and Cross-Appellants.
Ellis E. Herrington, Esquire, and Douglass D. Herrmann, Esquire, Attorneys for Appellants. STREETT, J.
Introduction
Joseph Baird, Alton Griffin, and Jeannine Medora (collectively the "Borrowers") each entered into separate high interest rate loan agreements with Auto Equity Loans of Delaware (with David Levi, the owner of Auto Equity Loans of Delaware, the "Appellants"). Each loan contained an arbitration provision and a Delaware choice-of-law provision.
The loan agreements stated that any dispute is governed by the Federal Arbitration Act.
Subsequently, each of the Borrowers filed separate Demands for Arbitration on the loan agreements, asserting several claims and requesting that the arbitrator apply Pennsylvania law. The arbitrator determined that Pennsylvania law applied to each loan, found that the loans violated the applicable Pennsylvania law, and granted an arbitration award to each Borrower.
Mr. Baird asserted claims of unconscionability, Pennsylvania Loan Interest and Protection Law ("PLIPL"), Pennsylvania Unfair Trade Practices and Consumer Protection Law ("UTPCPL"), Truth in Lending Act ("TILA"), and Racketeer Influenced and Corrupt Organizations Act ("RICO"). Mr. Griffin asserted claims under PLIPL, UTPCPL, and RICO (he withdrew an unconscionability claim). Ms. Medora asserted claims under PLIPL and TILA (she withdrew her unconscionability, UTPCPL, and RICO claims).
Appellants appealed each of the arbitrator's awards to the Court of Common Pleas (the "reviewing court"). The reviewing court consolidated the three petitions. Appellants asserted that the arbitrator manifestly disregarded the law when he applied Pennsylvania law instead of Delaware law.
Appellants originally filed in the Delaware Court of Chancery and was transferred to the reviewing court.
The parties filed cross motions for summary judgment. The reviewing court held that the arbitrator manifestly disregarded the law in applying Pennsylvania law to the Griffin and Medora loan agreements and vacated the Griffin and Medora awards. The reviewing court did not make the same holding regarding the Baird loan agreement. Instead, it affirmed the Baird award.
Appellants moved for judgment to vacate the three awards and the Borrowers moved for judgment to affirm the three awards. The reviewing court granted in part and denied in part Appellants' motion (granted on the Griffin and Medora awards and denied on the Baird award) and granted in part and denied in part Borrowers' motion (granted on the Baird award and denied on the Griffin and Medora awards).
The reviewing court did not fully explain why it upheld the Baird arbitration award, which had a Delaware choice-of-law provision, even though the court found that the Baird loan agreement had the same connections to Delaware as the Griffin and Medora loan agreements.
Appellants now ask this Court to reverse the reviewing court's decision concerning the Baird arbitration award (which upheld application of Pennsylvania law). Appellants are also asking this Court to affirm the reviewing court's decision to vacate the Griffin and Medora arbitration awards (which had been based on Pennsylvania law).
Ms. Medora and Mr. Griffin (Cross-Appellants) ask this Court to reverse the reviewing court's decision to vacate their arbitration awards that had been based on Pennsylvania law.
Mr. Baird asks this Court to affirm the reviewing court's decision to uphold his arbitration award that had been based on Pennsylvania law.
For the following reasons, the Court affirms the reviewing court's decision to uphold the Baird arbitration award and reverses and remands the decision to vacate the Griffin and Medora arbitration awards.
Statement of Facts
Appellants are in the business of making loans secured by automobiles. Auto Equity Loans of Delaware is a Limited Liability Company organized under the laws of Delaware, has offices in Delaware, and is licensed and regulated by the Delaware State Bank Commissioner. David Levi is the owner. At all relevant times, Mr. Baird, Mr. Griffin, and Ms. Medora were Pennsylvania residents, had viewed Appellants' advertisements on the internet, and their vehicles were registered in Pennsylvania.
From 2014 to 2016, Mr. Baird entered into a series of nine loan agreements with Appellants concluding with a Secondary Motor Vehicle Finance Contract Loan and Security Agreement. On July 23, 2015, Mr. Griffin entered into a Secondary Motor Vehicle Finance Contract Loan and Security Agreement with Appellants. On July 15, 2016, Ms. Medora entered into a Secondary Motor Vehicle Finance Contract Loan and Security Agreement with Appellants. Each Borrower travelled individually to Appellants' office in Delaware to sign its loan. Each Borrower's loan was secured by the Borrower's automobile. Each loan agreement stated that it "shall be governed by the laws of the State of Delaware" and that the arbitrator shall apply applicable substantive law consistent with the Federal Arbitration Act.
The Borrowers assert that the Baird loan was $2,025.00 with an approximately 180% A.P.R.; the Griffin loan was $3,590.00 with an approximately 121.67% A.P.R., and the Medora loan was $390.00 with an approximately 242.35% A.P.R.
During the repayment period, each of the Borrowers separately filed Demands for Arbitration with the American Arbitration Association ("AAA"). They each requested that Pennsylvania law apply. John Kelly, Esquire, (the "arbitrator") was selected by the AAA to be the arbitrator. Each Borrower asserted several claims: unconscionability; usury pursuant to Pennsylvania law; a claim pursuant to Pennsylvania's Unfair Trade Practices and Consumer Protection Law ("UTPCPL"); and a Racketeer Influenced and Corrupt Organizations Act ("RICO") claim. Ms. Medora and Mr. Baird also asserted a claim under the Truth-in-Lending Act ("TILA"). Ms. Medora and Mr. Griffin later withdrew their unconscionability claims. Ms. Medora also subsequently withdrew her UTPCPL and RICO claims.
On April 29, 2016, Mr. Griffin filed his Demand for Arbitration. On July 29, 2016, Ms. Medora filed her Demand for Arbitration. On October 24, 2016, Mr. Baird filed his Demand for Arbitration.
On January 24, 2017, the arbitrator held an evidentiary hearing concerning the Medora loan. On March 19, 2017, the arbitrator issued an award in favor of Ms. Medora.
On February 2, 2017, the arbitrator held an evidentiary hearing concerning the Griffin loan. On March 23, 2017, the arbitrator issued an award in favor of Mr. Griffin.
On March 8, 2017, the arbitrator held an evidentiary hearing concerning the Baird loan. On March 21, 2017, the arbitrator issued an award in favor of Mr. Baird.
In each decision, the arbitrator found that Pennsylvania substantive law applies and Delaware substantive law did not apply. He relied on Kaneff v. Delaware Title Loans and Gregoria v. Total Asset Recovery, Inc. (Federal cases) and Salvatico v. Carbucks of Delaware, Inc. and Jaibur v. Auto Equity Loans of Delaware, LLC and David Levi (Pennsylvania cases). The arbitrator found that the high interest rates charged by Appellants are prohibited by Pennsylvania public policy and the Pennsylvania Loan Interest and Protection Law even though the arbitrator ruled against Mr. Baird's unconscionability claim. The arbitrator also held that Appellants violated TILA, UTPCPL, and RICO.
Kaneff v. Delaware Title Loans, F.3d 616, 624 (3rd Cir. Nov. 24, 2009) (In deciding on the procedural issue of whether an arbitration provision should be enforced, where the plaintiff was claiming that the entire contract was unconscionable, the Third Circuit held that "Pennsylvania's interest in the dispute, particularly its antipathy to high interest rates... represents ... a fundamental policy that [it] must apply Pennsylvania law.").
Gregoria v. Total Asset Recovery, Inc., 2015 WL 115501 (E.D. Pa. Jan. 8, 2015) (Citing Kaneff, the District Court overruled the Delaware choice-of-law provision in the contract and applied Pennsylvania law because Pennsylvania's law against usury is a fundamental policy).
Salvatico v. Carbucks of Delaware, Inc., C.A. No. 2006-00971 (CCP Bucks Co. Pa., Oct. 24, 2013) (In an Order, without a written opinion, the Bucks County Court of Common Pleas ruled that Pennsylvania law applied to loans made by a Delaware auto title lender).
Jaibur v. Auto Equity Loans of Delaware, LLC and David Levi, C.A. No. CCP Bucks Co. Pa. June 30, 2016) (Without providing a written opinion, the Bucks County Court of Common Pleas issued an Order denying the Delaware Lender's Preliminary Objection to the Pennsylvania Borrower's complaint which asserted that Pennsylvania law applies).
Procedural History
Appellants appealed each of the three arbitrator's awards to the Delaware Court of Chancery. On August 15, 2017, the cases were transferred to the reviewing court, pursuant to 10 Del. C. § 5702(d), and consolidated. The parties filed cross-motions for summary judgment.
Notwithstanding anything to the contrary in this Chapter 57 of this title, the term "Court" in this chapter shall refer to the Court of Common Pleas with respect to all actions arising from an arbitration agreement in or relating to a contract to provide consumer credit, and the making of such an agreement to arbitrate issues arising from the extension of consumer credit shall confer jurisdiction on the Court of Common Pleas, and not the Court of Chancery, to enforce the agreement and to enter judgment on an award. Any action brought under this Chapter 57 of this title relating to an agreement to arbitrate issues arising from the extension of consumer credit filed in the Court of Chancery shall not therefore be dismissed, but shall be transferred to the Court of Common Pleas for resolution there as though filed originally in that Court.
Appellants asserted, in its briefs, that the arbitration awards should be vacated. Appellants contended that the arbitrator manifestly disregarded the law when he: (1) ignored the plain terms of the loan agreements and/or failed to perform a choice of law analysis, (2) ignored controlling precedent that he had previously relied upon in a similar 2012 arbitration when he ruled that Delaware law applied, (3) based his decision on claims withdrawn or abandoned [by the Borrowers], (4) disregarded the commerce clause of the United States Constitution, and (5) applied UTPCPL, RICO and TILA retroactively without analysis.
In a 2010 matter, involving the issue of whether Delaware law or Pennsylvania law applies in a dispute concerning a high interest loan agreement, the same arbitrator found that Pennsylvania law applies pursuant to Kaneff. However, in a 2012 case on the same issue, the same arbitrator found that Delaware law, and not Pennsylvania law, applied, finding that Kaneff applied to procedural law and not necessarily to substantive law. The arbitrator explained that his "thinking and reasoning have evolved." In the instant case, the arbitrator explained that subsequent cases (Gregoria, Salvitico, and Jaibur) indicate that Pennsylvania substantive law as well as its procedural law applies to cases involving high interest rates in loan agreements with Pennsylvania borrowers.
The Borrowers asserted that: (1) the arbitrator properly rejected the Delaware choice-of-law clause in the contracts, (2) the arbitrator did not exceed his authority, (3) an arbitrator's reasonable choice-of-law analysis is beyond the scope of review, (4) the application of Pennsylvania law in these cases did not violate the United States Constitution, and (5) the arbitrator did not retroactively impose new rules of law.
On May 2, 2018, the reviewing court issued its decision. The reviewing court vacated the Griffin and Medora awards and upheld the Baird award.
The reviewing court granted in part and denied in part Appellants' motion for summary judgment and granted in part and denied in part the Borrowers' motion for summary judgment.
The reviewing court found that Appellants' Commerce Clause claim lacked merit because Appellants did not cite any cases and the Court did not find a case where the Commerce Clause was applied to an arbitrator's choice-of-law decision. "In fact, the case [Appellants] rel[ied] on, [Midwest Title Loans, Inc. v. Mills, 593 F.3d 660 (7th Cir. 2010)] notes - in the context of a state requiring state licensing if a territorial component to the lending occurred - that the commerce clause does not prevent a choice-of-law analysis." Auto Equity Loans of Delaware, LLC v. Baird, 2018 WL 2059939, at *7 n.64 (Del. CCP. May 2, 2018). The reviewing court also noted that Appellants "failed to present the Court with evidence that the arbitrator consciously disregarded controlling precedent, and ... finds in [Borrowers'] favor regarding [the Commerce Clause claim]." Id. The reviewing court also found that Appellants failed to show that the arbitrator retroactively applied UTPCPL, RICO, and TILA. Id.
The reviewing court's decision focused on Appellant's first two claims (that the arbitrator ignored or incorrectly applied the choice-of-law analysis and that this decision that Pennsylvania substantive law applied contradicted his decision in a 2012 arbitration). It applied a balancing test between Delaware's connections to the contract, freedom of contract, and sanctity of contract against Pennsylvania's policy against usury. The reviewing court based its decision on the plain language of the loan agreements and choice of law analysis provided in Restatement (Second) of Conflict of Laws § 187 to determine which state has the materially greater interest.
Here, the loan agreements specified that Delaware law is to apply. However, Restatement (Second) of Conflict of Laws § 187(2)(b) states that a choice of law provision will generally be upheld unless "application of the law of the chosen state would be contrary to a fundamental policy of a state which has a materially greater interest than the chosen state in the determination of the particular issue and which, under the rule of § 188, would be the state of the applicable law in the absence of an effective choice of law by the parties." The reviewing court found that Pennsylvania had a fundamental policy against usury while Delaware had a policy to uphold contracts and, therefore, it was required to determine which state had a materially greater interest in the action.
The reviewing court stated that "[i]n determining which state has a materially greater interest under § 187 the Court refers to Restatement (Second) of Conflict of Laws § 188." Restatement (Second) of Conflict of Laws § 188 reads:
(1) The rights and duties of the parties with respect to an issue in contract are determined by the local law of the state which, with respect to that issue, has the
most significant relationship to the transaction and the parties under the principles stated in [Restatement (Second) of Conflict of Laws] § 6.
(2) In the absence of an effective choice of law by the parties (see § 187), the contacts to be taken into account in applying the principles of § 6 to determine the law applicable to an issue include:
(a) the place of contracting,
(b) the place of negotiation of the contract,
(c) the place of performance,
(d) the location of the subject matter of the contract, and
(e) the domicil[e], residence, nationality, place of incorporation and place of business of the parties.
The Court evaluates the contacts based on their relative importance with each particular issue.
Restatement (Second) of Conflicts of Law § 188.
Additionally, the factors listed in § 188 are to be considered "in light of Restatement (Second) of Conflict of Laws § 6(2) which lists several policy interests:
Travelers Indemnity Company v. CNH Industrial America, LLC, 2018 WL 3434562, at *6 (Del. Ch. July 16, 2018).
(a) the needs of the interstate and international systems,
(b) the relevant policies of the forum,
(c) the relevant policies of other interested states and the relative interests of those states in the determination of the particular issue,
(d) the protection of justified expectations,
(e) the basic policies underlying the particular field of law,
(f) certainty, predictability and uniformity of result, and
(g) ease in the determination and application of the law to be applied.
Restatement (Second) of Conflicts of Law § 6(2).
In applying the § 188 factors, the reviewing court found that Delaware law applied based on Delaware's "materially greater interest" in the action because the Borrowers "travelled to Delaware and visited [Appellants'] office in Delaware, signed the contract and pledged their Pennsylvania titled vehicles as collateral while at the Delaware location, and received the loan while at that Delaware location." It determined that the "important contacts outlined in § 188 ... balance in [Appellants'] favor."
Auto Equity Loans of Delaware, LLC v. Baird, 2018 WL 2059939, at *11 (Del. CCP. May 2, 2018).
Id. The reviewing court found that the "negotiation, performance, and execution of the loan occurred in Delaware." The reviewing court also stated that Delaware has a public policy as "a contracting haven." Id.
As such, the reviewing court found that the Griffin and Medora arbitration awards were in "direct contradiction to the express terms of the agreement[s] of the parties" and that the arbitrator's choice-of-law analysis was "clearly erroneous." While the reviewing court acknowledged that something "more" than grave legal error on the part of the arbitrator is required to vacate an arbitration award, it found that this case involved something "more" - "the arbitrator's reliance on inapplicable case law despite the extensive briefing by the parties regarding the appropriate analysis for a choice-of-law question, and the arbitrator's statements in his current and prior arbitration awards regarding Delaware versus Pennsylvania choice-of-law issues." The reviewing court held that "[t]hese contextual parameters evidence that the arbitrator was 'cognizant' of controlling law and willfully disregarded the law."
Id.
The reviewing court stated:
I find Kaneff, Gregoria, Salvatico, and Jaibur inapplicable to Respondents Medora and Griffin's arbitration awards. Kaneff engaged in a procedural choice-of-law analysis for an unconscionability claim and Gregoria cited Kaneff in its choice-of-law analysis. Further, in Gregoria, the United States District Court of the Eastern District of Pennsylvania dismissed the Fair Debt Collection Practice Act claim and required the plaintiff to file an amended complaint to join a necessary party. Neither case is applicable to Respondent Medora or Respondent Griffin. Whereas Respondent Baird asserted an unconscionability claim during the arbitration proceedings and the arbitrator ruled on that claim, Respondents Medora and Griffin withdrew their unconscionability claims. Furthermore, Respondents' reliance on Salvatico and Jaibur is misplaced, as these cases were judicial orders which did not involve adequate analysis.Auto Equity Loans of Delaware, LLC v. Baird, 2018 WL 2059939, at *14 (Del. CCP. May 2, 2018) (emphasis in the original).
Id.
The reviewing court did not vacate the Baird award. The reviewing court appears to have distinguished Mr. Baird's case on the ground that he had not withdrawn his unconscionability claim.
The reviewing court does not specifically state whether Delaware law or Pennsylvania law should have applied to the Baird loan agreement, however, the reviewing court pointed out that Kaneff involved an unconscionability claim and that Griffin and Medora had withdrawn their unconscionability claims.
Parties' Contentions
Appellants contend that the reviewing court should have vacated the Baird arbitration award when it vacated the Griffin and Medora awards. Appellants argue that the Baird case is indistinguishable from the Griffin and Medora cases and the reviewing court failed to explain why it reached a different conclusion concerning the Baird award. Appellants also assert that the reviewing court correctly reversed the Griffin and Medora arbitration awards because "Delaware had a materially greater interest in the transaction than Pennsylvania" and that the arbitrator had erroneously applied Pennsylvania law. Appellants claim that "if parties transact in Delaware, other states, including Pennsylvania, may not regulate, or interfere with, that transaction."
Appellants' Opening Brief, at 14.
Appellants' Answer, at 24.
Appellants additionally contend that the Commerce Clause of the U.S. Constitution bars application of Pennsylvania law to a transaction in Delaware that is governed by Delaware law.
Cross Appellants (Mr. Griffin and Ms. Medora) contend that the reviewing court committed error when it vacated their awards. They argue that the arbitrator correctly applied Pennsylvania law and Appellants have not established that the arbitrator manifestly disregarded the law.
Appellee (Mr. Baird) asserts that the reviewing court's decision affirming his award was correct and should be affirmed.
As such, this Court will discuss whether the reviewing court correctly held that the arbitrator manifestly disregarded the law concerning the Griffin and Medora contracts and whether its decision concerning the Baird contract was inconsistent.
Concerning the Griffin and Medora agreements, this Court's task is to examine whether the reviewing court made a legal error in holding that the arbitrator manifestly disregarded the law in applying Pennsylvania law to their contracts. The manifest disregard standard requires a showing that the arbitrator was "fully aware of the existence of a clearly defined governing legal principle but refused to apply it, in effect, ignoring it." SPX Corp. v. Garda USA, Inc., 94 A.3d 745, 750 (Del. June 24, 2014). Concerning the Baird agreement, this Court's task is to review whether the reviewing court made a legal error in not holding the same.
Standard of Review
Pursuant to 10 Del. C. § 1326(a), a party may appeal "any final order, ruling, decision, or judgment of the [Court of Common Pleas] in a civil action" to the Superior Court. As to arbitration awards, under 10 Del.C. § 5719 an appeal may be taken from a final order confirming or vacating an award and "[t]he appeal shall be taken in the manner and to the same extent as from orders or judgments in a civil action."
10 Del. C. § 1326(a) ("From any final order, ruling, decision or judgment of the court in a civil action there shall be the right of appeal to the Superior Court of the State in the county in which said order, ruling, decision or judgment was rendered"). See also Anderson v. R.A. Midway Towing, 2006 WL 1971806, *2 (Del. Jul. 14, 2006) ("The Superior Court has statutory authority to decide appeals from decisions of the Court of Common Pleas") (citing 10 Del. C. § 1326).
10 Del.C. § 5719 states:
(a) Appeals may be taken from:
(1) A final order denying a complaint seeking to compel arbitration made under § 5703(a) of this title;
(2) An order granting an application to enjoin arbitration made under § 5703(b) of this title;
(3) A final order confirming or denying confirmation of an award;
(4) A final order modifying or correcting an award;
(5) A final order vacating an award without directing a rehearing; or
(6) A final judgment or decree entered pursuant to the provisions of this chapter.
(b) The appeal shall be taken in the manner and to the same extent as from orders or judgments in a civil action.
This Court is an intermediate appellate court. This Court's role is limited to determining "whether there is legal error, whether the trial court's factual findings are sufficiently supported by the record, and whether those findings are the product of an orderly and logical reasoning process." Conclusions of law are reviewed de novo. "The decision of the Court of Common Pleas granting summary judgment presents a question of law that is entitled to de novo review by this Court."
Walls v. Burton, 2019 WL 458894, at *1 (Del. Super. Feb. 6, 2019); Id.
Hicklin v. Onyx Acceptance Corp., 970 A.2d 244, 248 (Del. 2009).
Davis v. Frontier Communications, 2012 WL 1413490, *1 (Del. Super. Jan. 4, 2012).
Walls v. Burton, 2019 WL 458894, at *1 (Del. Super. Feb. 6, 2019).
As such, it will review the Court of Common Pleas' decision concerning the instant arbitration awards pursuant to 10 Del.C. § 5702(d) which confers jurisdiction on the Court of Common Pleas to enforce an agreement and to enter judgment on an arbitration award on actions arising from the extension of consumer credit.
Discussion
In this appeal, the Court's examination of the reviewing court's decision will be de novo. "Whether the grant or denial of a motion for summary judgment is proper presents a question of law" and the parties assert that the reviewing court erred in applying the law. Where the issue on appeal is a matter of law, this Court must determine whether the reviewing court "erred in formulating or applying legal precepts."
The parties do not claim that there are material factual disputes and they "implicitly concede[d] the absence of material factual disputes and acknowledge[d] the sufficiency of the record to support their respective motions" when they filed cross-motions for summary judgment to the reviewing court. Gillespie v. Chelsea on Square Apartments, 2010 WL 3386553, at *3 (July 30, 2010). In reviewing the record, this Court does not find the existence of a material factual dispute.
Newtowne Village Service Corp. v. Newtowne Road Development Company, Inc., 772 A.2d 172, 174-75 (Del. May 2, 2001).
Id.
Here, it is not this Court's role to determine whether Delaware law or Pennsylvania law applies to the three contracts. This Court's role is to determine whether the reviewing court (1) committed legal error when it granted summary judgment for Appellants (vacating the Griffin and Medora awards); and (2) whether the reviewing court committed legal error when its decision concerning the Baird case differed from its conclusion in the Griffin and Medora cases. For the following reasons, the Court finds that vacatur of the Griffin and Medora awards was error and it was not error to uphold the Baird award.
Arguably, Pennsylvania law could apply based on Pennsylvania's fundamental policy against usury and on interstate advertising, origin of payments, and location of the vehicles.
The Court also finds that the reviewing court did not commit error when it concluded, in a footnote, that Appellants' Commerce Clause claim lacks merit. As the reviewing court noted, Appellants failed to present any evidence that the arbitrator consciously disregarded controlling precedent concerning Appellants' Commerce Clause claim and Appellants did not cite any cases applying the Commerce Clause to an arbitrator's choice-of-law decision. In addition, Appellants' argument that the arbitrator violated the Commerce Clause by applying Pennsylvania law to a contract governed by Delaware law is misplaced. Appellants' claim rests on the assertion that Delaware law applies because Delaware, purportedly, had more contacts with the loan agreements. However, Delaware's choice-of-law analysis requires more than adding up which state has the most contacts. See GTE Mobilenet Inc. v. Nehalem Cellular, Inc., 1994 WL 116194, at *3 (Del. Ch. Mar. 17, 1994). See also Restatement (Second) of Conflict of Law § 188 (2) ("These contacts are to be evaluated according to their relative importance with respect to the particular issue."). In fact, in this case, Delaware law required that the fundamental policy of Pennsylvania be taken into account. See Restatement (Second) of Conflict of Law § 187(2)(b). Moreover, Delaware allows parties to contract for arbitration and recognizes that the parties enter an arbitration contract aware that arbitrators may make mistakes in applying Delaware laws. See E.I. DuPont de Nemours and Company v. Custom Blending International, Inc., 1998 WL 842289, at *5 (Del. Ch. Nov. 24, 1998).
When a party is seeking to vacate an arbitration award, the Federal Arbitration Act and the Delaware Uniform Arbitration Act "require reviewing courts to give practically the highest degree of deference, short of 'untouchable,' recognized in the law to an arbitrator's award." "Indeed, to overturn an award, the court must be satisfied that there is absolutely no support at all in the record justifying the arbitrator's determinations." The Delaware Supreme Court has held that "review of an arbitration award is one of the narrowest standards of judicial review in all of American jurisprudence," and the Delaware Chancery Court has referred to the prospect of overturning an arbitrator's award as climbing a "nearly vertical mountain."
Under 9 U.S.C. § 10(a) of the Federal Arbitration Act, an arbitration award may be vacated:
(1) where the award was procured by corruption, fraud, or undue means;
(2) where there was evident partiality or corruption in the arbitrators, or either of them;
(3) where the arbitrators were guilty of misconduct in refusing to postpone the hearing, upon sufficient cause shown, or in refusing to hear evidence pertinent and material to the controversy; or of any other misbehavior by which the rights of any party have been prejudiced; or
(4) where the arbitrators exceeded their powers, or so imperfectly executed them that a mutual, final, and definite award upon the subject matter submitted was not made.
Under 10 Del. C. § 5714(a) of the Delaware Uniform Arbitration Act, an arbitration award shall be vacated where:
(1) The award was procured by corruption, fraud or other undue means;
(2) There was evident partiality by an arbitrator appointed as a neutral except where the award was by confession, or corruption in any of the arbitrators or misconduct prejudicing the rights of any party;
(3) The arbitrators exceeded their powers, or so imperfectly executed them that a final and definite award upon the subject matter submitted was not made;
(4) The arbitrators refused to postpone the hearing upon sufficient cause being shown therefor, or refused to hear evidence material to the controversy, or otherwise so conducted the hearing, contrary to the provisions of § 5706 of this title, or failed to follow the procedures set forth in this chapter, so as to prejudice substantially the rights of a party, unless the party applying to vacate the award continued with the arbitration with notice of the defect and without objection; or
(5) There was no valid arbitration agreement, or the agreement to arbitrate had not been complied with, or the arbitrated claim was barred by limitation and the party applying to vacate the award did not participate in the arbitration hearing without raising the objection;
but the fact that the relief was such that it could not or would not be granted by a court of law or equity is not ground for vacating or refusing to confirm the award.
Carl Zeiss Vision, Inc. v. Refac Holdings, Inc., 2017 WL 3635568, at *4 (Del. Ch. Aug. 24, 2017).
Id. at *4.
SPX Corp. v. Garda USA, 94 A.3d 745, 750 (Del. June 24, 2014).
Carl Zeiss Vision, Inc. v. Refac Holdings, Inc., 2017 WL 3635568, at *1 (Del. Ch. Aug. 24, 2017).
The law is clear that the arbitrator is not required to explain his analysis. Moreover, ambiguity in an arbitration opinion and an arbitrator's legal error (without more) are not proper grounds for vacatur. Indeed, "[i]t is recognized that inaccuracies as to the law or facts [made by the arbitrator] are possible and their existence is accepted implicitly by an agreement to submit the dispute to arbitration." Furthermore, there is a presumption that the arbitrator did not exceed his authority and "the court must resolve all doubts in favor of the arbitrator."
Carl Zeiss Vision, Inc. v. Refac Holdings, Inc., 2017 WL 3635568, at *5 (Del. Ch. Aug. 24, 2017) ("Even if the arbitrator did not state the grounds for a grant or denial of relief, the grant or denial of relief will be deemed to be within the scope of the arbitrator's authority if grounds for the award can be inferred from the facts of the case.") (brackets removed).
TD Ameritrade, Inc. v. McLaughlin, Piven, Vogel Securities, Inc., 953 A.2d 726, 732 (Del. Ch. July 24, 2008) ("there is a presumption that the arbitration panel acted within the scope of its authority, and this presumption may not be rebutted by an ambiguity in a written opinion") (internal quotation marks removed).
Blank Rome, LLP v. Vendel, 2003 WL 21801179, at *7 (Del. Ch. Aug. 5, 2003) ("Factual or legal errors, without more, are not sufficient bases to vacate an arbitration award.").
E.I. DuPont de Nemours and Company v. Custom Blending International, Inc., 1998 WL 842289, at *5 (Del. Ch. Nov. 24, 1998).
Government Employees Insurance Company v. Progressive Direct Insurance Company, 2016 WL 6477026, at *3 (Del. Ch. Nov. 2, 2016) ("[T]here is a presumption that the arbitration panel acted within the scope of its authority, and this presumption may not be rebutted by an ambiguity in a written opinion. [I]f any grounds for the award can be inferred from the record, the Court must presume that the arbitrator did not exceed his authority and the award must be upheld.") (internal quotation marks removed) (brackets in the original).
CPL Toxicology, Inc. v. Casla Bio Holdings LLC, 2019 WL 1233458, at *1 (Del. Ch. Feb. 18, 2019); Carl Zeiss Vision, Inc. v. Refac Hldgs., Inc., 2017 WL 3635568, at *5 (Del. Ch. Aug. 24, 2017) (quoting TD Ameritrade, Inc. v. McLaughlin, Piven, Vogel Sec., Inc., 953 A.2d 726, 732 (Del. Ch. 2008) (internal quotation marks removed).
Under the Federal Arbitration Act (9 U.S.C. § 10) and the Delaware Uniform Arbitration Act (10 Del. C. § 5714(3)), one of the circumstances where vacatur is appropriate is when "the arbitrator acts in 'manifest disregard' of the law." The manifest disregard standard requires that the arbitrator was "fully aware of the existence of a clearly defined governing legal principle but refused to apply it, in effect, ignoring it." To meet this standard, the party seeking vacatur must prove "that the arbitrator (1) knew of the relevant legal principle, (2) appreciated that this principle controlled the outcome of the disputed issue, and (3) nonetheless willfully flouted the governing law by refusing to apply it."
SPX Corp. v. Garda USA, Inc., 94 A.3d 745, 750 (Del. June 24, 2014) (arbitrators exceed their powers when they manifestly disregard the law).
Here, although the loan agreements state that the Federal Arbitration Act governs any dispute, the reviewing court cited the Delaware Uniform Arbitration Act in vacating the award. However, the reviewing court noted that "[t]he applicable standard for vacating an award under both the Federal Arbitration Act and [Delaware Uniform Arbitration Act] is 'manifest disregard.'" Auto Equity Loans of Delaware, LLC v. Baird, 2018 WL 2059939, at *14 (Del. CCP. May 2, 2018). Therefore, the analysis is the same under both acts. See SPX Corp. v. Garda USA, Inc., 94 A.3d 745, 750 (Del. June 24, 2014).
SPX Corp. v. Garda USA, Inc., 94 A.3d 745, 750 (Del. June 24, 2014).
Id.
In Carl Zeiss Vision, Inc. v. Refac Holdings, Inc., the Chancery Court provides further guidance on the standard required for vacating an arbitrator's award:
When considering whether the arbitrator exceeded its authority, the court must resolve all doubts in favor of the arbitrator. Even if the arbitrator did not state the grounds for a grant or denial of relief, the grant or denial of relief will be deemed to be within the scope of the arbitrator's authority if grounds for the award can be inferred from the facts of the case. This court will not pass an independent judgment on the evidence or applicable law, and if any grounds for the award can be inferred from the facts on the record, the Court must presume that the arbitrator did not exceed his authority and the award must be upheld.Carl Zeiss Vision, Inc. v. Refac Holdings, Inc., 2017 WL 3635568, at *5 (Del. Ch. Aug. 24, 2017) (internal quotation marks removed) (internal brackets removed).
Here, although the reviewing court acknowledged the great deference given to arbitrator's awards, it held that the Restatement (Second) of Conflict of Laws § 187 choice-of-law analysis (adopted by Delaware courts) is the governing law and the Delaware contacts listed in Restatement (Second) of Conflict of Laws § 188 outweighed Pennsylvania contacts thereby requiring the application of Delaware's policy of enforcing (arguably usurious) contracts. It also held that the evidence shows that the arbitrator knew of the choice-of-law analysis (based on briefs submitted by the parties), appreciated that Delaware law controlled the issue in the instant case, and willfully flouted the law when the arbitrator based his decision on cases (Kaneff, Gregoria, Salvatico, and Jaibur) that the reviewing court deemed inapplicable.
The reviewing court found that the arbitrator appreciated that the choice-of-law was the controlling law because in the 2012 arbitration award decision he had found that it required the application of Delaware law.
However, the Delaware Supreme Court has held that "[a]n arbitrator's awareness of the contract language, ... does not prove that the arbitrator knew of the relevant legal principle or appreciated that this principle controlled the outcome of the dispute." Moreover, "[a] reviewing court is not to pass an independent judgment on the evidence or applicable law submitted to the arbitrator." Thus, even if the arbitrator committed legal error in applying Kaneff, Gregoria, Salvatico, and Jaibur, an arbitrators' failure to understand the law is an insufficient reason to vacate an arbitration award.
SPX Corporation v. Garda USA, Inc., 94 A.3d 745, 750-51 (Del. June 24, 2014).
Pocket Change Kahunaville, Inc. v. Kahunaville of Eastwood Mall, Inc., 2003 WL 1791874, at *3 (Del. Ch. Mar. 21, 2003). See also Wolfe v. Holman, 2012 WL 863805, at *1, n. 8 (Del. Ch. Mar. 13, 2012); TD Ameritrade, Inc. v. McLaughlin, Piven, Vogel Securities, Inc., 953 A.2d 726, 733 (Del. Ch. July 24, 2008); Audio Jam, Inc. v. Fazelli, 1997 WL 153814, at *1 (Del. Ch. Mar. 20, 1997).
Although, arguably, those cases had sufficient similarities. In Kaneff and Gregoria Pennsylvania borrowers travelled to Delaware to sign auto title loans, the loans charged high interest rates, the lenders were located in Delaware, and the agreements had a Delaware choice-of-law provision. There are also similar issues (whether Pennsylvania law or Delaware law applies to the high interest rate loans, whether a Delaware choice-of-law provision precludes the application of Pennsylvania law, and whether Pennsylvania's law against usury provides it with a materially greater interest). The court in Kaneff also stated that it engaged in a choice-law-analysis under Restatement (Second) of Conflict in Laws § 187 which is the analysis that the reviewing court in the instant case deemed to be the proper analysis. Furthermore, in holding that Pennsylvania's policy against usury is a materially greater interest, Kaneff does not preclude application of its holding to substantive law on claims other than an unconscionability claim. Indeed, Gregoria broadly interpreted Kaneff as "overruling the choice of law provision in [a] contract finding that Pennsylvania's antipathy to high interest rates ... represents such a fundamental policy that we must apply Pennsylvania law." Gregoria v. Total Asset Recovery, Inc., 2015 WL 115501, at *4 (Although the contract had a Delaware choice-of-law provision, the court decided to "apply Pennsylvania law to interpret the loan agreement" because "the same policy against usurious interest rates [as in Kaneff] is implicated.") (internal quotation marks removed).
Viacom International, Inc. v. Winshall, 2012 WL 3249620, at *11 (Del. Ch. Aug. 9, 2012) ("A court's role in reviewing the outcome of the arbitration proceedings is not to correct factual or legal errors made by an arbitrator... In other words, to vacate the award the court must find something beyond and different from a mere error in the law or failure on the part of the arbitrators to understand or apply the law.") (internal quotation marks removed).
Furthermore, the record does not support a determination that the arbitrator willfully flouted the law in these 2017 arbitration decisions based on a decision in an unrelated arbitration where he reached a different result five years prior to this case. Here, the arbitrator explained in each of these arbitration decisions that Gregoria, Salvatico, and Jaibur (all decided after his 2012 decision) influenced his understanding that Pennsylvania law would apply in these situations. The arbitrator applied his understanding of controlling law as he believed it to exist in 2017.
In the arbitration awards, the arbitrator stated: "Applying Kaneff, Gregoria, Jabur [sic] and Salvatico, Pennsylvania, not Delaware substantive law applies to this loan transaction. I recognize that in a similar case deciding the same issue I held that Delaware law applied. However, that decision was prior to the Gregoria, Jabur [sic] and Salvatico decisions interpreting Kaneff."
As such, the arbitrator's explanation evinced an attempt to follow what he believed was the controlling law. There is a presumption that the arbitrator did not manifestly disregard the law when making this determination. Furthermore, the reviewing court was required to resolve all doubts in favor of the arbitrator, and no evidence was presented to show that the arbitrator was disingenuous when he explained how he reached a conclusion in the Griffin and Medora cases that differed from his conclusion in an unrelated 2012 case.
TD Ameritrade, Inc. v. McLaughlin, Piven, Vogel Securities, Inc., 953 A.2d 726, 732 (Del. Ch. July 24, 2008) ("there is a presumption that the arbitration panel acted within the scope of its authority, and this presumption may not be rebutted by an ambiguity in a written opinion") (internal quotation marks removed).
Carl Zeiss Vision, Inc. v. Refac Holdings, Inc., 2017 WL 3635568, at *5 (Del. Ch. Aug. 24, 2017) ("[T]he court must resolve all doubts in favor of the arbitrator.") (internal quotation marks removed).
An arbitrator's determinations is not to be overturned unless "there is absolutely no support at all in the record justifying [those] determinations." In the instant case, there is some support in the record for the arbitrator's determination that Pennsylvania law applied. Here, the Borrowers presented legal authority (Kaneff, Gregoria, and 41 P.S. § 408) that favored the application of Pennsylvania law and the facts of those cases were similar. When considering Pennsylvania's fundamental policy against usury, the courts in Kaneff and Gregoria undertook a choice-of-law analysis under Restatement (Second) of Conflict of Law § 187 on similar contracts and concluded that Pennsylvania had a materially greater interest.
Carl Zeiss Vision, Inc. v. Refac Holdings, Inc., 2017 WL 3635568, at *4 (Del. Ch. Aug. 24, 2017).
GTE Mobilenet Inc. v. Nehalem Cellular, Inc., 1994 WL 116194, at *3 (Del. Ch. Mar. 17, 1994). See also Restatement (Second) of Conflict of Law § 188 (2): "These contacts are to be evaluated according to their relative importance with respect to the particular issue."
In the instant case, although the reviewing court found that several factors favored Delaware, including that the negotiation and place of contracting occurred in Delaware, the Restatements state that "[s]tanding alone, the place of contracting is a relatively insignificant contact" while the place of negotiation "is a significant contact." Restatement (Second) of Conflict of Laws § 188, Comment 2. Here, the place of performance was arguably split between Delaware and Pennsylvania (because the loan appears to have been disbursed in Delaware and the payments on interest were to be paid by the Borrowers who resided in Pennsylvania; in addition, Mr. Griffin's vehicle, which was collateral for the loan, was repossessed in Pennsylvania). See Clark Equipment Company v. Liberty Mutual Insurance Company, 1994 WL 466325, at *2 (Del. Super. Aug. 1, 1994) (The court found that the place of performance was both Michigan and Illinois because the insured mailed premiums to the insurers in Chicago, Illinois and the insurers mailed payment for claims to Buchanan, Michigan); Buhl Building, L.L.C. v. Commonwealth Land Title Insurance Company, 2019 WL 3916615 (Del. Super. Aug. 19, 2019) (The court found that Michigan law was the place of performance, in part, because the party paid its premiums from Michigan). See also Restatement (Second) of Conflict of Law § 188, Comment 2 ("the state where performance is to occur has an obvious interest in the question whether this performance would be illegal."). The location of the subject matter factor applies when "the contract deals with a specific physical thing, such as land, or chattel, or affords protection against a localized risk," neither of which is present here. Clark v. Equipment Co. v. Liberty Mutual Insurance Co., 1994 WL 466325, at * 3 (Del. Super. Aug. 1, 1994). Lastly, Borrowers were residents of Pennsylvania while Auto Equity Loans was incorporated in Delaware, splitting the final § 188 factor.
In addition to arguing that Kaneff and Gregoria hold that Pennsylvania law applies, the Borrowers also pointed out that under Pennsylvania statute. 41 P.S. § 408 states "[n]otwithstanding any other law, [the law against usury] may not be waived by any oral or written agreement executed by any person."
Here, the reviewing court found that Delaware had a materially greater interest because it had more contacts with the loan agreements (finding that the negotiation, performance, and execution of the loan took place in Delaware). However, in Kaneff, although the Pennsylvania resident drove to Delaware and signed the loan agreement in Delaware, the lender was a Delaware corporation, the loan required repayment in Delaware, and the loan agreement had a Delaware choice-of-law provision, the court held that "Pennsylvania has a materially greater interest than Delaware in the determination of whether the arbitration clause is unconscionable." Kaneff v. Delaware Title Loans, F.3d 616, 623-24 (3rd Cir. Nov. 24, 2009). In Gregoria, the Pennsylvania borrowers also travelled to Delaware to sign an auto title loan provided by a Delaware company and the agreement had a Delaware choice-of-law provision. The court, citing Kaneff, applied Pennsylvania law finding that Pennsylvania's "antipathy to high interest rates" was a fundamental policy. Gregoria v. Total Asset Recovery, Inc., 2015 WL 115501, at *4 (E.D. Pa. Jan. 8, 2015).
As such, concerning the Griffin and Medora agreements, the standard for vacating an arbitrator's award, as stated by the Delaware Supreme Court, has not been met. It has not been established that the arbitrator appreciated that a governing law controlled the outcome of the disputed issue and, nevertheless, willfully flouted that law by refusing to apply it to the Griffin and Medora loan agreements.
Concerning the Baird agreement, the reviewing court did not conclude that the arbitrator manifestly disregarded the law when he applied Pennsylvania law to the Baird loan agreement. Appellants failed to provide any evidence that overcomes the presumption that the arbitrator acted within his authority when he concluded that Pennsylvania law applies to the Baird loan agreement. This Court finds that there was some support in the record for the arbitrator's determination that Pennsylvania law applies and Appellants did not present evidence showing that the arbitrator willfully flouted the governing law. As such, this Court finds that the reviewing court did not commit error in upholding the Baird arbitration award.
The reviewing court did not provide an analysis as to why it did not vacate the Baird arbitration award. However, the reviewing court's Opinion stated that Kaneff and Gregoria were inapplicable to Griffin and Medora, in part, because they withdrew their unconscionability claims; it did not state the same concerning Mr. Baird, who had not withdrawn his unconscionability claim.
Because Appellants failed to provide evidence that the arbitrator willfully flouted the law concerning the Baird arbitration award, summary judgment in favor of the Borrowers on this issue was properly granted.
While it is clear that the reviewing court gave great consideration to the issues and identified several reasons why it disagrees with the arbitrator's choice of law, this Court does not find that the arbitration awards were the product of manifest disregard of the law. Vacatur of the Griffin and Medora arbitration awards was error and affirmance of the Baird award was not error.
Conclusion
Accordingly, the Court of Common Pleas' decision granting summary judgment to Appellants and vacating the arbitration awards of Mr. Griffin and Ms. Medora is REVERSED and the matter is REMANDED for proceedings consistent with this opinion. The decision upholding the arbitration award to Mr. Baird is AFFIRMED.
IT IS SO ORDERED.
/s/_________
Diane Clarke Streett, Judge