Applying controlling Second Circuit precedent, the district court for the Eastern District of New York compelled arbitration between the plaintiffs and five defendant-banks in a RICO action. The banks successfully argued that, although they had not signed the arbitration agreement at issue, they should be able to avoid litigation based on principles of equity and the plaintiffs should have to arbitrate their claims against the banks. Moss v. BMO Harris Bank, N.A., 24 F. Supp. 3d 281 (E.D.N.Y. 2014).
The plaintiffs brought this class action based on the banks’ alleged role in facilitating high-interest payday loans, which are illegal in some states but remain available online. The plaintiffs had contracts with the payday lenders but did not sue them; instead, they sued the banks that facilitated the fund transfers relating to the plaintiffs’ loans. Each of the loan agreements contained an arbitration clause. Though none of the banks were parties to those loan agreements, the agreements stated that the “plaintiffs must arbitrate not only with the [payday] lenders, but also with the lenders’ ‘agents’ and ‘servicers.’” The banks argued that they were “agents” and “servicers” under the loan agreements and therefore entitled to enforce the arbitration requirement.
The district court agreed, granting the banks’ motion to compel arbitration. The court applied the Second Circuit’s “two-part intertwined-ness test, under which the court examines whether: (1) the signatory’s claims arise under the subject matter of the underlying agreement and (2) whether there is a close relationship between the signatory and the non-signatory party.” Id. at *4. Here, the plaintiffs claimed that the banks facilitated the loans in violation of New York usury law. In addition, the plaintiffs and banks had a sufficiently close relationship, as it was foreseeable that the banks would be included among the lenders’ agents and servicers.
Moss v. BMO Harris Bank provides a good example of when equitable estoppel applies in an arbitration setting: “a non-signatory to an arbitration agreement may compel a signatory to that agreement to arbitrate a dispute where… ‘the issues the non-signatory is seeking to resolve in arbitration are intertwined with the agreement that the estopped party has signed.”’ Ragone v. Atl. Video at Manhattan Ctr., 595 F.3d 115, 126–27 (2d Cir. 2010) (citation omitted); see also Smith/Enron Cogeneration Ltd. P'ship v. Smith Cogeneration Int'l, Inc., 198 F.3d 88, 98 (2d Cir. 1999) (same); Crewe v. Rich Dad Educ., LLC, 884 F. Supp. 2d 60, 75 n.6 (S.D.N.Y. 2012) (Holding that “even if a defendant herein was held to fall outside the broad language of the Agreement’s arbitration provision, equitable estoppel would oblige [plaintiff] to include that defendant in arbitration here, given the Amended Complaint’s pervasive allegations of interdependent and coordinated misconduct between the non-signatories and signatory….”).
Put differently, under the equitable estoppel test, a court will consider whether a party who has not signed an arbitration agreement nonetheless has a sufficiently close relationship to one of the signing parties that the contracting parties, in effect, have consented to extend their arbitration agreement to the non-signatory. In Moss, the court found that such a close relationship did exist.
Key words: alternative dispute resolution, litigation, equitable estoppel, non-signatory, RICO arbitration, class action