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Captain Bounce, Inc.; et al v. Business Financial Services

March 19, 2012


The opinion of the court was delivered by: Honorable Janis L. Sammartino United States District Judge


Presently before the Court is Defendants' motion to compel arbitration and stay the action pending arbitration. (Mot. to Compel Arbit., ECF No. 5.) Also before the Court are Plaintiffs' opposition (ECF No. 12), Defendants' reply (ECF No. 13), Plaintiff's ex parte motion for leave to file a surreply (ECF No. 18) and the proposed surreply (ECF No. 18-2), as well as Defendants' opposition to the motion for leave to file a surreply (ECF No. 20). Plaintiffs have also filed several notices of recent authority in opposition to Defendants' motion to compel arbitration (ECF Nos. 22, 33, 36), and evidentiary objections to Defendants' declarations and exhibits (ECF No. 19), and Defendants have filed a response to Plaintiffs' notice of recent authority (ECF No. 34). Also pending in this case is Plaintiff's "motion for corrective action," which essentially seeks injunctive relief. (ECF No. 23.) The Court took the mater under submission without oral argument pursuant to Civil Local Rule 7.1(d)(1). Having considered the parties' arguments and the law, the Court GRANTS Plaintiffs' motion for leave to file a surreply, and GRANTS Defendants' motion to compel arbitration and stay the action.


Plaintiffs' claims concern Defendants' alleged practice of charging excessive interest rates and other unfair business practices and violations of California's usury laws in their contracts for "merchant cash advances." (Compl., Ex. A to Notice of Removal, ECF No. 1.) Plaintiffs filed their complaint in state court on March 10, 2011, on behalf of themselves and a putative class of others similarly situated who entered into merchant cash advance transactions with Defendants during a four year period. On April 22, 2011, Defendants removed the case to this Court, asserting federal jurisdiction based on complete diversity of citizenship, pursuant to 28 U.S.C. § 1332(d). On April 29, 2011, Defendants moved to compel arbitration of Plaintiffs' claims and stay this action pending arbitration.

The named plaintiffs are Captain Bounce, Inc. (Captain Bounce), a California corporation that sells inflatable jumpers and slides primarily for use at children's parties, and KC Dancegear (KC), a sole proprietorship in California that sells dance products such as ballet shoes and leotards. (Pl.'s Opp'n 1, ECF No. 12.) Defendant Business Financial Services, Inc. (BFS) is a North Carolina corporation, and Defendants Business Cash Advance, Inc., and Faton, Inc., are Florida corporations.*fn1 Defendants do business in California, providing a type of financing to small- and mid-size businesses termed "merchant cash advances." In such transactions, a financing company (such as BFS) advances a sum of money to a business in exchange for the assignment of a set amount of that business' future credit card receivables. (Mot. to Compel Arbit. 3.) The business directs its credit card processing company to remit to BFS a set percentage of each payment the processor receives from a credit card issuer, referred to as the "Settlement Percentage." (Id.)

Thus, if the Settlement Percentage is 10%, the credit card processor will remit 10% of each credit card payment to BFS before paying out 90% to the business (less the processor's fees). (Id. at 3-4.) This process will continue until BFS has received the total assigned value of credit card receivables.

Plaintiffs entered into three different merchant cash advances with BFS in 2009 and 2010 (the Agreements). On August 7, 2009, Captain Bounce entered into an "Accounts Receivable Purchase Agreement" with BFS. (Compl. 3, Ex. 1.) Under the terms of this agreement, BFS advanced $40,000 to Captain Bounce in exchange for $58,000 of Captain Bounce's future credit card receivables, with a Settlement Percentage of 16% of each consumer credit card transaction to go to BFS. (Mot. to Compel Arbit. 4.) BFS collected the entire $58,000 of Captain Bounce's receivables pursuant to this agreement. On June 22, 2010, KC entered into a similar agreement with BFS, accepting an advance of $6,500 in exchange for $8,775 of future credit card receivables, with a Settlement Percentage of 14%. (Id. at 5.) KC entered into a second such agreement with BFS on October 10, 2010 for another $5,000 in exchange for $6,750 of future credit card receivables. These agreements were apparently terminated when KC paid the balance of the aggregate amount of receivables in a lump sum payment. (Id.)

At issue here, these three agreements contain the same provision regarding arbitration, which provides in relevant part:

21. Arbitration. (a) Notwithstanding anything to the contrary contained herein, any dispute arising out of or in connection with this Agreement shall be settled exclusively and finally by arbitration conducted in the City of Charlotte, North Carolina, under the commercial arbitration rules of the American Arbitration Association ("the AAA"), such arbitration to apply the laws of the State of North Carolina (without giving effect to conflict of laws principles). The arbitrator at such arbitration shall not be entitled to award punitive damages to any party, and the costs and fees of such arbitration shall be borne by the losing party. The parties hereto acknowledge and agree that this arbitration shall be solely between the parties to this agreement and no class arbitration or other representative action may be undertaken by the arbitrators. The arbitration shall be conducted by one neutral arbitrator, such arbitrator shall be appointed by the AAA.

(b) Reservation of rights. Nothing in this arbitration provision shall be deemed to . . . (iii) limit the right of the Purchaser hereto (a) to exercise self help remedies such as (but not limited to) setoff, or (b) to foreclose against any real or personal property collateral, or (c) to obtain from a court provisional or ancillary remedies such as (but not limited to) injunctive relief, writ of possession or the appointment of a receiver. The Purchaser may exercise such self help rights, foreclose upon such property, or obtain such provisional or ancillary remedies before, during or after the pendency of any arbitration proceeding brought pursuant to this instrument, agreement or document. Neither this exercise of self help remedies nor the institution or maintenance of an action for foreclosure or provisional ancillary remedies shall constitute a waiver of the right of any party, including the claimant in any such action, to arbitrate the merits of the controversy or claim occasioning to resort to such remedies.

(Compl. Ex. 1 at 8; Ex. 2 at 8.) Defendants now seek to compel arbitration of Plaintiff's claims under this provision. Plaintiffs challenge the validity of the arbitration provision as unconscionable, and assert that the Court should refuse to enforce the arbitration clause.


The Federal Arbitration Act ("FAA") governs the enforceability of arbitration agreements in contracts involving transactions in interstate commerce. See 9 U.S.C. § 1, et seq.; Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20, 24--26 (1991). If a suit is proceeding in federal court, the party seeking arbitration may move the district court to compel the resisting party to submit to arbitration pursuant to their private agreement to arbitrate the dispute. 9 U.S.C. § 4. The FAA reflects both a "liberal federal policy favoring arbitration agreements" and the "fundamental principle that arbitration is a matter of contract." AT&T Mobility LLC v. Conception, - U.S. -, 131 S.Ct. 1740, 1745 (2011); see also Kilgore v. KeyBank, Nat'l Ass'n, - F.3d -, 2012 WL 718344 at *4 (9th Cir. Mar. 7, 2012) ("The United States Supreme Court has repeatedly explained that the FAA was intended to reverse the long history of judicial refusal to enforce arbitration agreements.") (citing cases); Circuit City Stores, Inc. v. Adams, 279 F.3d 889, 892 (9th Cir. 2002) (the FAA "not only placed arbitration agreements on equal footing with other contracts, but established a federal policy in favor of arbitration, and a federal common law of arbitrability which preempts state law disfavoring arbitration.") The FAA also includes a savings clause that allows arbitration agreements to be invalidated by courts only "upon such grounds as exist at law or in equity for the revocation of any contract." 9 U.S.C. § 2 (emphasis added).

In determining whether to compel a party to arbitration, a district court may not review the merits of the dispute; rather, a district court's role under the FAA is limited "to determining

(1) whether a valid agreement to arbitrate exists and, if it does, (2) whether the agreement encompasses the dispute at issue." Cox v. Ocean View Hotel Corp., 533 F.3d 1114, 1119 (9th Cir. 2008) (citing Chiron Corp. v. Ortho Diagnostic Sys., Inc., 207 F.3d 1126, 1130 (9th Cir. 2000)). In determining the validity of an arbitration agreement, the Court applies state law contract principles. Circuit City, 279 F.3d at 892; see also 9 U.S.C. § 2. However, the FAA does not permit arbitration agreements to be declared unenforceable by defenses "that apply only to arbitration or that derive their meaning from the fact that an agreement to arbitrate is at issue." Concepcion, 131 S.Ct. at 1746. As the Supreme Court's recent opinion in AT&T Mobility LLC v. Concepcion makes clear, if a generally applicable doctrine, such as unconscionability, is applied by a particular state in a fashion that disfavors arbitration, then that rule interferes with arbitration and is preempted by the FAA. Id. at 1747-50; see also Kilgore, 2012 WL 718344 at *5 ("In short, a state statute or judicial rule that applies only to arbitration agreements, and not to contracts generally, is preempted by the FAA.") Thus, "[s]tates cannot require a procedure that is inconsistent with the FAA, even if it is desirable for unrelated reasons." Concepcion at 1753.

If the district court determines that a valid arbitration agreement encompasses the dispute, then the FAA requires the court to enforce the arbitration agreement according to its terms. Lifescan, Inc. v. Premier Diabetic Servs., Inc., 363 F.3d 1010, 1012 (9th Cir. 2004). The FAA "leaves no place for the exercise of discretion by a district court, but instead mandates that district courts shall direct the parties to proceed to arbitration on issues as to which an arbitration agreement has been signed." Dean Whitter Reynolds, Inc v. Byrd, 470 U.S. 213, 218 (1985). Further, the Court must stay litigation of arbitral claims until such arbitration "has been had according to the terms of the agreement." 9 U.S.C. § 3.


Ordering the parties to a case to arbitration requires that those parties have contractually agreed to settle disputes through arbitration. 9 U.S.C. § 2. Here, Plaintiffs admit that they signed the Agreements at issue, that an arbitration provision exists in these Agreements, that the FAA applies, and that their claims fall within the scope of the arbitration clause. (Pl.'s Opp'n at 3.) Thus, the focus of Plaintiffs' opposition to the instant motion is their allegation that the arbitration clause is unconscionable for at least four different reasons, that the unconscionable aspects of the clause cannot be severed, and that consequently the Court should refuse to enforce the arbitration clause. (Id. at 2.) Plaintiffs, as the parties challenging the enforceability of the arbitration clause, "bear[ ] the burden of proving that the claims at issue are unsuitable for arbitration." Green Tree Fin. Corp.-Ala. v. Randolph, 531 ...

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