Fourth Circuit Issues Its Opinion in Dillon v. BMO Harris Bank
On May 10, 2017, the Fourth Circuit Court of Appeals issued its opinion in Dillon v. BMO Harris Bank, Case No. 16-1362, which held a tribal choice of law provision and arbitration clause in a lending contract were unenforceable because portions of the contract contained language that speficially excluded the application of Federal law to disuptes.
The facts of the case are as follows: Dillon received a loan from a TLE and authorized electronic transfers for the deposit of loan funds and repayment. The loan agreement that he electronically signed included an arbitration clause that required disputes to be submitted to arbitration with the exclusive application of tribal law to the exclusion of state and federal laws. The contract detailed the borrower’s submission to tribal law in three different sections. The loan terms exceeded the usury limits of the state of North Carolina.
Rather than suing the TLE, Dillon brought suit under the Racketeer Influenced and Corrupt Organizations (RICO) Act against the banks for processing payments for lenders, arguing the banks were attempting to collect an unlawful debt.
BMO Harris Bank (“BMO”) moved to compel arbitration under the loan agreement, but the U.S. District Court for the Middle District of North Carolina refused the motion, holding that the arbitration clause was unenforceable based upon the principles of a previous case involving Western Sky, Hayes v. Delbert Services Corp. BMO appealed the district court’s decision.
In analyzing the loan agreement’s arbitration provision, the Fourth Circuit Court of Appeals relied heavily on a recent opinion that reviewed the arbitration clause used by Western Sky Financial in its loan agreements. Like the Hayes case, the Court in Dillon found that an arbitration clause that excluded the application of federal law was unenforceable and violated public policy. Quoting U.S. Supreme Court precedent, the Fourth Circuit added that the arbitration clause cannot “waive a party’s right to pursue statutory remedies.” The court went on to categorize tribal law as “foreign law” for the purposes of analysis. It found that the provisions of the loan agreement would preclude the application of federal consumer protection statutes during arbitration and was therefore unenforceable.
Notably, the Fourth Circuit refused to sever the choice-of-law component from the loan agreement and found the contract totally unenforceable. The court determined that the entire loan agreement was drafted to avoid application of state and federal law, so simply severing one component would not change the entire nature of the agreement. The Court affirmed the decision of the district court and denied the motion to compel arbitration.
In light of the Fourth Circuit’s ruling in regards to the enforceability of contracts containing a tribal choice of law provision that exclude application of federal law, NAFSA urges its members and TLEs utilizing tribal choice of law provisions to carefully review this decision and discuss with counsel.