United States Court of Appeals
For the First Circuit
No. 01-2533
ELMORE THOMPSON and PAULA M. THOMPSON,
Plaintiffs, Appellants,
v.
IRWIN HOME EQUITY CORP. and IRWIN UNION BANK & TRUST CO.,
Defendants, Appellees.
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF RHODE ISLAND
[Hon. Ernest C. Torres, U.S. District Judge]
Before
Boudin, Chief Judge,
Bownes, Senior Circuit Judge,
and Lipez, Circuit Judge.
Christopher M. Lefebvre, with whom Daniel A. Edelman, Law
Offices of Claude Lefebvre & Sons, and Edelman, Combs & Latturner,
LLC, were on brief, for appellants.
R. Bruce Allensworth, with whom Irene C. Freidel, Kirkpatrick
& Lockhart LLP, Steven E. Snow, and Partridge Snow & Hahn LLP were
on brief, for appellees.
August 20, 2002
LIPEZ, Circuit Judge. Elmore Thompson and Paula M.
Thompson appeal from the judgment of the district court requiring
them to arbitrate their Truth in Lending Act claims against
defendants Irwin Union Bank & Trust Company and Irwin Home Equity
Corporation. Seeing no reason why the claims should not be
arbitrated, we affirm.
I.
On August 29, 2000, the Thompsons obtained a mortgage
loan of $11,000 from Irwin Union Bank & Trust Company at a
disclosed annual percentage rate of 15.9%. The loan, which was
assigned to Irwin Home Equity Corp. for servicing,1 was secured by
the Thompsons' home, and was not made in connection with the
initial acquisition or construction of the home. Hence the
transaction was subject to the right of rescission provided by the
Truth in Lending Act (TILA), 15 U.S.C. § 1635, which grants the
borrower an unconditional right of rescission for the first three
days following the consummation of the transaction, along with a
conditional right of rescission if the creditor fails to deliver
certain forms and to disclose certain information, including notice
of the right to rescind itself. The statute puts a three-year time
limit on the exercise of the conditional rescission right. Id.
§ 1635(f).
On April 24, 2001, the Thompsons commenced this action in
federal district court, claiming that Irwin had violated TILA by
1
We refer to the two defendants as "Irwin."
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failing to notify them of their right to rescind, as required by 15
U.S.C. § 1635(a). The Thompsons take issue with Irwin's delivery
of blank notices of the right to rescind -- that is, generic forms
without the pertinent dates filled in -- accompanied by
"Instructions for Completing the Notice of Right to Cancel." In
their view, this "do-it-yourself disclosure scheme" does not
constitute adequate notice of the right to rescind. Their
complaint seeks rescission of the loan agreement and damages.
In June of 2001 Irwin filed a motion to compel
arbitration, pursuant to a provision in the loan agreement that
"[a]ny controversy or claim . . . arising out of or relating to
this Agreement . . . shall be determined by binding arbitration."
In October of 2001 the district court entered an order compelling
arbitration and dismissing the case. The Thompsons appeal from
that order.
II.
The Thompsons argue that the district court erred in
compelling arbitration because they had rescinded their loan
agreement with Irwin pursuant to TILA, 15 U.S.C. § 1635(a)
(providing that borrower may rescind loan transaction by notifying
creditor of intention to do so).2 In their view, "[r]escission
pursuant to § 1635 is automatic, and results in the consumer having
2
In their brief to this court the Thompsons claim to have
notified Irwin a few weeks prior to the commencement of this
litigation of their purported rescission of the loan agreement.
Irwin points out that the Thompsons do not allege this in their
complaint, nor is there evidence in the record of such notice
having been given.
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no further obligation to the lender. Given the fact that the
entire transaction was rescinded, the arbitration clause, which was
contained in the fine print of the rescinded contract, no longer
existed."
In Large v Conseco Finance Servicing Corp., 292 F.3d 49
(1st Cir. 2002), on facts materially indistinguishable from the
facts here, we rejected the argument that a demand for rescission
under TILA is somehow self-executing and results in the automatic
voiding of the loan agreement. We explained:
Neither the statute nor the regulation
establishes that a borrower's mere assertion
of the right of rescission has the automatic
effect of voiding the contract. . . . If a
lender disputes a borrower's purported right
to rescind, the designated decision maker --
here an arbitrator -- must decide whether the
conditions for rescission have been met.
Until such decision is made, the [borrower
has] only advanced a claim seeking rescission.
The agreement remains in force . . . .
Id. at 54-55. Large thus forecloses the Thompsons claim that their
demand for rescission had the automatic effect of invalidating the
loan agreement.
As an alternative ground for avoiding arbitration, the
Thompsons point to the following language in the arbitration
agreement:
Nothing contained in this Alternative Dispute
Resolution provision shall limit the right of
any party to this Agreement to exercise self-
help remedies such as setoff or to obtain
provisional or ancillary remedies from a court
of competent jurisdiction before, after, or
during the pendency of any arbitration or
other proceeding. The exercise of a remedy
does not waive the right of either party to
resort to arbitration.
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The Thompsons take the view that rescission is a "self-help remedy"
under TILA, and is therefore not subject to arbitration.3
A "self-help remedy" is a remedy "not obtained from a
court, such as repossession." Blacks Law Dictionary 1297 (7th ed.
1999). The loan agreement provides that "[t]he exercise of a
remedy does not waive the right of either party to resort to
arbitration." Given this clear language, the Thompsons' attempt to
exercise their right to rescind does not affect Irwin's right to
have an arbitrator decide whether there are indeed grounds for
rescission. Assuming arguendo that the Thompsons' demand for
rescission of the loan agreement under TILA constitutes a self-help
remedy, the same cannot be said of their subsequent commencement of
litigation in federal district court challenging Irwin's refusal to
cooperate with their attempt at self-help. That litigation is
unmistakably governed by the arbitration clause.
III.
The Thompsons also take issue with a provision in the
arbitration agreement that "[t]he prevailing party in an
arbitration shall be entitled to reasonable attorney's fees." They
argue that this provision deprives them of their statutory right,
as they see it, to pursue a TILA action with the prospect of
recovering their attorney's fees if they prevail, but with no risk
3
The Thompsons also suggest that rescission is an
"ancillary" remedy, although they do not explain what this means.
We note simply that the voiding of the entire loan agreement cannot
logically be deemed an "ancillary" remedy for a violation of TILA's
disclosure requirements.
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of having to pay Irwin's attorney's fees if they are unsuccessful.
15 U.S.C. § 1640(a)(3).4 They point out that "[b]y agreeing to
arbitrate a statutory claim, a party does not forgo the substantive
rights afforded by the statute; it only submits to their resolution
in an arbitral, rather than a judicial, forum." Mitsubishi Motors
Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614, 628 (1985).
The Thompsons argue that the provision permitting prevailing
creditors to recover attorney's fees is inconsistent with the
remedial goals of TILA, a statute designed "to vest considerable
enforcement power in 'private attorneys general,' individual
borrowers who by suing lenders for alleged violations could achieve
widespread compliance without government intervention." Bizier v.
Globe Fin. Servs., Inc., 654 F.2d 1, 2 (1st Cir. 1981). In their
view, the attorney's fees provision in the arbitration agreement
taints the entire arbitration agreement and renders it
unenforceable.
We will not address the merits of that argument here,
including the Thompson's reading of the meaning of the attorney's
fees provision of the TILA. "A court compelling arbitration should
4
TILA provides, in relevant part:
any creditor who fails to comply with any
requirement . . . under [15 U.S.C. § 1635] . . . with
respect to any person is liable to such person in an
amount equal to the sum of -- . . . (3) in the case of
any successful action to enforce the foregoing liability
or in any action in which a person is determined to have
a right of rescission under section 1635 of this title,
the costs of the action, together with a reasonable
attorney's fee as determined by the court . . . .
15 U.S.C. § 1640(a).
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decide only such issues as are essential to defining the nature of
the forum in which a dispute will be decided. . . . Whether
federal public policy prohibits an individual from waiving certain
statutory remedies is an issue that may be raised when challenging
an arbitrator's award." Larry's United Super, Inc. v. Werries, 253
F.3d 1083, 1085-86 (8th Cir. 2001) (internal quotation marks
omitted); accord Metro E. Ctr. for Conditioning and Health v. Qwest
Communications Int'l, Inc., 294 F.3d 924, 929 (7th Cir. 2002)
(explaining that "the arbitrator determines whether contractual
limitations on remedies are valid"); Great W. Mortgage Corp. v.
Peacock, 110 F.3d 222, 230-31 (3rd Cir. 1997) ("[A] court
compelling arbitration should decide only such issues as are
essential to defining the nature of the forum in which a dispute
will be decided. . . . Any argument that the provisions of the
Arbitration Agreement involve a waiver of substantive rights
afforded by the . . . statute may be presented in the arbitral
forum."). But see Perez v. Globe Airport Sec. Servs., Inc., 253
F.3d 1280, 1285-87 (11th Cir. 2001) (denying defendant's motion to
compel arbitration because arbitration agreement required plaintiff
to waive her statutory right under Title VII to recover fees and
costs if she prevailed) (vacated per stipulation, 294 F.3d 1275
(2002)); Graham Oil Co. v. Arco Prods. Co., 43 F.3d 1244, 1247-48
(9th Cir. 1995) (reversing district court's decision to compel
arbitration on ground that provision in arbitration agreement
deprived plaintiff of statutory right).
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Our refusal to decide the validity of the attorney's fees
provision at this time is consistent with our opinion in Rosenberg
v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 170 F.3d 1 (1st
Cir. 1999). There, the defendant employer appealed the district
court's denial of its motion to compel arbitration of Rosenberg's
discrimination claim. Although we affirmed the district court's
decision on other grounds, we first rejected Rosenberg's argument
that she could not be required to arbitrate her claim because the
rules under which the arbitration would be conducted might require
her to pay unreasonable forum fees. Id. at 15-16. We suggested
that if an arbitrator were in fact to award unreasonable fees
against Rosenberg, she could then proceed to challenge the award in
federal court. Id. at 16. However, since no such award had yet
been made, we explained that the issue "is not presented by this
case." Id.
Arbitration is the correct initial forum for the
Thompsons to air their objection to the attorney's fees provision
in the arbitration agreement. If an arbitrator does award
attorney's fees against the Thompsons, the district court would
then be in a position to hear their argument that the challenged
provision on attorney's fees is unenforceable because it deprives
them of a statutory right.
Affirmed.
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