AF Trucking Inc v. Business Financial Services, Inc.

Background

AF Trucking Inc., doing business as AF Trucking, and Yida Falkowitz sued Business Financial Services, Inc., doing business as BFS Capital, and Axos Bank. The plaintiffs alleged that the parties’ March 7, 2019 agreement was a usurious loan because the interest rate exceeded 25 percent. They sought a declaration that the agreement was void.

The agreement contained a broad arbitration provision covering disputes arising from or connected with the agreement or the parties’ interactions. It stated that a court, rather than an arbitrator, would decide disputes about the arbitration provision’s own validity, enforceability, coverage, or scope. It did not reserve disputes about the validity of the agreement as a whole for the court.

The plaintiffs originally filed the action in New York state court. The defendants removed it to federal court based on diversity jurisdiction, asserting that the parties were citizens of different states and that more than $75,000 was at issue. The plaintiffs then moved to remand the case to state court or, alternatively, for summary judgment. The defendants moved to compel arbitration and stay the federal proceedings.

Remand

The court held that removal was proper. It found complete diversity because the plaintiffs were citizens of New York, BFS Capital was a citizen of North Carolina and Florida, and Axos Bank was a citizen of California for diversity purposes. The court also found that the amount in controversy exceeded $75,000.

The court rejected the plaintiffs’ arguments that Axos Bank’s New York office defeated diversity or that the defendants’ alleged forum shopping required remand. The court explained that an office in New York did not make Axos Bank a citizen of New York and that the plaintiffs had identified no legal basis requiring remand because the defendants allegedly preferred the federal forum.

Arbitration

The court concluded that the plaintiffs’ claim was covered by the arbitration provision. The provision clearly assigned disputes about the agreement’s overall validity to the arbitrator while reserving only disputes specifically challenging the arbitration provision for the court.

The plaintiffs challenged the agreement as a whole, arguing that the court should first decide whether it was usurious and invalid. They did not challenge the arbitration provision or its delegation of contract-validity questions to the arbitrator. The court therefore held that the arbitrator must decide the agreement’s overall validity in the first instance.

Rulings

Judge Cathy Seibel denied the plaintiffs’ motion to remand. She granted the defendants’ motion to compel arbitration and stay the proceedings, and denied the plaintiffs’ summary judgment motion. The court directed the Clerk to terminate the pending motions and stay the case pending arbitration. The parties were ordered to submit a joint status letter within fourteen days after the arbitration ended.