J.B. Plumbing and Heating of Virginia, Inc. v. Yellowstone Capital LLC

Background

J.B. Plumbing and Heating of Virginia, Inc. and Jerry Bush, Jr. brought a proposed class action against Yellowstone Capital LLC, Capital Advance Services LLC, Caporly LLC, David Glass, Yitzhak Stern, and Tsvi H. Davis. Plaintiffs alleged that the defendants participated in an enterprise that made fraudulent, usurious loans and used abusive collection practices. The complaint asserted claims under the Racketeer Influenced and Corrupt Organizations Act and for fraud.

Between July 2017 and May 2018, plaintiffs signed six agreements with Capital Advance Services LLC, or CAS. The agreements described transactions in which CAS purchased a percentage of J.B. Plumbing’s future receivables in exchange for immediate payments. Plaintiffs alleged that the transactions were actually loans with unlawfully high interest rates disguised as receivables purchases. The agreements included arbitration provisions and New York choice-of-law provisions.

Plaintiffs alleged that Yellowstone, CAS, Glass, Stern, Davis, and Caporly operated together in making and collecting on the alleged loans. They relied on allegations and evidence concerning the companies’ ownership, management, shared locations, and operations. The defendants disputed parts of that account, including Davis’s alleged role and the extent of the relationships among the defendants.

Motions and legal framework

Plaintiffs moved to compel arbitration. Defendants opposed that motion, arguing among other things that plaintiffs had not sent the contractually required certified-mail notice, that plaintiffs waived arbitration by filing suit first, and that the defendants other than CAS were not signatories to the agreements.

All defendants also moved to dismiss the complaint for failure to state a claim. The court explained that the Federal Arbitration Act makes written arbitration agreements enforceable, but does not require arbitration without an agreement to arbitrate. Whether the parties agreed to arbitrate was a threshold question for the court. When the evidence presents a factual dispute about arbitrability, the court must hold a trial to resolve that dispute.

Rulings on arbitration

The court rejected defendants’ argument that plaintiffs’ arbitration request was premature because plaintiffs had not sent certified-mail notice. Although the agreements required written notice by certified mail, plaintiffs’ counsel sent defense counsel an email demanding arbitration on the day the state-court action was filed, and plaintiffs later filed the motion to compel. Relying on Second Circuit precedent, the court held that the motion and the notice defense counsel actually received were sufficient for this purpose.

The court also held that plaintiffs did not waive arbitration by filing the lawsuit. Waiver depends on factors including the time before requesting arbitration, the amount of litigation, and prejudice to the opposing party. Plaintiffs requested arbitration the same day they filed the action, no discovery had occurred, and defendants had not shown prejudice.

The court concluded that CAS was bound by the arbitration provisions because it had signed the agreements. The other defendants argued that they could not be compelled to arbitrate because they had not signed them. The court considered possible legal theories that can bind non-signatories, including agency and veil-piercing or alter-ego theories. It found factual disputes concerning CAS’s ownership, whether CAS and Yellowstone were treated as interchangeable, shared office space and personnel, and the alleged control or involvement of Glass, Stern, Davis, and Caporly.

The court therefore held that it could not compel the defendants other than CAS to arbitrate on the existing record. Because plaintiffs had raised factual issues about whether those defendants were bound by CAS’s agreements, the court ruled that a trial on arbitrability was necessary.

Disposition

Judge Mary Kay Vyskocil denied plaintiffs’ motion to compel arbitration without prejudice to renewal after the trial on arbitrability. Although the court stated that CAS was bound to arbitrate, it did not order CAS to proceed to arbitration until the court determines whether any other defendant is also bound to arbitrate.

The court likewise denied defendants’ motions to dismiss without prejudice to renewal if, after the arbitrability trial, the defendants’ arguments are appropriate for resolution by the court. The clerk was directed to terminate the motions listed at docket entries 23, 27, 30, and 33.