Source Lender Not Named in Borrower’s Lawsuit Has Standing to Compel Arbitration

The Fourth Circuit Court of Appeals has held that a party to a contract, while not named as a party in litigation, still had standing to compel arbitration as agreed to in the contract.

In Republic Bank & Trust Co. v. Kucan, No. 05-1638, 2007 WL 2376927 (4th Cir. Aug. 21, 2007), Advance America, a national payday lender, contracted to act as Republic Bank’s servicing and marketing agent, while Republic Bank remained the actual lender. The loan agreements included an arbitration clause requiring disputes between borrowers, Republic Bank, and Advance America to be submitted to arbitration.

Kucan received payday loans from Republic Bank through Advance America, and initiated in North Carolina state court an action against Advance America, not naming Republic Bank as a defendant. Kucan alleged that the loan transactions violated North Carolina’s usury laws and its Consumer Finance Act, and sought a declaration that the loan agreements were void.

Republic Bank sued in federal court, seeking to compel Kucan to submit his claim to arbitration as required by the loan agreement. In response, Kucan argued that the district court lacked subject matter jurisdiction and that Republic Bank lacked standing to compel the claims to arbitration, as it was not a party. The district court concluded that Republic Bank lacked standing to maintain the action and dismissed it.

On appeal, Republic Bank argued that the district court erred in dismissing its petition. The Court agreed and determined that Republic Bank satisfied the constitutional standing requirements. Republic Bank, Advance America, and Kucan were parties to contracts that required that disputes be resolved through arbitration. As a party to the contract, Republic Bank has a right to insist on compliance with the contractual terms.

Further, Kucan’s claims place assets belonging to Republic Bank at risk, even though Kucan did not name Republic Bank as a defendant. A determination that the loan transactions are void would necessarily affect the interest of Republic Bank as the lender, and could expose Republic Bank to claims from other borrowers not parties to this action.

The Court concluded that Republic Bank has a direct and personal stake in the litigation, and therefore, standing to bring petition to compel arbitration. The Court noted that the Federal Arbitration Act does not itself create federal subject matter jurisdiction.

A petition to compel arbitration may be filed in federal court only if subject matter jurisdiction exists with regard to the underlying controversy. The Court remanded the case so that district court can conduct the appropriate inquiries to determine whether subject matter jurisdiction exists.