Arbitration
Modern Perfection LLC v. Bank of America
Date: Jan. 13, 2025
Issue: Whether a lawsuit alleging that Bank of America (BofA) misled small businesses over its Paycheck Protection Program (PPP) loans fell within the scope of arbitration.
Case Summary: In a 3-0 decision, a Fourth Circuit panel affirmed a Maryland federal court decision requiring small businesses to arbitrate their proposed class action lawsuit alleging BofA misled them about the Paycheck Protection Program.
Six small businesses each signed two contracts with BofA, a deposit agreement and a promissory note. The deposit agreement included an arbitration provision, while the promissory note did not. The businesses claimed that BofA denied loan forgiveness for borrowers who used PPP loans to pay independent contractors or freelancers (1099 workers) instead of employees on payroll. The businesses argued that expenses for 1099 workers could be used to calculate loan eligibility under the PPP, but BofA still denied forgiveness.
A Maryland federal court granted BofA’s motion to compel arbitration and dismissed the businesses’ complaint. According to the court, “the parties have entered into an arbitration agreement that contains a valid and enforceable delegation clause,” and “the pain language of the delegation clause also makes clear that the parties must address threshold issues of arbitrability before the arbitrator.” Affirming the district court, the panel first sought to identify the type of claims the businesses were making and determine which were properly brought before it. In Coinbase, Inc. v. Suski, the Supreme Court outlined four types of disputes related to arbitration:
- First-order disagreements: Disputes about the merits, resolved by applying relevant laws and facts.
- Second-order disputes: Disagreements over whether the parties agreed to arbitrate the merits of their dispute.
- Third-order disputes: Questions about whether the court or arbitrator can decide arbitrability.
- Fourth-order disagreements: Conflicts about which of two contracts determines if a dispute is subject to arbitration.
In Coinbase, the Court held that fourth-order disagreements — those about which of “two contracts” “governs” whether a given dispute is subject to arbitration — must be decided by a court using traditional contract principles. Applying that framework, the panel concluded that the businesses raised no fourth-order issues, agreeing with the district court that the deposit agreements provide that an arbitrator decides arbitrability questions.
The panel refused to consider fourth-order issues because the businesses did not raise them in their briefs. Instead, the businesses argued that they never agreed to arbitrate this dispute (a second-order argument). They also claimed that the deposit agreements do not clearly and unmistakably delegate the question of arbitrability to the arbitrator (a third-order argument). In essence, the businesses contended that their claims fall outside the deposit agreements’ arbitration provision, not that the promissory notes supersede the deposit agreements. The panel noted, however, that the businesses failed to explain how their arguments would differ if the promissory notes did not exist. The panel emphasized this distinction is not about semantics but relates to the nature of the businesses’ claims and the grounds on which they sought to overturn the district court’s judgment. The panel emphasized that arguments not raised in an appellant’s opening brief are rarely considered.
The panel also concluded that the businesses’ argument — that the district court incorrectly found “an enforceable agreement to arbitrate claims against the bank,” a second-order holding — was unpersuasive. The panel clarified that the district court made no such decision. Instead, the district court issued a third-order ruling, deciding that the deposit agreements’ arbitration provision includes a valid and enforceable delegation clause requiring parties to present threshold arbitrability questions to the arbitrator. The businesses offered two challenges to the district court’s reasoning, but the panel dismissed both arguments. First, the businesses claimed the deposit agreements’ language was not clear enough to delegate arbitrability questions to the arbitrator. The panel noted that every court interpreting this provision disagreed with this claim, and “that streak would not end” with this case. It further explained that the U.S. Supreme Court and the Fourth Circuit have treated similar provisions as valid delegation clauses. Second, the businesses argued the delegation clause was unenforceable because they “never agreed to arbitrate claims arising out of promissory notes.” The panel determined this argument concerned the arbitration provision’s scope, not the delegation clause’s validity.
In addition, the panel rejected the businesses’ argument that the district court erred by dismissing their complaint rather than staying the suit pending arbitration. The panel stressed that the businesses never requested a stay, noting it rarely overturns district court decisions for not doing something the appealing party failed to request.
Bottom Line: As of Feb. 1, the businesses have not filed for an en banc (full panel) petition for rehearing.
Document: Opinion
