The Eleventh Circuit again faced the question (becoming increasingly common in the world of arbitration enforcement) of precisely which challenges to “arbitrability” can and cannot be contractually delegated to an arbitrator. The challenge in Steines v. Westgate Palace, L.L.C., 2024 WL 4052630 (11th Cir. Sept. 5, 2024), was based on the Military Lending Act (MLA), which prohibits certain consumer-credit contacts from containing mandatory arbitration agreements. The parties’ contract of course did have such an arbitration provision, and that provision also included a delegation clause, requiring disputes about arbitrability itself to be decided by arbitration. The Eleventh Circuit concluded that such a delegation clause does not supersede the court’s authority to determine if the MLA overrides the Federal Arbitration Act (FAA), because “the question of whether the FAA has been overridden by another act of Congress cannot be delegated to an arbitrator.”
While Adam Steines was an active-duty servicemember, he and his wife purchased a timeshare in Orlando that they financed with a loan from Westgate Palace, L.C.C. The loan agreement mandated arbitration of all issues arising from the contract, including the enforceability of the arbitration provision itself—commonly called a “delegation clause.”
The Steines brought a putative class action alleging that Westgate extended consumer credit to them in violation of the MLA, 10 U.S.C § 987. Westgate promptly moved to compel arbitration based on the arbitration agreement—particularly the delegation clause—and the FAA, 9 U.S.C. § 1 et seq. Westgate also moved to dismiss the complaint, asserting that the MLA does not apply to a loan designed to finance a timeshare. The Steines responded that their claim could not be compelled to arbitration, because the MLA overrides the application of the FAA and prohibits enforcement of the arbitration agreement. The district court denied both of Westgate’s motions, concluding that the MLA did override the FAA and prevented mandatory arbitration. Westgate immediately appealed the denial of the motion to compel arbitration, as allowed by § 16 of the FAA.
The Eleventh Circuit addressed three issues on appeal:(1) Should the district court have addressed the question of whether the MLA overrides the FAA, or was that a question of arbitrability for the arbitrator under the delegation clause?; (2) If so, did the district court answer that question correctly—i.e., does the MLA override the FAA, at least as to the delegation clause?; and (3) Does the MLA apply to loans for timeshare interests, or do they fall into its exception for “residential mortgages”?
The court concluded that the district court correctly answered all three questions and affirmed denial of Westgate’s motion to compel:
First, when it comes to the question of whether the FAA applies at all, the court should decide that threshold issue of arbitrability even if the presence of a delegation clause. Generally, courts treat a delegation clause as its own agreement to arbitrate arbitrability, separate and apart from the larger arbitration agreement. Any challenge to the delegation clause must be to that clause itself and not to the arbitration agreement as a whole. That is because the § 2 of the FAA provides that arbitration agreements (including any agreement to arbitrate arbitrability) are severable from the larger contract and must be enforced according to their terms. But if the FAA doesn’t apply, then neither do its rules. So, if a party challenges the applicability of the FAA itself, the court must determine whether the FAA has been overridden by another act of Congress.
Second, the MLA overrides the FAA and prohibits enforcement of arbitration agreements in contracts to which the MLA applies. Specifically, the MLA makes it “unlawful for any creditor to extend consumer credit to a covered member … with respect to which … the creditor requires the borrower to submit to arbitration or imposes onerous legal notice provisions in the case of a dispute.” 10 U.S.C. § 987(e)(3). And the MLA even has a provision titled “Arbitration,” stating that “[n]otwithstanding section 2 of title 9 [i.e., the FAA] … no agreement to arbitrate any dispute involving the extension of consumer credit shall be enforceable against any covered member.” § 987(f)(4).
Third, the court held that the MLA did in fact apply to the Steines’s loan to purchase a timeshare interest. Westgate argued that the loan fell into an exception in the MLA for “residential mortgages.” Looking to definitions in the MLA’s implementing regulations as well as dictionaries, the court rejected Westgate’s argument. In short, “these timeshare interests are far more like a hotel and far less like a home.”
The Eleventh Circuit’s opinion in Steines is notable for its contrast to the court’s 2022 opinion in Attix v. Carrington Mortgage Services, 35 F.4th 1284 (11th Cir. 2022). As we wrote in our previous post (which you can find here), the panel in Attix “easily decided that arbitration must be compelled to allow the arbitrator to decide whether arbitration of the consumer’s claims was precluded by the Dodd-Frank Act.”
The Steines court distinguished Attix based on the language of two statutes. Dodd-Frank provides that certain contracts cannot “bar a consumer from bringing an action in an appropriate district court of the United States.” This language prohibits arbitration of the merits of the consumer’s claim, not the claim’s arbitrability. The MLA, by contrast, “does not merely prohibit agreements that prevent consumers from bringing an action in federal court, but rather displaces the FAA altogether.” How district courts in the circuit will navigate this distinction remains to be seen.