Eleventh Circuit Holds Third-Party Insurer Not Entitled to Enforce Arbitration Clause of Loan Agreement

On August 10, 2011, the Eleventh Circuit held that Life of the South, a credit life insurer, could not enforce an arbitration clause in a loan agreement that it was not a party to or an assignee of.  Lawson v. Life of the South Insurance Co., 2077 WL 3476876 *6 (August 10, 2011).  Following Georgia law, the Eleventh Circuit held that only intended beneficiaries under a contract may maintain an action against the promisor on the contract and that in order for a party to compel arbitration under the doctrine of equitable estoppel, a plaintiff’s claims must directly, not just indirectly, be based on the contract containing an arbitration clause.  Id.

In December 2002, the Lawsons purchased a used 2000 Chevrolet Blazer from a car dealership in Morrow, Georgia.  The Lawsons financed their purchase by entering into a loan agreement with the dealership.  The dealership assigned the loan agreement to Chase Manhattan Bank.   The loan agreement required the Lawsons to pay monthly installments on the car for 60 months and it granted them the right to pay off the loan early.  The loan agreement also contained a clause titled “Agreement to Arbitrate Disputes,” which allowed the parties to arbitrate any claims arising from the loan agreement.  Under the loan agreement, the Lawsons were given the option to purchase credit life insurance.

The Lawsons purchased the credit life insurance and checked the appropriate box on the loan agreement.  The premium for the insurance was a one-time, up-front payment of $530.08, and that premium would be included in the total amount financed under the loan agreement for the purchase of the car.  The credit life insurance policy provided that if the Lawsons paid off the entire balance of the loan early, they would be eligible for a refund of any remaining premium on the policy.  Unlike the loan agreement between the Lawsons and the car dealership, the credit life insurance policy agreement between the Lawsons and Life of the South did not contain an arbitration clause.

The Lawsons were able to pay off the entire balance of the loan in April 2005, more than two-and-a-half years early.  After paying off the remaining balance of the loan, Life of the South made no effort to refund the unearned amount of the prepaid premium to the Lawsons.  Nearly one year after paying off the balance of the loan, the Lawsons filed a nationwide consumer class action against Life of the South.  In response, Life of the South filed a motion to compel arbitration based on the arbitration clause in the loan agreement.

Writing for the majority, Justice Carnes wrote that the face of the arbitration clause did not show an intent to give Life of the South, a third party, the right to compel arbitration.  Lawson, 2011 WL 3476876 *5.  The loan agreement granted only “you” (defined as the Lawsons) and “we” (defined as the car dealership, Chase Manhattan, and their assignees) the right to elect to arbitrate.  Since Life of the South was neither a “you” or a “we,” it could not compel arbitration.  Life of the South further argued that it could compel the Lawsons to arbitration under the equitable estoppel doctrine.  Equitable estoppel allows a non-signatory to an arbitration agreement the ability to compel arbitration or to be compelled to arbitration if the signatory to a written agreement must rely on the terms of the written agreement in asserting its claims against the non-signatory.  Life of the South claimed that the equitable estoppel doctrine applied in this case because the Lawsons’ claims against Life of the South made reference to and presumed the existence of the underlying loan agreement.  The Court held that, although the Lawsons’ complaint made reference to the loan agreement twelve times and their claims depended on the existence of the loan agreement, their claims against Life of the South were not directly based on the loan agreement containing the arbitration clause.  Id.  Therefore, Life of the South could not rely on the equitable estoppel doctrine to compel arbitration.

The Eleventh Circuit’s ruling in this case is significant on two fronts.  The first is that the Court made it clear that a non-party signatory in a consumer class action must be an intended beneficiary of a contract to enforce an arbitration clause in that contract.  The other is that in order for the equitable estoppel doctrine to apply, the underlying claim must directly involve the contract that includes the arbitration clause.  The factual significance of the Lawson case is that the Lawsons referenced the loan agreement, that included the arbitration, clause twelve times in its complaint and the Eleventh Circuit held that this was not sufficient to rule that the Lawsons’ claims directly involved the loan agreement.