Wells v. Chevy Chase Bank, F.S.B.

²³⁵ RODOWSKY, Judge. This appeal was taken from an order compelling arbitration. A preliminary procedural issue is whether Maryland law, which authorizes such appeals, has been preempted by 9 U.S.C. §§ 1 through 16, the Federal Arbitration Act (FAA). The substantive issue is whether the appellants, plaintiffs below, agreed to arbitrate.

As explained below, we shall answer each issue in the negative. The plaintiffs are Dale Wells of Ellieott City, Maryland, Sharon Goldenberg of Washington, D.C., and John Dovel of Falls Church, Virginia (the Plaintiffs). They sue Chevy Chase Bank, F.S.B. (Chevy Chase) and First U.S.A. Bank, N.A.

(First U.S.A.) (collectively, the Defendants). Plaintiffs’ first amended complaint alleges that the Defendants, in a number of aspects, breached the open end credit agreement (the Cardholder Agreement) in effect between Plaintiffs, as cardholders of credit cards issued by Chevy Chase, and Chevy Chase, as the card-issuing credit grantor. Prior to January 16, 1996, Chevy Chase had maintained its home office in Maryland. 1 The Cardholder Agreement provided for an annual fee, a minimum late charge fee of fifteen dollars, described the method of computing the finance charge, and stated that the “ANNUAL PERCENTAGE RATE will never exceed 24%.” With respect to amendments the Cardholder Agreement read: “We may amend the terms of this Agreement in accordance with applicable law at any time. Also we may at any time add new credit services, discontinue any credit services, or replace your card with another card.” The Cardholder Agreement also contained a “Governing Law” provision reading: ²³⁶ “This Agreement is made in Maryland.

It is governed by Subtitle 9 [‘Credit Grantor Revolving Credit Provisions’] of Title 12 [‘Credit Regulations’] of the Commercial Law Article of the Maryland Annotated Code and applicable federal laws.” There was no mediation or arbitration provision in the Cardholder Agreement. On or about January 16,1996, Chevy Chase moved its home office to Virginia. With the periodic statements mailed in January and February of 1996 to its cardholders, Chevy Chase included a notice of change of terms of the Cardholder Agreement. The notice of change took the form of a restatement and revision of the Cardholder Agreement, with the new or revised terms italicized and, with respect to a waiver of jury trial provision, both italics and all uppercase print was used.

Solely for purposes of this appeal, and without indicating any opinion on whether the Cardholder Agreement was effectively amended or whether the amendments are substantively valid, we shall call the product of the January and February mailings the “Amended Agreement.” The Amended Agreement provided that it was made in Virginia and was “subject to and governed by Virginia law and applicable federal law and regulations.” The Amended Agreement further recited that “[t]he parties agree that by engaging in activities with or involving each other, they are participating in transactions involving interstate commerce.” Also contained in the Amended Agreement was an alternative dispute resolution section which in relevant part reads: “Mediation and Arbitration — Any controversy or claim (‘Claim’) between or among you and us or our agents, employees and affiliates, including but not limited to those arising out of or relating to this Agreement or any related agreements, including -without limitation any Claim based on or arising from an alleged tort, shall, at the request and expense of the claiming party, be submitted to mediation, using the rules of the American Arbitration Association (‘AAA’). ²³⁷ “If mediation fails to resolve the Claim within 30 days from the date of engagement, then the Claim shall be determined by binding arbitration. (Mediation or Arbitration, as appropriate, are sometimes referred to below as the ‘Proceeding’.) Arbitration shall be conducted in accordance with the United States Arbitration Act (Title 9, U.S.Code), notwithstanding any choice of law provision in this Agreement, and under the rules of the AAA. Either you or we may, by summary proceedings (e.g., a plea in abatement or motion to stay further proceedings), bring an action in any court having jurisdiction for the sole purpose of compelling compliance with these mediation and arbitration provisions.” (Emphasis added). On or about September 30,1998, First U.S.A. purchased the credit card portfolio of Chevy Chase.

Plaintiffs instituted the instant action in January 1999. They allege that the defendants breached the Cardholder Agreement by charging interest in excess of twenty-four percent, by increasing the interest on past balances, by failing to provide legally required notice of the amendments, by changing the method of calculating the finance charge without proper notice, and by increasing the late fees and over-limit fees without proper notice. Plaintiffs also allege violation of the Maryland Consumer Protection Act, Maryland Code (2000 Repl.Vol.), §§ 13-101(d) and 13-303(3) of the Commercial Law Article (CL). The principal theory of the Plaintiffs’ case is that the Cardholder Agreement was never effectively amended.

In this connection, Plaintiffs principally rely on CL § 12-912 that addresses amendment of the agreement governing a revolving credit plan. In broad strokes, that section requires, “at least 25 days before the effective date of the amendment,” a clear and conspicuous written notice, “[i]f the amendment has the effect of increasing the interest, finance charges, or other fees and charges to be paid by the borrower ... or altering the manner of their computation.” § 12-912(b)(l). The notice must include “[a] clear statement comparing the original ²³⁸ terms and the terms under the amended agreement.” § 12-912(b)(l)(i). The initial notice is also to include “a statement that a second notice will be sent in the borrower’s next periodic statement.” § 12 — 912(c)(7).

Both notices are to be in ten point type. Id. The notice is to advise of the cardholder’s optional right to refuse the amendment and to describe the manner of refusing. § 12 — 912(c)(7)(ii). Where, as here, the plan charges an annual fee, rejection of the amendment entitles the cardholder to “use the account pursuant to its original, unamended terms, for ... [t]he duration of the time for which a fee was paid for use of the plan.” § 12 — 912(c)(5)(i)l.

In addition, § 12-912(e) provides: “If the terms of the agreement governing the plan, as originally drawn or amended[,] provide, any amendment may, on or after the date on which it becomes effective as to a particular borrower, apply to all then outstanding unpaid indebtedness in the borrower’s account under the plan, including any indebtedness which shall have arisen out of purchases made or loans obtained prior to the effective date of the amendment.” Plaintiffs also seek to have their claims certified as a class action for a class consisting of “[a]ll cardholders who had a Chevy Chase-issued Visa or MasterCard credit card prior to January 16, 1996 in which Chevy Chase agreed that the governing law would be Subtitle 9 of Title 12 of the Commercial Law Article of the Maryland Annotated Code and thereafter incurred any finance charges, late fees, or overlimit fees.” Defendants responded to the complaint by moving, pursuant to the FAA, to compel mediation/arbitration in accordance with the Amended Agreement. Plaintiffs’ answer to the demand for arbitration was that they had never agreed to arbitrate. Principally, Plaintiffs contended that the Cardholder Agreement had never been effectively amended because the alleged failure to comply with CL § 12-912 caused the arbitration provision of the Amended Agreement, as well as its financial terms, to lack any contractual foundation. The De ²³⁹ fendants made a twofold replication.

First, they argued that the Amended Agreement was severable and that no provision in CL § 12-912 even addressed an arbitration provision in an open end credit plan. The second ground argued by the Defendants was that § 12-912 was preempted by 12 C.F.R. § 560.2 (a), a regulation of the Office of Thrift Supervision (OTS). That regulation undertakes to preempt by “occup[ying] the entire field of lending regulation for federal savings associations.” Id. 2 ²⁴⁰ Plaintiffs’ rejoinder was that, as stated in 12 C.F.R. § 560.2 (c)(1), § 560.2(a) does not preempt the contract law of a state. Plaintiffs assert that in the Cardholder Agreement Chevy Chase covenanted that it would comply with Subtitle 9 of Title 12 of the Maryland Commercial Law Article and that federal preemption cannot negate that promise.

Defendants’ surrejoinder was that Plaintiffs’ rejoinder misinterpreted the governing law provision of the Cardholder Agreement and that, in any event, that which had been invalidated by federal preemption could not be incorporated by reference as governing law into a contract. The circuit court granted the Defendants’ motion to compel arbitration. Essentially the court reasoned that CL § 12-912 did not prevent the arbitration provision, which was viewed as severable from the other provisions of the Amended Agreement, from becoming part of the contract between the parties. Plaintiffs appealed from that order to the Court of Special Appeals where they were met by a motion by the Defendants to dismiss the appeal on the ground that the Maryland law permitting an appeal from an order compelling arbitration was preempted by a provision of the FAA.

The Court of Special Appeals denied the motion without prejudice to renewal at argument. Thereafter, we granted a petition for certiorari filed by the Plaintiffs and a cross-petition for certiorari filed by the Defendants which asserted a lack of appellate jurisdiction. Wells v. Chevy Chase Bank, 358 Md. 608 , 751 A.2d 470 (2000). ²⁴¹ I Maryland Code (1974, 1998 Repl.Vol.), § 12-301 of the Courts and Judicial Proceedings Article (CJ) is the general appeals statute, conferring a right to appeal “from a final judgment entered in a civil or criminal ease by a circuit court.” Because an order of a circuit court compelling the parties in an action before it to arbitrate the underlying claim completely terminates the action in the circuit court, we have held that an order compelling arbitration is a final judgment and appeal-able under CJ § 12-301. Horsey v. Horsey, 329 Md. 392, 402-04 , 620 A.2d 305, 310-12 (1993); Litton Bionetics, Inc. v. Glen Constr.

Co., 292 Md. 34, 41-42 , 437 A.2d 208, 212 (1981). The Defendants submit that this application of CJ § 12-301 is preempted by FAA § 16(b)(2). In relevant part § 16 provides: “(a) An appeal may be taken from— “(3) a final decision with respect to an arbitration that is subject to this title. “(b) ... [A]n appeal may not be taken from an interlocutory order— “(1) granting a stay of an action under section 3 of this title; [and] “(2) directing arbitration to proceed under section 4 of this title[.]” 9 U.S.C. § 16 (1994). Because 9 U.S.C. § 16 (a)(3) permits an appeal from “a final decision,” and because the instant order to compel arbitration is a final judgment under Maryland procedural law, one might conclude that would dispose of the dismissal motion.

Defendants, however, press a distinction found in the federal cases. They argue as follows: “FAA § 16 does permit immediate appeals from ‘a final decision with respect to an arbitration.’ 9 U.S.C. § 16 (a)(3). A ‘final decision’ is one that resolves an ‘independent’ action, in which the ‘sole issue before the district court is the arbitrability of the [underlying] dispute.’ [In re ] Pisgah ²⁴² Contractors, 117 F.3d [133,] 136 [ (4th Cir.1997) ] (quoting Humphrey v. Prudential Sec., Inc., 4 F.3d 313, 317 (4th Cir.1993)) (emphasis in original). Where arbitration is only ‘one issue among others for the district court to resolve,’ the arbitration issue is considered to be ‘embedded,’ and an order compelling arbitration in such a case is an unappealable interlocutory order within the meaning of FAA § 16(b), even if the order compels arbitration of all substantive claims involved in the dispute.

Id.; American [Cas.] Co. v. L-J, Inc., 35 F.3d 133, 136 (4th Cir.1994). Because the Arbitration Order here was entered in the context of a larger breach of contract dispute, the arbitration issue was ‘embedded’ in appellants’ contract and state statutory claims, and therefore the Arbitration Order is not an appealable ‘final decision’ for purposes of FAA § 16. Pisgah Contractors, 117 F.3d at 136.” Brief of Appellees at 6 n. 1. We shall assume, arguendo, that arbitrability in the instant matter is “embedded” in other issues, but we conclude that Maryland procedural law, under which the subject order to compel is a final judgment, is not preempted by the FAA.

The problem with Defendants’ reliance upon 9 U.S.C. 16(b)(2) is that § 4 of the FAA, as well as § 3, expressly deal only with the procedure to be followed by the federal courts. The relevant texts of those two sections are: “If any suit or proceeding be brought in any of the courts of the United States upon any issue referable to arbitration under an agreement in writing for such arbitration, the court in which such suit is pending, upon being satisfied that the issue involved in such suit or proceeding is referable to arbitration under such an agreement, shall on application of one of the parties stay the trial of the action until such arbitration has been had in accordance with the terms of the agreement, providing the applicant for the stay is not in default in proceeding with such arbitration.” 9 U.S.C. § 3 (1994) (emphasis added). “A party aggrieved by the alleged failure, neglect, or refusal of another to arbitrate under a written agreement for ²⁴³ arbitration may petition any United States district court which, save for such agreement, would have jurisdiction under Title 28, in a civil action or in admiralty of the subject matter of a suit arising out of the controversy between the parties, for an order directing that such arbitration proceed in the manner provided for in such agreement.... The court shall hear the parties, and upon being satisfied that the making of the agreement for arbitration or the failure to comply therewith is not in issue, the court shall make an order directing the parties to proceed to arbitration in accordance with the terms of the agreement.” 9 U.S.C. § 4 (1994) (emphasis added). Further, although the United States Supreme Court has applied 9 U.S.C. § 2 to actions in state courts and given that statute preemptive effect over substantive provisions of state law, the Court has declined to decide whether §§ 3 and 4 apply in state court actions. 3 See Southland Corp. v. Keating, 465 U.S. 1 , 16 n. 10, 104 S.Ct. 852 , 861 n. 10, 79 L.Ed.2d 1 , 15 n. 10 (1984) (“In holding that the Arbitration Act preempts a state law that withdraws the power to enforce arbitration agreements, we do not hold that §§ 3 and 4 of the Arbitration Act apply to proceedings in state courts.

Section 4, for example, provides that the Federal Rules of Civil Procedure apply in proceedings to compel arbitration. The Federal Rules do not apply in such state-court proceedings”). The Court reiterated this limitation of its Southland holding in Volt Info. Sciences, Inc. v. Board of Trustees of Leland Stanford Junior Univ., 489 U.S. 468 , 109 S.Ct. 1248 , 103 L.Ed.2d 488 (1989), stating: ²⁴⁴ “It is undisputed that this contract falls within the coverage of the FAA, since it involves interstate commerce, and that the FAA contains no provision authorizing a stay of arbitration in this situation.

Appellee contends, however, that §§ 3 and 4 of the FAA, which are the specific sections claimed to conflict with the California statute at issue here, are not applicable in this state-court proceeding and thus cannot preempt application of the California statute.... While the argument is not without some merit, we need not resolve it to decide this case, for we conclude that even if §§ 3 and 4 of the FAA are fully applicable in state-court proceedings, they do not prevent application of Cal.Civ.Proc.Code Ann. § 1281.2(c) to stay arbitration where, as here, the parties have agreed to arbitrate in accordance with California law.” Volt, 489 U.S. at 476-77 , 109 S.Ct. at 1254-55 , 103 L.Ed.2d at 498-99 (footnote omitted). In a related footnote the Court explained: “While we have held that the FAA’s ‘substantive’ provisions— §§ 1 and 2 — are applicable in state as well as federal court, see Southland Corp. v. Keating, 465 U.S. 1, 12 , 104 S.Ct. 852, 859 , 79 L.Ed.2d 1, 13 (1984), we have never held that §§ 3 and 4, which by their terms appear to apply only to proceedings in federal court, see 9 U.S.C. § 3 (referring to proceedings ‘brought in any of the courts of the United States’); § 4 (referring to ‘any United States district court’), are nonetheless applicable in state court. See Southland Corp. v. Keating, supra, at 16 n. 10, 104 S.Ct. at 861 n. 10, 79 L.Ed.2d at 15 n. 10 (expressly reserving the question whether ‘ §§ 3 and 4 of the Arbitration Act apply to proceedings in state courts’); see also id., at 29, 104 S.Ct. at 867 , 79 L.Ed.2d at 23-24 (O’CONNOR, J., dissenting) (§§ 3 and 4 of the FAA apply only in federal court).” Volt, 489 U.S. at 476 n. 6, 109 S.Ct. at 1254 n. 6, 103 L.Ed.2d at 499 n. 6.

The majority opinion in Volt also stated, “There is no federal policy favoring arbitration under a certain set of procedural rules; the federal policy is simply to ensure the enforceability, according to their terms, of private agreements ²⁴⁵ to arbitrate.” Id. at 476 , 109 S.Ct. at 1254 , 103 L.Ed.2d at 498 . The common denominator of the recent United States Supreme Court decisions that have held state laws preempted by § 2 of the FAA seems to be that those state statutes targeted agreements to arbitrate and treated them less favorably than other contracts. In Doctor’s Assocs., Inc. v. Casarotto, 517 U.S. 681 , 116 S.Ct. 1652 , 134 L.Ed.2d 902 (1996), the Court found that FAA § 2 preempted a provision in a Montana statute regulating franchise agreements that voided a promise to arbitrate disputes, unless the provision was typed in capital letters, with underlining, on the first page of the franchise agreement. An Alabama statute which made written, predispute arbitration agreements invalid was held to be preempted by FAA § 2 in Allied-Bruce Terminix Cos. v. Dobson, 513 U.S. 265 , 115 S.Ct. 834 , 130 L.Ed.2d 753 (1995).

There the Court rejected an interpretation of “a transaction involving commerce” in § 2 which would have limited the reach of the FAA to transactions where the parties contemplated substantial interstate activity. Perry v. Thomas, 482 U.S. 483 , 107 S.Ct. 2520 , 96 L.Ed.2d 426 (1987), held that FAA § 2 preempted a California statute which provided “that actions for the collection of wages may be maintained ‘without regard to the existence of any private agreement to arbitrate.’ ” Id. at 484, 107 S.Ct. at 2523 , 96 L.Ed.2d at 432 . Southland Corp. v. Keating, supra, involved a