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First Atlantic Federal Credit Union v. Pine Belt Automotive, Inc.

A-4136-08T3 (N.J. Super. App. Div. 2010) (Unpublished)

ARBITRATION — Where an agreement contains an arbitration provision limited to “this agreement,” and other, unrelated agreements do not contain an arbitration provision, disputes under those other agreements will not be subject to arbitration because private parties can only be compelled to arbitrate to the extent they have agreed to do so.

A credit union and an automobile dealer entered into a Dealer Agreement, setting forth the terms under which the credit union would provide non-recourse financing for the dealer’s customers. The dealer was to prepare a retail installment contracts and submit a credit application to a third-party processor for review. The processor was to “review the application and perform an underwriting analysis, including a review of the individual’s credit history and a verification of employment and residence, to determine if the customer qualified for credit.” If approved, the processor would forward the package to the credit union which would then conduct its own review. If satisfied, the credit union would approve the transaction and purchase the loan from the dealer.

“Under the terms of the Dealer Agreement, [the dealer] would not be liable for repayment ‘if the reason for non-payment relate[d] solely to the creditworthiness of any maker, co-maker or grantor who is party’ to the loan.” The dealer was also to represent and warrant that, to its knowledge, the buyer’s application was true and correct in all respects and that the dealer had no knowledge of any undisclosed adverse information. The Dealer Agreement also contained an arbitration provision and a merger clause.

The credit union had another loan program known as its “Instant Approval Program” under which it would provide financing to the same dealer’s customers. Under this program, the prospective buyer had to meet certain specific criteria, including having a credit score of no less than 600, having “a minimum of five trade-lines, one of which had been open for at least five years; hav[ing] a stable employment history; and a prior satisfactory auto loan.” Buyers who had previously been bankrupt or had a home repossessed were not eligible nor were loans that required a co-signer.

The credit union sued the dealer alleging that the dealer had misused the Instant Approval Program by “submitting inaccurate credit reports and Instant Approval Forms to obtain financing for more [than] 1,000 customers who would otherwise not have qualified.” Among that group, there were a significant number of defaults. The credit union demanded that the dealer make it whole for the losses. The dealer responded by demanding arbitration, citing the provision in the Dealer Agreement. The credit union responded that the Instant Approval Program was “a ‘specialized’ one that was ‘separate and distinct from any Dealer Agreement.’” The Instant Approval Program was targeted for the “most qualified buyers” and did not utilize third-party processors. It permitted dealers to pass on a buyer’s credit. The dealer also noted that “transactions under the Instant Approval Program were ‘processed separately and in addition to the ordinary flow of contracts offered under the Dealer Agreements.’” The lower court denied the motion and sent the matter to arbitration. The dealer appealed, arguing, among other things, that “[a]n agreement to arbitrate should be read liberally in favor of arbitration.” The Appellate Division rejected that argument, pointing out that “[p]rivate parties, however, can only by compelled to arbitrate to the extent they have agreed to do so.” Courts are required to “determine and enforce an agreement to arbitrate based on ‘the contractual terms, the surrounding circumstances, and the purpose of the contract.” In this case, the arbitration provision in the Dealer Agreement applied to breaches of “this Agreement.” Thus, according to the Court, the arbitration provision was defined by the scope of the Dealer Agreement. Further, the Court agreed with the dealer that the two programs were separate and distinct and that there was no basis “to enforce into the Instant Approval Program the arbitration provisions contained in the Dealer Agreement.”

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