Fourth Circuit Reverses District Court's Decision; Rules Debt Collector's Arbitration Provisions Unenforceable

Payday Lending Debt Collection

Recently, the U.S. Court of Appeals for the Fourth Circuit reversed a District Court’s decision that a debt collector’s arbitration provisions in loan agreements were enforceable. Hayes v. Delbert Services Corp., No. 15-1170 (4th Cir. Feb. 2, 2016). The defendant collected on loans that were transferred from an online payday lender owned by a member of the Cheyenne River Sioux Tribe. The loan agreements for the transferred loans provided that disputes between the borrower and the payday lender, or any assignee, would be resolved by binding arbitration “conducted by the Cheyenne River Tribal Nation by an authorized representative in accordance with its consumer dispute rules and the terms of this Agreement.” The loan agreement also provided that the agreement “IS MADE PURSUANT TO A TRANSACTION INVOLVING THE INDIAN COMMERCE CLAUSE OF THE CONSTITUTION OF THE UNITED STATES OF AMERICA, AND SHALL BE GOVERNED BY THE LAW OF THE CHEYENNE RIVER SIOUX TRIBE. The arbitrator will apply the laws of the Cheyenne River Sioux Tribal Nation and the terms of this Agreement.” The agreement went on to state that the arbitrator would not apply “any law other than the law of the Cheyenne River Sioux Tribe of Indians to this Agreement.”  

The Fourth Circuit held that existing Supreme Court precedent makes it clear that the freedom to contract for arbitration does not extend to using an arbitration provision or choice of law clause to create a “substantive waiver of federally protected civil rights.” Essentially, the Fourth Circuit found the arbitration provisions in the loan agreement purported to create a prospective waiver of substantive rights under federal law, which rendered the arbitration provisions unenforceable. The Fourth Circuit observed that “a party… may not flatly and categorically renounce the authority of the federal statutes to which it is and must remain subject.” The Fourth Circuit also found that the arbitration provisions addressing governing law were not severable, because they went to the essence of the contract.

On February 16, the defendant filed a petition for rehearing arguing that the Fourth Circuit’s ruling (i) conflicts with past Supreme Court and Fourth Circuit decisions; and (ii) “will lead to the invalidation of countless arbitration agreements with foreign choice-of-law clauses on the ground that explicitly providing for the application of foreign law violates the prospective waiver doctrine.”