Subscribe to our InfoBytes Blog weekly newsletter and other publications for news affecting the financial services industry.
On November 27, the Superior Court of New Jersey, Appellate Division, affirmed an order requiring arbitration between a consumer and the buyer of the consumer’s debt (debt collector) in a lawsuit filed by the consumer claiming that the debt collector was not licensed to collect debts in New Jersey. According to the decision, the consumer had opened a credit card account with a bank, which included an arbitration agreement, then defaulted on the account. The debt collector then bought the debt and collected the consumer’s debt. The consumer subsequently sued the debt collector for its purported unlicensed collection of debts, but the trial court dismissed the complaint and compelled arbitration between the parties. The consumer appealed, arguing in part that the trial court erred by allowing an arbitrator to decide the validity of the assignment to the debt collector, and, therefore, the enforceability of the arbitration agreement. The appellate division court sided with the trial court that the arbitration clause “clearly and expressly stated claims relating to the ‘application, enforceability or interpretation of this Agreement, including this arbitration provision’ are subject to arbitration.” Moreover, the court concurred that the agreement did not violate the state’s plain language statute. However, the appellate division remanded the case to the trial court for issuance of an order to stay—rather than dismiss—the matter pending arbitration.
On October 17, the U.S. District Court for the District of New Jersey issued an opinion allowing consumer protection claims to proceed against a car dealership related to fees added to vehicle purchase prices, while granting two other related entities’ motions to dismiss. The plaintiff’s complaint against the dealership and related entities alleged that the dealership charged her additional mandatory fees when purchasing the vehicle, required her to spend $3,500 on a service contract in order to obtain financing, and charged interest on the contract even though, the plaintiff alleged, the contract constituted a fee related to the extension of credit and therefore was not subject to interest. These actions, the plaintiff alleged, violated TILA, the Consumer Fraud Act (CFA), the Truth-in-Consumer Contract, Warranty and Notice Act, and the Consumer Service Contract Act (CSCA). According to the plaintiff, the contracts contained cancellation provisions that guaranteed a full refund if a request was submitted within a specified period with a guaranteed 10 percent penalty for each 30-day period for which the refund was unpaid. The plaintiff executed timely refund requests but claimed that the entities failed to refund the fees within the allotted contractual period. In separate motions to dismiss, the entities argued that, while the allegations could be considered contractual breaches, they were not sufficient to constitute violations under the alleged consumer protection statutes. The court agreed and granted the entities’ motions, ruling that their contract language complied with the CSCA and that, although the entities allegedly failed to perform under their contracts, they would only have violated the CFA if they knew at the time the contract was formed that they did not intend to fulfill their contractual duties. Moreover, the court referred to a New Jersey Supreme Court holding, which said that a breach of warranty or contract, “‘is not per se unfair or unconscionable. . .and. . .alone does not violate a consumer protection statute” unless there are “substantial aggravating circumstances.” As such, the court determined, the entities’ alleged breaches of the cancellation provisions were not “‘unconscionable commercial practices’” as required under the CFA. However, the plaintiff can amend her claims.
Moreover, the court ruled that the allegations against the dealership can proceed, and denied the dealership’s bid to send the case to arbitration. According to the court, the dealership’s argument that it never received notices that the plaintiff had initiated arbitration proceedings because of a “clerical error” or a wrong mailing address were unpersuasive, and referred to the American Arbitration Association’s decision to decline “to administer the case due to the failure of [the dealership] to pay the required arbitration fees.”
On October 8, the U.S. District Court for the Northern District of Illinois granted a defendant’s motion to compel arbitration in a putative class action suit alleging that he threatened to charge unauthorized late fees on defaulted consumer debt. The suit claimed that the defendant, who was an attorney hired to collect the debt, violated the FDCPA when he sent a letter attempting to collect on a delinquent account containing the language: “Because of interest, late charges, attorneys fees, if any, and other charges that my vary from day to day, the amount due on the day you pay may be greater.” According to the borrower, the statement was false and misleading because late fees could not accrue on her debt anymore since the debt had already been “fully accelerated” under the provisions of consumer loan agreement signed with the company that owned her consumer loan account. The attorney moved to compel arbitration based on an arbitration provision in the borrower’s loan agreement. While the borrower did not dispute that the arbitration provision was valid, she argued that the attorney does not fall within the provision’s scope. Among other things, the borrower asserted that (i) the attorney was not a party to the loan agreement and, thus, could not invoke its arbitration provision; and (ii) FDCPA claims can only be brought against a debt collector and not against the creditor, and that, because the company (not the attorney) was her creditor, the arbitration provision would not cover her FDCPA claims.
The court disagreed. “The fact that an FDCPA claim against [the company] would be a clear loser does not mean that the arbitration provision does not cover FDCPA claims—which have been brought, and will continue to be brought, against creditors,” the court stated. “Arbitration provisions cover weak and strong claims alike, so long as the claim falls within the provision’s defined scope.” According to the court, the claims fell comfortably within the provision’s broad agreement to arbitrate “any dispute, claim or controversy” related to a borrower’s account, loan agreement or relationship with the company. Concerning the borrower’s argument that the attorney cannot invoke the arbitration provision because he is not a party to the loan agreement, the court agreed that, “as a general rule, ‘[o]nly signatories to an arbitration agreement can file a motion to compel arbitration.’” However, it ruled that Illinois law allows an exception to the general rule where the signatory’s agent seeks to compel arbitration. Moreover, the court further ruled that the attorney has not waived his right to arbitration by litigating the case for nine months before moving to compel arbitration.
On September 10, the U.S. District Court for the Eastern District of Arkansas granted a motion to compel arbitration in a putative class action alleging violations of the Arkansas Fair Debt Collection Practices Act (AFDCPA) and the FDCPA. According to the order, the plaintiffs contended that the defendants—a debt buyer and its law firm—attempted to collect charged-off credit card debts “through standardized, form debt collection complaints . . . that fraudulently and falsely averred that [the debt buyer] ‘holds in due course a claim . . . pursuant to a defaulted [bank] credit card account.” While the plaintiffs did not dispute that the arbitration provision contained within the cardholder agreement entered into with the bank was valid and that their state and federal claims fell within its scope, they argued that the debt buyer was not a “holder in due course” of the accounts in questions, and as such, the arbitration provision contained within the cardholder agreement was not assigned to the defendants. The court disagreed, ruling that the cardholder agreements specifically permitted the original creditors to assign their rights to a third party, which includes the right to arbitration and the right to enforce the class action prohibition.
On August 23, the U.S. District Court for the Northern District of California held that a portion of a class action suit alleging a bank improperly assessed overdraft fees must proceed to arbitration. According to the opinion, a consumer filed the class action complaint alleging the bank charged multiple non-sufficient funds fees for the same credit card payment transaction, in violation of the contract between the bank and the consumer. The class action alleged claims for breach of contract, or, in the alternative, unjust enrichment, as well as a claim for violating the California Business & Professions Code and a claim for violating the California Consumer Legal Remedies Act. The bank moved to compel arbitration of all the claims based on an arbitration clause contained in the customer deposit agreement. The court concluded that the claims for breach of contract and unjust enrichment are covered by the arbitration clause in the deposit agreement and therefore compelled arbitration. As for the injunctive relief the consumer sought under the California state statutory claims, the consumer argued that the court should apply the California Supreme Court decision in McGill v. Citibank, N.A (covered by a Buckley Special Alert here), which held that a waiver of the plaintiff’s substantive right to seek public injunctive relief is not enforceable, and that “Texas law is contrary to a fundamental policy of California.” The court determined that because Texas does not have a “rule comparable to McGill and because California has a materially greater interest than Texas,” California law applies to the injunctive relief claims and therefore, the claims “must be litigated and not arbitrated.” However, to the extent the consumer sought monetary relief under the state statutory claims, those claims must be arbitrated.
On July 12, the U.S. Court of Appeals for the 3rd Circuit affirmed the denial of a debt collector’s motion to compel arbitration, concluding the debt collector did not establish authority to enforce the arbitration agreement made between the consumer and the original creditor. According to the opinion, a consumer executed a credit card agreement with a creditor containing an arbitration clause. After the consumer fell behind on her payments, her account was referred to the debt collector for collection. The consumer filed suit against the debt collector, alleging that one of the collection letters violated the FDCPA by “failing to inform her whether interest would continue to accrue on her account.” The debt collector moved to compel arbitration based on the provision in the consumer’s credit card agreement with the original creditor, under a third-party beneficiary, agency, or equitable-estoppel theory. The district court rejected each theory and denied the motion, concluding that (i) the agreement did not “evince an intent to benefit” the debt collector; (ii) the FDCPA claim “did not bear a sufficient nexus to the credit-card agreement”; and (iii) the debt collector could not equitably estop the consumer from resisting arbitration under the 3rd Circuit’s previous interpretation of South Dakota law.
On appeal, the 3rd Circuit agreed with the district court. The appellate court noted that the debt collector failed the test to enforce an agreement as a third-party beneficiary under South Dakota law, because the debt collector failed to establish that the original creditor and its consumers “would not have entered the card agreement but for the intent to benefit debt collectors.” As for the debt collector’s agency theory, the appellate court stated that the debt collector did not cite, and the court did not find, “South Dakota authority adopting a freestanding ‘agency’ theory of third-party enforcement.” Further, the appellate court noted that the debt collector’s arguments would fail under the South Dakota test for equitable estoppel and, therefore, the appellate court had “no basis to conclude that South Dakota would allow [the debt collector], as a non-signatory, to enforce [the original creditor]’s arbitration agreement with its customers.”
On June 28, the U.S. Court of Appeals for the 9th Circuit affirmed the denial of a rent-to-own company’s motion to compel arbitration in a putative class action alleging the company charged excessive prices. According to the opinion, three named plaintiffs filed suit against the company in 2017, alleging that the company structured its rent-to-own pricing in violation of California law, including the Karnette Rental-Purchase Act, the Unfair Competition Law, the Consumers Legal Remedies Act, and the state’s prohibitions against usurious loans. The plaintiffs sought public injunctive relief, as well as compensatory damages and restitution, among other things. The company moved to compel arbitration in accordance with the arbitration agreement executed in connection with the plaintiff’s rent-to-own air conditioner contract. The district court denied the motion to compel arbitration, concluding that the arbitration agreement violates the California Supreme Court decision in McGill v. Citibank, N.A (covered by a Buckley Special Alert here) because it constitutes a waiver of the plaintiff’s substantive right to seek public injunctive relief. Moreover, the court concluded that McGill was not preempted by the Federal Arbitration Act (FAA), and that the agreement’s severance clause allowed for the plaintiff’s Karnette Act, UCL, and CLRA claims to be severed from the arbitration.
On appeal, the 9th Circuit agreed with the district court, rejecting the company’s arguments that McGill was preempted by the FAA. The appellate court found that McGill does not interfere with the bilateral nature of a typical arbitration, stating “[t]he McGill rule leaves undisturbed an agreement that both requires bilateral arbitration and permits public injunctive claims.” Moreover, the appellate court noted that the severance clause in the agreement, which precludes an arbitrator from awarding public injunctive relief, is triggered by the McGill rule, and disagreed with the company that the arbitrator would still adjudicate liability first, concluding that the clause provides “the entire claim be severed for judicial determination.”
On June 10, the U.S. District Court for the Southern District of California denied a national payday lender’s motion to compel arbitration, agreeing with plaintiffs that the arbitration provision in their loan agreement was unenforceable because it was procedurally and substantively unconscionable. According to the opinion, plaintiffs filed a putative class action suit against the payday lender alleging the lender sells loans with usurious interest rates, which are prohibited under California’s Unfair Competition Law and Consumer Legal Remedies Act. The lender moved to compel arbitration asserting that the consumers’ loan agreements contain prohibitions on class actions in court or in arbitration, require arbitration of any claims arising from a dispute related to the agreement, and disallow consumers from acting as a “private attorney general.”
The court first determined that California law applied. It concluded that, while the lender was headquartered in Kansas, the consumers obtained their loans in California, and California “has a materially greater interest than Kansas in employing its laws to resolve the instant dispute,” based on its “material and fundamental interest in maintaining a pathway to public injunctive relief in unfair competition cases.”
The court then determined that the arbitration provision was procedurally unconscionable because, even though the consumers had a 30-day opt-out window, it required them to waive statutory causes of action “before they knew any such claims existed.” Finally, because the provision contained a waiver of public injunctive relief, the court determined it was substantively unconscionable based on the California Supreme Court decision in McGill v. Citibank, N.A (covered by a Buckley Special Alert here). The court rejected the lender’s arguments that McGill was preempted under the Federal Arbitration Act (FAA), noting a 2015 decision by the U.S. Court of Appeals for the 9th Circuit, “effectively controls” the dispute and the 9th Circuit reasoned that a similar state-law rule against waivers was not preempted by the FAA. Lastly, the court held that the unconscionable public injunctive relief waiver provision was not severable from the entire arbitration provision, because the agreement contained “poison pill” language that would invalidate the entirety of the arbitration provision.
On May 30, the U.S. Court of Appeals for the 9th Circuit denied a plaintiff’s writ of mandamus challenging the district court’s order compelling arbitration of the plaintiff’s claims against a national shipping company. According to the opinion, a customer filed a putative class action complaint alleging the company “systematically overcharges” customers by applying delivery surcharge rates through third-parties, which are higher than the company’s advertised rates. The company moved to compel arbitration because the customer enrolled in a free, optional program offered by the company that provides tracking and managing services of packages; and that enrollment in the program required the customer to agree to arbitrate all claims related to the company’s shipping services. The customer argued that while he checked the box agreeing to the service terms and technology agreement when enrolling, he should not be bound by the arbitration agreement because it was, among other things “so inconspicuous that no reasonable user would be on notice of its existence.” The district court rejected the customer’s arguments and granted the motion to compel arbitration.
On review of the writ of mandamus, the appellate court acknowledged that “locating the arbitration clause at issue here requires several steps and a fair amount of web-browsing intuition,” detailing that “...the first hyperlink [is] to the 96-page Technology Agreement. The user must then read the [service terms] and understand that they incorporate [additional terms and conditions of service]…. the user must visit the full [company] website, intuitively find the link [to the additional terms and conditions of service] at the bottom of the webpage, select it, and locate yet another link to the [terms and conditions of service]” in order to read the document and locate the arbitration clause. The appellate court held that the “extraordinary remedy of mandamus” could not be awarded because it could not say “with ‘definite and firm conviction’ that the district court erred by finding the incorporation [of the terms and conditions of service] valid” and found that there is no question the customer affirmatively assented to the terms. While it did not impact its analysis, the appellate court noted that the company’s service terms document now includes a hyperlink to the terms and conditions of service and expressly informs the user that the terms contain an arbitration provision.
On May 28, the U.S. District Court for the Southern District of Florida ruled that customers who financed a vehicle through a Florida car dealership were bound by the arbitration provision contained within a signed purchase order and retail installment sale contact. The customer plaintiffs contended that the defendant car dealership violated the FCRA and state law when it ran a “hard” credit inquiry on them instead of the “soft” credit inquiry they had authorized on a pre-approval financing form completed on the defendant’s website. As a result, the plaintiffs’ credit scores were affected. Based on the arbitration provisions contained in the purchase order and retail sale installment contract, the defendant filed a motion to compel arbitration. The plaintiffs argued that they were not bound by the arbitration agreements because they were signed a few days after the dealership ran the unauthorized credit check. However, the court held that it did not matter when the agreement was signed, stating that the “[p]laintiffs’ sole argument is that the [hard credit report check], does not in any way ‘relate to’ the purchasing documents which contain the arbitration clauses, and thus the arbitration clauses cannot be applied retroactively to encompass disputes arising from that transaction. The [c]ourt disagrees.” In granting the motion to compel arbitration, the court explained that the plaintiffs’ argument was “essentially one relating to scope and arbitrability, issues that the parties clearly and unmistakably agreed to arbitrate.”
- Daniel P. Stipano to discuss "Risk management in enforcement actions: Managing risk or micromanaging it" at an American Bar Association webinar
- Kari K. Hall and Christopher M. Walczyszyn to speak on the "Understanding updates to Regulation CC to ensure effective check processing" at a National Association of Federal Credit Unions webinar
- Daniel P. Stipano to discuss "ACAMS Moneylaundering.com Year-End Compliance Review and 2020 Outlook" at an ACAMS webinar
- APPROVED Webcast: Periodic reporting made easier
- Daniel P. Stipano to discuss "A 20/20 view on 2020’s legislative and regulatory outlook" at the ACAMS Anti-Financial Crime and Public Policy Conference