Forced arbitration is a widespread problem for American consumers. Corporations bury complex terms in fine print, and then argue that consumers “agree” to arbitration in everyday contracts. But in general consumers have little understanding of what forced arbitration is or what rights they are “agreeing” to give up. Put simply, forced arbitration means: NO JUDGE, NO JURY, NO RIGHT OF APPEAL. Further, the arbitrator is not even required to follow the law. Forced arbitration has been called a “silver bullet” used to kill consumer lawsuits. It provides what Adam Levitin calls “bargain basement justice.”
What about debt buyers? When a debt buyer buys a debt it is buying the original creditor’s side of the contract with the consumer. If the debt buyer can prove that the original creditor had inserted a forced arbitration clause into the contract, can the debt buyer invoke the forced arbitration provision in order to immunize itself against lawsuits for collection abuse?
Two recent cases suggest a growing trend of debt buyers attempting to use forced arbitration to avoid being held accountable in court.
The cases, from Maryland and New Jersey, both involve the same debt buyer: Midland Funding, LLC, part of Encore Capital Group. In both cases, Midland sued consumers in state court, but, when those consumers fought back with counterclaims or lawsuits of their own, Midland tried to force them into arbitration. In both cases the state courts ordered arbitration.
In the New Jersey case, the consumer counterclaimed against Midland under the Fair Debt Collection Practices Act, arguing that Midland’s claim against her was barred by the Statute of Limitations. Suing on time barred debts has been held to be a violation of the FDCPA (see e.g. Herkert v. MRC Receivables Corp.) Midland replied to the lawsuit, but then asked the New Jersey court to send the case to arbitration. Here is the consumer’s brief on appeal.
In the Maryland case, Midland Funding had sued and obtained a judgment against the consumer. The consumer later filed a class action against Midland, arguing the judgment was void because at the time it obtained the judgment, Midland did not have a debt collection license in Maryland. That case was stayed, to wait for a decision on that issue from an appellate court in another case, Finch v. LVNV. In Finch, the Court of Special Appeals (Maryland’s intermediate court of appeal) held that “a judgment entered in favor of an unlicensed debt collector constitutes a void judgment as a matter of law.” After the decision in Finch, Midland asked the Maryland court to throw the case out of court due to a forced arbitration clause. Here is the consumer’s brief on appeal.
Was There Really An Arbitration Clause?
The main challenge facing debt buyers who want to push consumers into arbitration is a lack of admissible evidence. The debt buyer has to prove that the consumer’s original contract contained an arbitration clause, that the original creditor sent it to the consumer, and that the consumer received and consented to it. Debt buyers often have trouble proving basic facts, such as their purchase of a specific consumer’s debt, so proving the existence of a forced arbitration cause relating to a particular consumer would seem to be an especially difficult challenge.
In the New Jersey case, Midland attempt to prove the existence of the arbitration clause using a two page excerpt from a contract that did not mention the consumer. The authenticity of the document was first certified by its attorney, then by an affidavit from one of Midland’s agents.
In the Maryland case, Midland used testimony by an employee of the original creditor (Citibank) that a particular arbitration clause was in the consumer’s original credit card agreement.
What About Waiver?
In both cases, the consumers argued that Midland had waived its right to demand arbitration. In both cases, Midland went further than simply filing a lawsuit. In the New Jersey case, Midland filed an answer to her counterclaim and only demanded arbitration three weeks later. In the Maryland case, Midland went further: it obtained a judgment in its original lawsuit against the consumer but then when the consumer later sued Midland, it had the case stayed for months awaiting the decision in Finch. The consumer argued that this was a “‘tactical’ delay” – Midland wanted to stay in court in the hope that Finch would be decided differently. That sort of tactical delay has been important in previous cases about wavier of arbitration in Maryland.
The consumer in the New Jersey appeal argues differently:
Filing a complaint in state court to collect an alleged debt, where the complaint says nothing about an applicable arbitration agreement . . . is clear and convincing evidence that Midland Funding chose a different, judicial, forum before changing its mind and seeking to arbitrate this dispute.
Why Are Debt Buyers Invoking Forced Arbitration?
Why do debt buyers want to invoke forced arbitration when they are sued and why are they raising these issues now? Arbitrating disputes instead of litigating them before hostile courts would avoid precedents being set against debt buyers. This can be very important, since many of the questions debt buyer cases raise are new. Arbitration could allow debt buyers to argue every point of law anew in every case. Those arguments would be heard in secret and in isolation from one another. There would be no decisions like Finch, conclusively interpreting the law in a way that is unfavorable to debt buyers.
Adam Levitin’s piece points to another use for arbitration: destroying class actions.
Class actions are the only practical recourse for addressing widespread, small-dollar harms—the category under which most consumer claims fall. Preventing class actions is a license for unscrupulous businesses to steal from their consumers.
The Maryland case involves a proposed class action, which Midland may succeed in destroying, if all of the named plaintiffs can be forced to arbitrate their claims.
Debt buyers’ interest in arbitration clearly extends beyond the destruction of classes, however. In New Jersey, the consumer has filed an individual (not a class action) case, in which the appellate brief suggests a much simpler reason for Midland’s desire for arbitration: “apparently [Midland] decided that the pace and vigor of [the consumer’s] defense of her rights was not to its liking.” If debt buyers can use forced arbitration to derail meritorious counterclaims by individual consumers, this strategy may become much more common.
Light On the Horizon
Earlier this year, the Consumer Financial Protection Bureau completed a huge study of arbitration. More recently, the CFPB announced plans to stop arbitration clauses being used to destroy class actions, with the Director saying “[c]onsumers should not be asked to sign away their legal rights when they open a bank account or credit card.” More details on the CFPB’s proposals are here. Although the CFPB’s plan is promising, it is unlikely to affect debt buyers for years to come, since the proposed rule would apply only to new contracts that would not reach debt buyers for some years. In addition, CFPB’s plan faces serious opposition from businesses that would like to keep their silver bullet.