Handling Arbitration Agreement Abuse in Credit Card Cases

We have all become accustomed to expecting arguments attacking the validity of the credit card agreement as a contract or demands for heightened pleading requirements in credit card contracts due to their unwritten nature. However, the current trend is to attempt to use the formerly disrespected card member agreements against card issuers. Specifically, much litigation in our field is becoming focused on arbitration clauses.

Ideally, arbitration should be an efficient, cost-effective mechanism to resolve disputes. Generally, arbitration agreements are put into contracts in an effort to manage the risk associated with class actions. However, what is a sensible precaution is being manipulated by some in the consumer’s bar and certain debt settlement companies to force arbitration where collection firms have already initiated litigation. The result is neither efficient nor cost effective, especially for the creditor.

Given the purpose of placing the arbitration clauses, it is fair to say that our clients did not put these sections in place to arbitrate simple collection actions. Nonetheless, this is exactly what many in the consumers bar encourage the courts to do. These firms are seeking to use the reciprocal nature of these arbitration agreements to force private arbitration thereby delaying trial court proceedings or in hopes of finding a more favorable forum.

While the delay is significant, the costs associated with private arbitration renders its application in collection untenable. Many arbitration agreements often provide for a fee shifting mechanism (where the consumer may ask the creditor to front the cost of arbitration) with no guarantee of reimbursement or recovery, even if the creditor prevails. When not facing many options, this may seem a brighter avenue for consumers than state court litigation. As a result, some creditors have chosen to abandon their arbitration agreements altogether.

It would be different if the election to arbitrate took place before suit was filed. Unfortunately, the current trend is that the request for arbitration occurs after there has been participation in litigation: motion practice, discovery and filing affirmative defenses; and only when their efforts to dispense with the lawsuit have failed do they assert their claim for private binding arbitration. To add to the situation, the request usually comes on the day of trial.

This requires collection attorneys to be prepared to answer two questions before the trial commences:

1. Did the Defendant waive their right to arbitrate under the card agreement by participating in litigation?

2. To what extent must a party participate in litigation before arbitration is waived? An additional underlying hurdle is that both state and federal law favors arbitration, something most judges know and consider.

Generally, under the Federal Arbitration Act (FAA) and supporting case law, participation in litigation can result in the waiver of a right to arbitrate. That being said the extent of participation necessary to effectuate waiver is subject to the interpretation. It is also important to know how your particular state views arbitration as each state may have adopted slightly varying versions of the FAA. Where motions and discovery are issued, the question is easy to answer. But how about instances where the Defendant appears pro se and has filed boilerplate answer and affirmative defenses supplied by an out-of-state debt settlement company?

Even where the request is denied before or at trial, some consumers are encouraged by out-of-state debt settlement companies to file for arbitration even in the face of court orders barring it. This drains more time from post-judgment actions where the judgment is, at least momentarily, in question.

It is important to be pro-active internally and with your clients on arbitration litigation. In reality, most times, it is out-of-state, alleged debt settlement companies who place false hope in the consumer’s mind as to their chances at arbitration. Make sure your clients know if the request is good faith or manipulation by a third-party. Make sure your attorneys have read the arbitration agreements very carefully to determine if they are mandatory or elective. Utilize your state’s collection bar association to compare notes about third parties arbitration abuse. Where it appears a third party might be regularly engaging in wide ranging consumer arbitration abuse, do not hesitate to contact your Attorney General. Many bar associations have had very successful partnerships with their AG s to help consumers. This means more work and preparation for creditor’s attorneys throughout litigation, leading right up to the commencement of trial and often beyond.

Fred N. Blitt, Esq., is a partner with Blitt and Gaines, PC in Illinois and Couch, Conville and Blitt in Louisiana. He is past president of NARCA. Contact: This email address is being protected from spambots. You need JavaScript enabled to view it..