17.5.2.5 Arbitration Requirements

Credit contracts usually contain a requirement that disputes be settled by binding arbitration. When the consumer sues the collector or the collector’s attorney, the defendant will typically seek to enforce the originating creditor’s arbitration requirement.

Before enforcing the arbitration requirement, the collector must produce evidence of a binding arbitration agreement applying to the consumer.¹⁴⁶ If the court in the collection action ruled that there is no written agreement applying to the consumer, then the collector in the subsequent litigation might be collaterally estopped from claiming the existence of an arbitration provision.

When, instead, the collector did not present sufficient evidence of the terms of the contract to prevail in its collection action, and this failure is not treated as collateral estoppel, the collector bears the same burden in the consumer’s affirmative action to prove the terms of the contract when it seeks to enforce that contract’s arbitration provision.¹⁴⁷ The collector must also show that it has rights under the contract—for example, proving that the contract has been assigned to the collector.¹⁴⁸ Expect a debt buyer in a subsequent FDCPA action to go to greater efforts to offer proof of the terms of a contract applying to the consumer, and proof that the contract has been assigned to the debt buyer, than the debt buyer did in the initial collection action.

If an arbitration agreement applicable to the consumer is produced, then there are still a number of reasons why that arbitration provision may not be enforceable. These issues are examined in detail in NCLC’s Consumer Arbitration Agreements,¹⁴⁹ and this subsection just suggests a few of the main themes.

Whether the defendant can take advantage of the originating creditor’s arbitration agreement is another issue. Debt buyers (if they can produce evidence of the agreement) typically can take advantage of their assignors’ agreements. Arbitration agreements are generally viewed as applying to disputes with both the original creditor and the creditor’s assignees.¹⁵⁰ On the other hand, if the debt buyer has been assigned only receivables or choses in action, then it has not been assigned the contract, and there is a good argument that it cannot claim protection under the arbitration agreement.¹⁵¹

Unlike a debt buyer, a collection attorney is not an assignee of the originating creditor. Courts are divided as to whether a collection attorney is even an agent of the collector.¹⁵² If the collector’s attorney is viewed as an independent contractor, it is unlikely that the attorney can “bootstrap” onto the originating creditor’s arbitration rights, even under a third-party beneficiary or estoppel argument.¹⁵³

Even if the collection attorney is viewed as the creditor’s agent, whether an agent can take advantage of the originating creditor’s arbitration agreement will depend on the exact language of the arbitration agreement.¹⁵⁴ Parse the arbitration agreement to see how it treats agents of the creditor and the creditor’s assignees. For example, an arbitration agreement might apply to the creditor’s agents and its assignees but not mention agents of the assignee. The collector’s attorney should not be able to invoke an arbitration agreement between the consumer and the creditor that, by its own terms, does not apply to a debt buyer’s attorney.¹⁵⁵

A defendant debt buyer or collection attorney can also waive the right to enforce an arbitration agreement in three different ways. First, a defendant can wait too long to raise the arbitration requirement in the consumer’s affirmative litigation. By acting inconsistent with a known right to the consumer’s prejudice, the defendant has waived the arbitration requirement.¹⁵⁶ This may be the case where the defendant first raises the arbitration requirement after extensive discovery, after motions to dismiss or summary judgment, or after other litigation activity.

Second, a defendant can waive the arbitration agreement where the consumer proceeds to raise the litigation misconduct claims in arbitration and the defendant fails to pay the arbitration fees or otherwise fails to participate in the arbitration proceeding. The defendant’s conduct in thwarting the arbitration procedure may be viewed as a waiver of the arbitration requirement,¹⁵⁷ allowing the consumer to proceed in court.

Third, waiver may be implicated by the prior debt collection lawsuit. There is a growing body of case law finding that, where the collector or collection attorney first sued the consumer in court, the collector waives the right to enforce an arbitration requirement when the consumer subsequently sues that party for litigation misconduct.¹⁵⁸ The collector has chosen not to use the arbitration process in its initial collection action and cannot compel the consumer to do so. However, some courts hold to the contrary.¹⁵⁹ But this waiver may still be operative even when the collector brought the collection action in small claims court and the arbitration requirement does not apply to such a circumstance. The collector is not required to bring the action in small claims court, but could choose another court, and, by doing so, waives the arbitration requirement.¹⁶⁰

There is also a question as to whether an FDCPA claim for litigation misconduct is one of the types of disputes to which the arbitration requirement applies. Look to see if the language of the arbitration agreement would cover this type of dispute. Such disputes are certainly outside the parties’ expectation as to the arbitration agreement’s coverage. The expectation is that the arbitration requirement deals with disputes concerning the original transaction, not litigation abuse by the creditor’s assignee. A number of courts have found similar practices to be outside the scope of an arbitration clause.¹⁶¹

There is also extensive case law addressing whether an arbitration clause is unconscionable and therefore unenforceable. Unconscionability may relate to the cost of the arbitration proceeding, to the arbitration agreement’s limitation on consumer remedies, to the fact that the agreement only requires the consumer to litigate disputes and not the collector, and to the procedure by which the arbitration requirement was imposed.¹⁶²